Tax Treatment of “Skill Game” Terminals
If you live in Pennsylvania, you are probably familiar with the growing trend of “skill games”. These slot machine-esque offerings have been growing in availability in gas stations and bars around the state. The regulation of these machines has been a subject of debate recently. Kentucky and Virginia have upheld bans on “skill game” terminals (though have yet to make a legal argument that it constitutes gambling). While Pennsylvania seems to agree with machine manufacturers that these machines are not subject to gambling regulation.
So how should those who use these games classify income, or losses, derived from their play?
These “skill games” operate in a similar manner to slot machines. Your average gambler often would not be able to tell the difference between the two. However, these machines offer certain “rewards” that can result in positive payback. This is where the “skill” aspect comes into play.
For instance, after a losing spin, certain machines will allow players to participate in a series of memory games to “win back” their losses on that spin. It often takes 30 minutes or more to complete this series of tasks. Due to these time constraints, it is fair to say your average gambler will skip this option, accept the loss, and spin again.
But does this constitute gambling? Per the tax code, gambling income occurs when:
There is money earned
From placing a wager
On a game of chance
From a tax perspective, it seems the winnings and losses from these “skill games” should be classified as gambling income. This is similar to the current daily fantasy sports dispute and the legality of pick’em sites. These activities may fall within the gray area of gambling regulation, but all should be treated as gambling winnings and losses from a tax reporting standpoint.
These machines meet the three criteria outlined above. Although there is a chance to “win back” your money or alter the amount of chance in a given action, these terminals operate almost identically to slot machines. Additionally, it seems unreasonable to believe your average gambler would spend time to recoup a $1 spin. I believe if you look at the facts and circumstances of the typical gambler, it is clear this is a gambling activity for tax purposes and should be tracked and reported as such.