US citizens living in Canada: why gambling wins still go on the US return

Same win, two different tax results

Two people living on the same street in Toronto each win the same amount at a casino. For the one who is only a Canadian citizen, that is usually the end of it: the CRA's Income Tax Folio S3-F9-C1 says at paragraph 1.16 that a prize from a lottery scheme is not taxable unless it is income from employment, business or property, and paragraph 1.2 says an amount received as a windfall is not subject to tax. The other neighbour holds a US passport, perhaps from birth, perhaps as a dual citizen. For them the win is also a US tax question.

This article is about that second person: a US citizen who lives in Canada and wins at a Canadian casino, an online site or a lottery. It is not about Canadians who win at a casino in the United States, which is a different set of rules.

The US taxes citizens wherever they live

IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, states the starting point: if you are a US citizen or resident alien, your worldwide income is generally subject to US income tax, regardless of where you are living. You must file a return for any year in which your worldwide gross income is at least the threshold for your filing status, which the publication takes from the charts in the Form 1040 instructions.

The publication notes that the regular due date for calendar-year filers is April 15, and that taxpayers living abroad get an automatic 2-month extension to June 15 to file and pay. Interest still runs on tax paid after April 15.

Gambling winnings are reportable income

IRS Tax Topic 419, Gambling income and losses, says gambling income includes but is not limited to winnings from lotteries, raffles, sports betting, horse races and casinos, including cash and the fair market value of prizes. All winnings are reported on Form 1040 or 1040-SR using Schedule 1. Topic 419 also says that winnings must be reported even when no Form W-2G was issued.

Nothing in Topic 419 limits this to winnings from US sources. A win at a casino in Ontario, on a provincial lottery site or at an online casino counts as worldwide income for a US citizen in the same way.

Losses: only if you itemize

Topic 419 allows gambling losses to be deducted only if you itemize deductions on Schedule A, where they are claimed as "Other Itemized Deductions". The amount of losses you deduct cannot be more than the gambling income you reported. Many filers take the standard deduction instead, in which case losses do not reduce the reported winnings at all.

Topic 419 also requires an accurate diary or similar record of winnings and losses, plus receipts, tickets or statements that show both. For someone playing in Canada, that means keeping the casino or site's transaction history and their own bank records, not just remembering the big win.

Why the foreign tax credit and the treaty do not help here

A US citizen in Canada often relies on the foreign tax credit, which stops Canadian tax and US tax from both landing on the same income. Publication 54 explains the credit is based on the legal and actual foreign tax liability you pay or accrue during the year. That is exactly what is missing: Canada usually charges no tax on a casual win, so there is nothing to credit. The full US tax applies.

The foreign earned income exclusion is not a way out either. Publication 54 ties it to earned income such as wages, salaries and self-employment income received for personal services. A casino win is not pay for services.

The Canada-United States Tax Convention has a gambling clause. Article XXII, paragraph 3, lets a resident of one country deduct wagering losses against wagering gains taxable in the other country, on the same terms the other country gives its own residents. This is the clause that lets a Canadian non-citizen offset losses at a US casino. Topic 419 reflects it: nonresident aliens generally cannot deduct gambling losses unless they are residents of Canada.

The saving clause in Article XXIX, paragraph 2, says the Convention does not affect the taxation by a country of its residents and, for the United States, its citizens. Paragraph 3 lists the articles that are exempt from the saving clause, and Article XXII is not among them. The United States can therefore tax its citizens living in Canada as if the gambling clause did not exist.

The paperwork around the money

A win sitting in a Canadian bank account adds a reporting step that has nothing to do with gambling. Publication 54 says a US person must file FinCEN Form 114, the FBAR, for a financial interest in or signature authority over a foreign bank or other financial account, and the filing is not needed if the combined assets in the accounts are $10,000 or less during the entire year. The FBAR due date is April 15. Form 8938 is a separate report of specified foreign financial assets, required when their value exceeds the applicable threshold.

• Keep the casino's or site's win confirmation and transaction history, in CAD, with dates.
• Keep a running record of losses if itemizing could make sense.
• Check whether the Canadian account balance after the win crosses the FBAR line.

For where Canadians can play under provincial rules, see the top Canadian online casinos, and for limits and self-exclusion tools, the responsible gaming page.

This article explains what the IRS publications, the CRA folio and the Convention say. It is not tax advice; a cross-border tax professional or the IRS can confirm how they apply to a specific return.