When the economy is shaky, some folks compensate by trying their hand at gambling. While losses are the usual outcome, some do get lucky. Some even go pro.
Amateur or professional, it helps to know the tax rules for gambling wins and losses.
The Most Important Rule
The most important tax fact in gambling is that you can only deduct gambling losses for the year to the extent of your gambling winnings for that year. This limitation applies to the combined results from any and all types of gambling--playing the lottery, slots, poker, the horses, and all the rest. For example, say you win a total of $1,500 in various gambling activities and lose a total of $2,000. You can deduct $1,500 of losses to offset your winnings. The $500 of excess losses goes up in smoke.
After applying the losses-cannot-exceed-winnings limitation, the allowable gambling loss deduction for a person who is not a professional gambler is claimed on Line 28 of Schedule A (Itemized Deductions). If you don't itemize, you do not get a write-off. Also, an amateur gambler cannot deduct any out-of-pocket expenses related to gambling (such as transportation costs, meals, and lodging).
As for winnings, you must report the full amount as miscellaneous income on Line 21 on Page 1 of Form 1040. If your winnings exceed your losses, you cannot just report the net winnings amount on Line 21 of Form 1040. Instead, report all winnings on Line 21 of Form 1040 and all your losses on Line 28 of Schedule A (assuming you itemize). If losses exceed winnings, you still must report all winnings on Line 21 of Form 1040 and losses up to the extent of winnings on Line 28 of Schedule A.
Over the years, quite a few court decisions have tried to define what it takes to be a professional gambler. The bottom line is that you must devote substantial time to gambling on a regular basis, and you must depend on gambling winnings as a meaningful source of income. It also helps if you conduct your gambling activities in a business-like fashion by keeping detailed records of wins and losses and developing and evaluating strategies.
If you can rightly claim professional gambler status, report your gross winnings as income on Line 1 of Schedule C of Form 1040 (Profit or Loss from Business). Report your losses (up to the amount of your winnings) and allowable out-of-pocket expenses (for transportation, 50% of out-of-town meal costs, lodging, and so forth) as business expenses on Schedule C. Note that a professional gambler's allowable out-of-pocket expenses can be deducted in full on Schedule C without regard to the amount of your winnings. In other words, you are not required to combine out-of-pocket expenses with gambling losses in applying the losses-cannot-exceed-winnings limitation. Source: Ronald Mayo, 136 TC 81 (2011). The IRS caved in to this Tax Court decision in Action on Decision (AOD) 2011-06 (dated 12/21/11).
Warning: The seemingly benign rule that a professional gambler's winnings and losses belong on Schedule C can have a big negative impact in profitable years, because net Schedule C income gets hit with the dreaded self-employment tax. In some cases, this can make claiming professional gambler status more expensive than being an admitted amateur.
Remember: The losses-cannot-exceed-winnings limitation still applies to a professional's actual gambling losses (as opposed to out-of-pocket expenses). So you can only deduct gambling losses up to the amount of your winnings on Schedule C.
Form W-2G Keeps Winners Honest
For most types of gambling at a legitimate gaming facility, you will usually be issued a Form W-2G (Certain Gambling Winnings) if you win $600 or more. Of course, the IRS gets a copy too, so you better make sure the gross gambling winnings reported on Line 21 of your Form 1040 (or on Line 1 of Schedule C if you are a professional) at least equal the sum of the amounts reported on any Forms W-2G you receive.
Whether you are an amateur or professional gambler, you must adequately document the amount of your losses in order to claim your rightful gambling loss deductions. According to the IRS, taxpayers must compile the following information in a log or similar record.
- The date and type of each wager or wagering activity.
- The name and location of the gambling establishment.
- The names of other persons (if any) present with you at the gambling establishment (obviously this requirement cannot be met at a public venue such as a casino or race track).
- The amount won or lost.
You can document winnings and losses from table games by recording the number of the table and keeping statements showing casino credit issued to you. See also IRS Publication 529 (Miscellaneous Deductions).
Per-Session Record-Keeping Is OK
In theory, you are supposed to record each gambling win or loss--from each spin of the slot machine, each poker hand, and each horse race. Of course, nobody actually does that!
In 2008, the IRS relented by saying that casual slot players can simply keep a record of the net win or net loss amount for each gambling session. Source: IRS Chief Counsel Advice (CCA) 2008-011. The casual slot player should then report the sum total of net winnings from all winning sessions as income on Line 21 on Page 1 of Form 1040 (the amount should at least equal the total amount of winnings reported on any Forms W-2G you receive). The sum total of net losses from all losing sessions can be deducted on Schedule A, subject to the losses-cannot-exceed-winnings limitation.
Presumably, the recording of net wins and losses from each gambling session will also be considered adequate record-keeping for other types of gambling for both amateur and professional gamblers alike. (In a 2009 decision, the Tax Court appeared to endorse this per-session approach to recording wins and losses. Source: George Shollenberger, TC Memo 2009-306.