Gambling & Taxes (U.S. income tax)
Disclaimer: 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.
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.
This applies to citizens and permanent residents alike. 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))
|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 example, if you're single, they let you claim a standard deduction of about $6000 (in 2014). You don't have to keep track of anything, you just use $6000 as your deduction, even if your actual expenses were more or less. This makes things very easy. You get to pick this standard deduction on Line 40 of Form 1040.
But if you have a lot more than $6000 in deductions, then it makes sense to claim your actual expenses and skip the $6000 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.
- You can't carry over losses from one year to the next. You
report wins and losses for the current year only.
- You can deduct only if you're itemizing your deductions. See the sidebar at right for an explanation of what itemizing means.
- Nonresident aliens are taxed on slot winnings, but can't deduct their losses. (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||250||Luxor, blackjack, alone|
|May 5||-100||NY NY, slots, with wife|
|May 6||200||Monte Carlo, slots, with wife|
|May 6||-300||Monte Carlo, blackjack, with 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 Form 1040, 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, but a session can't span more than a day.
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 of gambling establishment
- Address or location of gambling establishment
- Name(s) of other person(s) (if any) present with taxpayer at the gambling establishment
- Amount won or lost (source)
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).
Note that you don't report the actual W-2G amounts on your tax return! You report your session wins, which is not the same thing as what's shown on the W-2G. Let's say you play slots all day (one long session), 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 session win, so there are no winnings to report. (sources)
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. However, there's no good way to "fix" this problem: 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.
- 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)
Like casual gamblers, pros can't deduct wagering losses in excess of winnings, but they can deduct related expenses (like hotel and travel), and those non-wagering expenses can exceed winnings. (source) For example, let's say a pro had $20k in winnings, $20k in wagering losses, and $4k in related expenses. He can deduct the $20k in wagering losses since it doesn't exceed winnings, then deduct the $4k in related expenses, for a $4k net loss. If losses had been $25k and $4k, he'd still deduct only $20k for wagering losses and the $4k for other losses, and show the same $4k net loss even though he actually had a $9k net loss. That's not ideal, but it's better than not being able to claim any loss. The catch to all this is that unless you're truly a bona-fide professional gambler, you have virtually no hope of convincing the IRS that you actually are one.
Pros declare their winnings and expenses on Schedule C.
- 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 (2013) is outdated, or at least unclear. In the "Other Income" section, it says to report your W-2G Line 1 winnings on 1040, Line 21. However, case law trumps instructions, and we also 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