How are the proceeds from gambling winnings typically reported?

Gambling winnings are considered taxable income by the Internal Revenue Service (IRS) and must be reported on tax returns, which is why the answer stating that they are reported as taxable income is correct. All gambling winnings, regardless of the amount, must be included in total income on a taxpayer's federal income tax return. This includes winnings from lotteries, casinos, sports betting, and online gambling.

While some might believe that winnings are only reported if they exceed a certain limit, the IRS requires all gambling winnings to be declared to ensure accurate income reporting and tax compliance. There are specific forms, such as the W-2G, issued for larger winnings, but this does not negate the requirement to report smaller winnings as well.

Additionally, it is important to note that taxpayers can deduct gambling losses up to the amount of their winnings if they itemize deductions; however, losses cannot exceed the reported winnings. Thus, while deductions can play a role in how gambling income is ultimately taxed, the winnings themselves must always be reported as income.