Why Are Cruise Ship Jackpots in International Waters Taxable?

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Carnival Fun Match and Brian Christopher Slots Cruises

Many cruises (although not all) will provide American players the same W2G paper when they win a jackpot while on a cruise, although they won’t deduct taxes. A player wonders why this is the case:

We just got off a cruise to the Caribbean. My hubby won 2 jackpot handpays and I won one. (Yay Us!) They do not take out taxes on the cruise line we were on. My question is when in international waters why would you have US taxes to pay? Or do you? Just wondering so we can be informed for our taxes.

Sally S.

When it comes to U.S. tax laws, all income, no matter when and where it’s earned, is considered taxable income. This includes gambling income, and so when you win jackpots on a cruise ship, that’s considered taxable income for U.S. residents under the law.

Of course, the IRS doesn’t know about jackpots unless they’re reported, which means many players would by default be on the honor system and we know what that means. But it ultimately doesn’t come to that for another reason.

Most cruise lines report jackpots to the IRS, even for cruises that don’t depart or arrive in the U.S. For instance, Brian Christopher went through the same jackpot process while cruising on the Carnival Splendor, when it departed from Australia, as when he was departing from U.S. ports. (Worse, the $1,200 threshold remained, but in Australian dollars, which have a lower value relative to U.S. dollars.)

When the jackpot is reported to the IRS, we as players will get that W2G. And so at that point they will know about it, so you have to file.

Why do cruise lines report it? As we shared in a previous article, cruise lines agree to follow general gambling regulations in mature U.S. markets like Nevada and New Jersey, and reporting rules fall into those regulations. They do this voluntarily to better cooperate with the U.S., despite their ships being flagged in other parts of the world.

So ultimately it’s a business decision to be transparent with the U.S. government, which in turn requires us to be transparent about those jackpots too. We advise to set some money aside given the lack of taxes removed, and if you have the ability to itemize, you may have the option to write off gambling winnings against losses, as long as you keep a reasonable paper trail to cover you against an audit.

As a reminder, Flip The Switch is not written by accountants or lawyers, and so the above is high-level guidance and should not be taken as personal advice. We advise all players to consult with an accountant familiar with tax law to ensure proper filing of your taxes in a way that’s proper for your personal situation.

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