Gambling Taxes (U.S. income tax)
I'm confident about the accuracy of this article, and I cite my
sources very well, but I'm not a tax expert. I did study
accounting at the university level (with an A in Financial
Accounting) and got the highest possible score on the SAT Test of
Standard Written English (so I should be expected to be able to
interpret tax instructions well), but ultimately I'm not an
accountant by trade.
This article covers U.S. income tax, not taxes for individual states or other countries. It also applies only to recreational gamblers, not professional gamblers.
Quick example of how to report
- Wins: $50,000 (total of winning sessions from your journal)
- Losses: $60,000 (total of losing sessions from your journal)
- W-2G total: $15,000
The proper way to report it is:
- $50,000 win on Schedule 1, Line 21.
- $50,000 loss on Schedule A. (Not $60,000, because you can't claim more losses than wins.)
- Ignore the W-2G. W-2G's are irrelevant, all but useless, and ought to be abolished. (sources)
However, if you received any W-2Gs, then reporting as above can possibly result in higher taxes. So, if you received any W-2Gs, then see my detailed instructions for how to handle them.
- You're supposed to report anything you win as income. If you win a prize rather than cash, you're supposed to report the cash value of the prize.
- You don't subtract losses from wins and report the net. Instead, you report your income as the total of all winning sessions. (For 2018 returns, it goes on Schedule 1, Line 21.) Separately, you report your loss as the total of all losing sessions (on Schedule A, if you itemize; see the sidebar below), but the losses you claim can't be more than the amount you won.
- If you received any W-2G forms, you'll need to choose whether to report the W-2G figures -OR- your session figures. I'll cover that in great detail below.
- You're supposed to keep a journal to document your gambling sessions. From this journal, the total of your winning sessions becomes your gambling income, and the total of your losing sessions becomes your losses. You can deduct on Schedule A if you're itemizing; you can also deduct related expenses like travel to/from the casino, hotels, etc., but you can't deduct more than you won.
- None of this is fair. While taxes in general are legitimate, since the overall result of all Americans' gambling each year is a loss for the players, there's no real income to tax. If the government is going to tax winnings, then they should let you fully deduct your losses, but most taxpayers can't make any extra deduction for gambling losses, because (a) their total deductions don't exceed the standard deduction, and (b) they can't deduct more than they won.
- The tax requirement applies to permanent residents as well. Visitors to the U.S. are taxed on slot machine winnings but not on winnings on most kinds of table games. (Forbes, in the comments, and USC § 871(j))
- Comps sometimes taxable, sometimes not. This is a gray area, since the IRS hasn't defined it, but tax professionals advise that if the casino gives the comp as a gift, it's not taxable (e.g., free room offer you got in the mail, where the casino hopes you'll play, but doesn't require you to), while if you earned it through your play, it is taxable (e.g., cashback or a buffet that you got from accumulating points through slot play). (source)
- This article covers federal income tax only, not state income tax. Tax laws vary from state to state and there's no way I can be knowledgeable about all of them. Significantly, I've heard that some states don't allow session accounting for wins & losses, and that some states don't allow any gambling losses to be deducted. (No, I don't have a list of such states.) However, I can tell you that if you travel to a different state and win money, you owe tax in your state of residence, not the state where you gambled.
|Have you never really
understood what it means to "itemize deductions"? Then
let's clear that up right now.
We all know that we pay taxes on our income. If you make $30,000, and you pay an average of 13% in taxes, then your taxes are $3900.
You can subtract out certain expenses to make your income lower, so you pay less taxes. Those special expenses are called deductions. If you had $30,000 in income, and $5000 in deductions, then you have only $25,000 in income that's subject to tax. So now your tax is a lot less.
The reason we say deductions and not expenses is that only some expenses are deductible. For example, food and rent are big expenses, but you don't get to deduct them. So they're not deductions. Deductions are things like medical & dental expenses, and gifts to charity.
Keeping track of all your deductions can be a chore, so the IRS gives you a shortcut. They let you take a "standard deduction". For 2018 returns, you can claim a standard deduction of $12,000 (single), $18,000 (head of household), or $24,000 (married filing jointly). You don't have to keep track of anything, you just subtract your standard deduction, even if your actual expenses were more or less. This makes things very easy. You get to pick this standard deduction on Line 8 of Form 1040 (2018). The overwhelming majority of taxpayers use the standard deduction and don't bother to itemize.
But if you're one of those rare taxpayers who has a lot more in deductions than the standard deduction amount, then it makes sense to claim your actual expenses and skip the $12-24k grab-bag. You list these expenses on Schedule A of Form 1040. When you use Schedule A to list your expenses instead of taking the standard deduction, then you're itemizing your deductions. So there you have it, that's what "itemizing your deductions" means.
Some losses are deductible
You can deduct your gambling losses, but there are some catches:
- You can deduct only as much as you won, not more. That means you can never show a net loss for gambling. For example, if you lose $1000 playing slots, and the next day win $400, and that's the only gambling you do for the year, you can deduct only $400 of your slot loss. You'll report a $400 win and a $400 loss.
- Starting in 2018, you can deduct related expenses, like travel to and from the casino (Pub. 529), but again, your losses can't exceed your winnings.
- You can deduct only if you're itemizing your deductions. See the sidebar at right for an explanation of what itemizing means.
- You can't carry over losses from one year to the next. You report wins and losses for the current year only.
- Nonresident aliens can't deduct their losses, even though they're taxed on winnings. (Forbes)
Separating wins from losses
You're supposed to report wins and losses separately.
do not report the net win for the year. If you win
$1000 and lose $750 in one year, you don't report a $250 win.
You report a $1000 win and a $750 loss. (IRS
Pub. 529, Nolo)
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 had $500 in session wins and $2000 in session losses (more about sessions later). 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, tax code requires that you report it, even if it was 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 disclosing your wins like you were supposed to, and that's not a position you want to be in if you get called on the carpet.
Note that if you never had a winning session then 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 session net result. (source) For example:
|Sample Diary of Sessions|
|May 5||-100||NY NY||slots||husband|
|May 6||-300||Stratosphere||BJ||Spanky McBluejay|
|Total||450||400||All of the above on
the Las Vegas, NV strip
At the end of the year you add up all your session 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 (on Schedule 1, Line 21), and $400 in losses (on
Schedule A). (sources)
The IRS doesn't explicitly define what a "session" is, so just use a reasonable definition. When you take a break for a meal or some other kind of entertainment, or when you cash in your chips, consider your session over. It's not clear whether you have to consider your session over if you simply switch games (e.g., slots to blackjack), or if you walk 30 seconds from one casino to the next (like in downtown Vegas where they're close together), but it couldn't hurt. You can have multiple sessions in one day. I don't think it would be reasonable for a session to span more than a day, unless you played constantly without stopping to eat or sleep.
Some online casinos will provide you with a report detailing your wins and losses. They track every single bet, and count every winning bet as a win, and every losing one as a loss. If you have such a report, you can use it, but most online casinos don't provide such a report, and land casinos never do.
Documenting your wins and losses
Make damn sure you can document your losses! Bill Remos won $50k in a blackjack session, and had at least $50k in losses for the year, so he shouldn't have owed any taxes, but he couldn't substantiate his losses, so the IRS made him pay the taxes on his $50k win without letting him deduct any losses to offset his winnings. Ouch. (Nolo)
So how do you document your losses? In almost all cases the IRS will accept the diary mentioned above, along with supplementary documents like hotel and airfare receipts. (source) You can use win/loss statements that casinos provide at the end of the year as backup evidence to supplement your diary, but not as your main evidence. As one tax attorney says, "The IRS has consistently and regularly rejected the use and reliance upon such information. The primary reason for the IRS belligerence is simply because the casinos explicitly state in their reports that the reports are inherently inaccurate and should not be used for accounting purposes." (Reece B. Morrel Jr., CPA JD) The IRS also likes other supplementary evidence that you were at the casino, such as airline tickets or receipts from casino restaurants and gift shops.
The IRS says your diary should include, at a minimum:
- Date and type of specific wager or wagering activity
- Name & address or location of the gambling establishment
- Name(s) of other person(s) (if any) present with you at the gambling establishment
- Amount won or lost (source)
Revenue Procedure 77-29 says you could also record things like the table number for table games, and slot machine number for slots. It couldn't hurt. (source)
Receiving W-2G 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 W-2G 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 W-2G form.
You get the W-2G only for single wins of $1200+. If you have many small wins that total more than $1200, you don't get the form.
If you have a bunch of $1200+ wins in a day, the casino can choose to report all the wins on a single form, rather than on a bunch of separate forms. The casino can also choose to base this on a "gaming day" rather than a calendar day, since many casinos start their financial day between 3:00-6:00 a.m. rather than at midnight.
W2-G's on table games are rare. They're issued only if
the odds on the win is 300 for 1 or more, and the win is
over $600 (usually progressive jackpots and certain side
bets). 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 (not for you).
What to do with W-2G forms
If you've received any W-2G forms, then reporting your session wins & losses rather than the W-2G amounts can lead to some potential problems:
- You might get a letter from the IRS saying your reported wins don't match your W-2Gs. This can usually be avoided by including a note with your return. If you do get an IRS letter, sending a letter back with wording as on the note will probably clear it up.
- You're increasing your Adjusted Gross Income (AGI), which could result in:
- Your Schedule A deductions being limited, and/or
- Your owing lots more in state taxes.
So, here's how to handle it:
- Prepare draft returns (federal + state) listing your session wins as income on Schedule 1 Line 21, and your session losses as a deduction on Schedule A.
- Prepare another set of draft returns listing your W-2G total as income on Schedule 1 Line 21. For your losses on Schedule A, if you had a net loss for the year, use the same figure as your W-2G win. If you had a net win for the year, then for your Schedule A losses, use whatever number will result in your W-2G win minus Schedule A loss equaling your session wins minus session losses. (Example 1: Your session wins were $2000, your session losses were $1600, and your W-2G is $1200. Session wins - losses is $2000 - $1600 = $400. Your reported losses will be $1200 - $400 = $800.)
- If the session method results in the same tax liability than the W-2G method, then use the W-2G method. That avoids a problem where your return is reviewed by an IRS clerk who's unfamiliar with session accounting and they send you a nastygram.
- If the session method results in less tax liability than the W-2G method, then use the session method. Include a note with your return on a full-size sheet of paper with your name, SS#, and this wording: "My reported gambling winnings don't match the W-2G total because I used session accounting to arrive at the total for winnings, as per Shollenberger v Commissioner, which established that wins and losses should be tracked by session, and that 'The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000.' For more, see VegasClick.com/gambling/taxes#sources"
- If the session method results in more tax liability than the W-2G method, then you'll have a difficult decision: Technically, you're supposed to use the session method, but realistically, you're unlikely to face any problems by going with the W-2G method. I am not recommending you use the W-2G method, just pointing out that you probably won't face any problems if you choose to do so.
There's widespread misunderstanding that you're supposed to enter the W-2G amounts as your gambling income. Many accountants and even TurboTax get that wrong. For proof that you don't simply transcribe the W-2G amounts, see the sources at the end of this article.
Once I received a fistful of W-2Gs for many thousands of dollars, but never had a winning session, so I had no wins to report, so I didn't. Despite the fact that my W-2Gs were sky high and I reported no gambling income, I never heard a peep from the IRS.
However, some taxpayers said that they got warnings from the IRS saying that their reported winnings don't match the W-2G. This just goes to show that even many rank-and-file IRS clerks aren't familiar with how gambling taxes are supposed to be reported. That's why in the instructions above, I suggest using the W-2G figures if they result in the same tax liability as session accounting, and to include a note with your return if you do use session accounting.
On a popular gambling forum, some members made the wild suggestion of reporting the W-2G amounts as income, even if it results in more tax, to avoid any trouble with the IRS. They conjure up images of having to hire lawyers and go through time-consuming court cases. But that almost certainly will not happen. The note I suggested you include will likely head off almost all problems with the IRS, and if you do get a notice from them, simply replying with a letter with an explanation should resolve the situation in almost all cases. Whenever the IRS has sent me a notice about something they mistakenly think I calculated wrong, I simply replied with a letter explaining how I properly calculated the amounts, and then I never heard from the IRS again about that. Here's also a post by one gambler who didn't report W-2G amounts, got a letter from the IRS, responded with his own letter, and the IRS was satisfied. (He also revised his return to separate wins from losses as I advise in this article, rather than reporting the net as income. His revisions didn't result in any extra tax.)
Yes, it's not fair
There are a number of aspects of the gambling tax that aren't exactly fair. Let's tally them.
- Net wins are taxable, but you can't deduct net losses.
As we saw above, you can't deduct more than you win. If you
win $1500 and lose $500, you pay tax on $1000 of winnings.
But if you win $500 and lose $1500, you don't get to claim a $1000
loss. The easiest solution to this problem is to simply not
tax gambling winnings. The overall result from all
Americans' gambling in a year is a net loss, so there's no real
income to tax anyway.
- You can deduct your losses only
if you itemize. (For an explanation of "itemizing", see
the sidebar above.) If you have $2000 in wins and $2000 in
losses, you'll have to itemize on Schedule A in order to deduct
your losses. Of course, if your standard deduction is more
than your itemized deductions, you'll want to go with the standard
deduction. But that means you don't get to deduct your
losses, specifically. You're gonna pay taxes on $2000 in
winnings with no way to offset it.
Those who would claim that you are deducting your losses as part of your standard deduction are missing this point: If you didn't gamble at all, you'd still get to take the full standard deduction. But by gambling and having wins that equal losses, you still use that same standard deduction, and thus have to pay more taxes compared to not gambling at all—even though you didn't have a net win.
- Gambling losses can't be
carried over from year to year. 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. So over four years you lost
$1000. However, in year 4 you'll pay taxes on the $2000 win,
and never get any credit for your $3000 in losses for the previous
three years. Too bad.
- Reporting wins separately from losses increases your AGI, reducing your ability to make other deductions. A $5000 yearly win and a $5000 yearly loss means you pay no taxes, but because you report wins separately from losses, your AGI (Adjusted Gross Income) goes up by $5000. That might be great if you're trying to get a loan and the bank uses your AGI as your income, but the downside is that you might lose the ability to deduct medical expenses, mortgage interest, and charitable contributions, among other things. (source) (Here's a detailed article on limitations on itemized deductions.) To get around this, some taxpayers might (questionably) choose to report their winnings as their W-2G amounts rather than their session wins. (more on that)
- Ron Wilburn, CPA. Reports on IRS case Shollenberger v Commissioner, which established that wins and losses should be tracked by session, and that "The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000."
- IRS Notice 2015-21. "Gross income from a slot machine wagering transaction is determined on a session basis."
- Randall Brody, IRS Enrolled Agent. "You add up all your winning sessions during the year to determine your winnings that are to be reported on line 21 of the Form 1040 and then do the same by adding up your losing sessions to determine your annual losses."
- Forbes. "In 2008, the IRS ruled that U.S. citizens could measure their gains on a per-session basis. In effect, you don't have to compute each wager separately to determine if you won or lost and by how much. Just tally your total at the end of your gambling session. The Tax Court reached the same conclusion in Shollenberger v. Commissioner."
- IRS Memo No. AM2008-011, Dec. 2008, PDF. Confirms the use of session-based wins and losses.
- Note that IRS Publication 525 (2017) is unclear! Many people think it's saying to count your W-2G winnings as your gambling income, which is not what it says. The actual wording is, "Include the amount from box 1 [of your W-2G] on Form 1040, line 21." Notice that it uses the word "include" and not "enter". In IRS parlance, "enter" means "copy this number exactly from one place to another". But "include" means "whatever number you're entering, make sure this other number is a part of it." So yes, it's worded poorly, and they failed to include any clarification, but in any event, it absolutely does not say that W-2G = what you report for gambling winnings. Even if it did, remember that (1) case law trumps instructions, and (2) we have the IRS memo above that clarifies that wins and losses are based on sessions (which may or may not match the W-2G amounts).
- Gives the requirements for how to record the diary.
- States that "An accurate diary...supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses."
- Also states, "Where possible, the diary...should be further supported by other documentation [such as] hotel bills, airline tickets, gasoline credit cards, canceled checks, credit records, bank deposits, and bank withdrawals."
- Link to the actual text