Nonresident alien gamblers that gamble recreationally in the U.S. have a substantial disadvantage vis-à-vis residents – they cannot offset their losses against their gains in determining gains subject to tax. The Tax Court made matters worse when it previously ruled that Sang J. Park, a nonresident alien, would be taxed on all of the winning pulls from his slot machine play, and could not offset the losing pulls.
The D.C. Circuit Court of Appeals described the unfortunate situation of Mr. Park:
Consider two people. The first, a U.S. citizen, walks into a casino and sits down to play slots. The player first wins $100 but then loses the $100 before leaving the casino for the night. In that hypothetical, the U.S. citizen would have $0 in income to report because the IRS interprets the applicable provision of the Tax Code to cover only gains measured over a session of gambling.
The second person, a non-resident alien, also wins $100 and then loses $100. The non-resident alien is in the same financial situation as our U.S. friend. But according to the IRS, the non-resident alien has $100 in income to report (the $100 he won in the initial bet) because the IRS interprets the applicable provision to require non-resident aliens to pay taxes on gains from each bet.
U.S. taxpayers are not so burdened – U.S. taxpayers are treated as having gains based on the result of their entire gambling session, not based on the results of each bet. To use the IRS’ own words in Memorandum AM2008-11, Office of Chief Counsel, Internal Revenue Service 4 (2008):
“We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” her net gain. Because gain or loss may be calculated over a series of wagers, a “taxpayer who plays the slot machines recognizes a wagering gain or loss at the time she redeems her tokens.”
U.S. recreational taxpayers still retain an advantage over nonresidents, in that they can still net their overall gambling losses against their gambling gains, although they cannot deduct any net losses. Code §165(d). Since this Code Section does not apply to recreational gambling nonresident aliens, gamblers like Mr. Park still cannot use losses from gambling “sessions” against winning “sessions” in determining taxable gains.
Park, (CA-DC 7/9/2013) 112 AFTR 2d ¶ 2013-5060