Gambling & Taxes (U.S. income tax)

I'm a layperson, not a tax expert.  I believe everything here is correct, but it's always prudent to check with a tax specialist about tax questions.

This article covers U.S. income tax, not taxes for individual states or other countries.

Gambling winnings are taxable

You're supposed to report anything you win as income.  It goes on line 21 of Form 1040.  (You can't use form 1040EZ if you have gambling winnings.)  If you win a prize rather than cash, you're supposed to report the cash value of the prize.

Some losses are deductible

You can deduct your gambling losses, but there are some catches:

1. You can deduct only as much as you won, not more.  So if you lose $1000 playing slots, and then win a $400 keno jackpot, you can deduct only $400.
2. You can't carry over losses from one year to the next.  You report wins and losses for the current year only.
   
3. You can deduct only if you're itemizing your deductions.  See the sidebar at right for an explanation of itemizing.

Right away we can see that this isn't exactly fair.  You always pay taxings on your winnings, but only sometimes can you deduct your losses.  However, there's not a good alternative.  If the IRS let you deduct 100% of your losses, gambling would effectively be cheaper, and the government would basically be giving people a huge incentive to gamble.  So it's understandable that this part of the code isn't perfectly fair.

Here's another example of inequity.  Let's say you lose $1000 a year for three years by playing slots.  Then in Year 4 you have a net win of $2000.  You pay taxes on the $2000 win, but you never got any credit for your $3000 in losses for the previous three years.  Too bad.

Separating wins from losses

You're supposed to report wins and losses separately.  You do not report the net win.  If you win $1000 and lose $750, you don't report a $250 win.  You report a $1000 win and a $750 loss.  Wins go on 1040 Line 21, and losses go on Schedule A.

If your losses exceed your wins, you won't owe any tax, but you're still supposed to report your wins and losses separately.  Let's say you won $500 playing blackjack and lost $2000 playing slots.  From the above you know that you can't deduct more than you won, so you have $500 in wins and a $500 loss deduction.  Since that's basically a wash, you might be tempted to not even report it at all.  It doesn't affect how much taxes you pay, so what's the point?

The point is that if you had winnings, it's illegal to not report it, even if they were entirely offset by losses.  If the IRS later finds that you had some gambling winnings, it's kind of late in the game for you to claim that you had losses that offset your wins.  You already look a little guilty for not reporting like you were supposed to.  You're certainly entitled to present your losses after you get called on the carpet, but wouldn't it be better if you weren't called on the carpet in the first place?

Note that if you had only losses there's no duty to report.  There's nothing to deduct anyway, because you can deduct losses only to the extent of your winnings.

But all this raises the question:  How do you keep track of wins and losses?  Let's say you're playing a slot machine.  Is every spin with no payout a "loss", and every spin with a payout a "win"?  How could anyone keep track of all that?

You can't, but you don't have to.  The IRS suggests keeping a diary of your daily net result.  For example:

• May 5:  +$250  Luxor (blackjack)
• May 6:  - $100  NY NY (slots)
• May 7:  +$200  Monte Carlo (video poker)
• May 8:   -$300  Monte Carlo (craps)
  

At the end of the year you add up all your daily wins and count that as your winnings, and you total up all your daily losses and count that as your losses.  In the above example, we'd report $450 in winnings and $400 in losses.

Note that the IRS says your diary should also include the names of any people present with you.

Most casinos will provide a tax statement for you at the end of the year, which shows the total of your daily wins and the total of your daily losses, provided you used your players card when you played (and you should).  However, given that such statements usually have the word "Estimate" written all over them, as well as other prominent disclaimers, it's not a bad idea to keep your own daily records.

W2-G forms

If you hit for $1200 or more on a slot machine (or $600 at the horse track, or $1500 in keno), then the casino will give you a W2-G form.  They'll ask you for your social security number, so don't freak out when they do.  They'll send a copy to the IRS, too.  This $1200 threshold for slots is why you'll see many machines with a top jackpot of $1199.  If you hit it, then neither you nor the casino has to fuss with the W2-G form.

You get the W2-G only for single wins of $1200+.  If you have many small wins that total more than $1200, you don't get the form.  You're still supposed to report those winnings, but you don't get the form.

You never get a W2-G for playing table games.  It's only for slots, races, and keno.  However, if you buy or cash more than $10,000 in chips in one day, the casino will do a CTR (Cash Transaction Report) form for the IRS.

Note that you don't report the actual W2-G amounts on your tax return.  You report your winnings, which is not the same thing as what's shown on the W2-G.  Let's say you play slots all day, hit three jackpots of $1500 each, but have a net loss for the day of $400.  That's also the only gambling you did for the year.  How much do you report in winnings?  Nothing.  Despite the three $1500 jackpots, you didn't have an overall daily win, so there are no winnings to report.

Professional gamblers

Professional gamblers can deduct all their gambling losses as a business expense, on Schedule C.  Their losses are not limited by their winnings.  So if they had a losing year, they can deduct more than they won.  Of course, if you're a professional gambler you already know this, and if you're not, you have virtually no chance of convincing the IRS that you are one.

Sources

• IRS Tax Tip:   Gambling winnings are always taxable
• IRS Publication 529:  Miscellaneous deductions