Gambling Losses & Winnings
Tax Questions on Gambling
- Do I have to report all gambling income on my tax return? Answer: All gambling income must be reported on the tax return and is taxable. This includes not just casino winnings reported on Forms W-2G or 1099, but unreported casino winnings, winnings from casual gambling among friends, winnings from illegal gambling, and, yes, winnings from church bingo.
- What gambling losses are deductible? Answer: Gambling losses are only deductible up to the amount of winnings reported in the same year. See Deducting Gambling Losses for more information.
- Can I offset my craps losses against my poker winnings? Answer: Yes. There is no distinction under the federal tax law between types of gambling winnings and losses. Losses from one type of wager or game can be deducted against winnings from another type of wager or game.
- If gambling losses are deductible and I have more losses than winnings, what does it matter? Answer: Because of the complexity of how tax laws function, and the tax law requirements regarding record-keeping and reporting all income, it is very important to keep good records. See Gambling Record-Keeping.
- What gambling records should I keep? Answer: Very detailed records. See Gambling Record-Keeping.
- Can I deduct losses from illegal gambling against winnings from legal gambling? Answer: Yes.
- If I don't have perfect documentation/records, can I use estimates for my tax return? Answer: Although not recommended, and frowned upon by the IRS, the tax court has in some cases allowed the use of estimated amounts as gambling loss deductions. In other cases the tax court has disallowed estimated amounts.
- Since poker requires significant skill, is it gambling under the tax law? Answer: Since it involves betting and chance, poker is gambling under federal tax law.
- Who can be treated as a professional gambler under the tax law? Answer: Only persons who make gambling a regular, full-time activity that is their primary source of support, and who meet other requirements, can qualify as professional gamblers under the tax law. See Professional Gambler.
- What is the benefit of being a professional gambler? Answer: Benefits include "above-the-line" deduction of gambling losses, deduction of gambling-related expenses other than just gambling losses, and avoiding the impact on “Phase-Outs” caused by above-the-line gambling income offset by “below-the-line” gambling losses. See Professional Gambler
- Can there a downside to being treated as a professional gambler? Answer: Yes. See Professional Gambler.
Deducting Gambling Losses
Gambling losses are deductible up to the amount of gambling winnings reported in the same year. Additional gambling losses are not deductible and cannot be carried back to previous tax years or forward to subsequent tax years.
Only a Professional Gambler can deduct other related gambling-related expenses like travel, meals, lodging, books, and seminars.
Gambling losses are itemized deductions on Schedule A.
- Gambling losses only save taxes to the extent they exceed: the standard deduction less other itemized deductions.
- Gambling losses do not reduce Adjusted Gross Income (AGI). This can be a BIG problem. See The AGI Problem below.
- Gambling losses are exempt from the 2% AGI threshold that applies to some itemized deductions.
- Gambling losses are exempt from itemized deduction 3%-cutback.
- Gambling losses are not an adjustment (add-back) in calculating Alternative Minimum Tax (AMT).
The AGI Problem
Gambling winnings increase Adjusted Gross Income (AGI) but gambling losses do not decrease AGI (except for a Professional Gambler). Even if an equal amount of gambling winnings and losses are on the tax return, taxable income can be higher than if the gambling winnings and losses did not exist. This is because the higher AGI can cause the partial or total loss of many tax deductions and credits, including:
- Alternative Minimum Tax (AMT) exemptions
- Personal exemptions
- Itemized deductions for things other than gambling losses (higher 3% cutback and higher floor for “2%-type” miscellaneous itemized deductions
- IRA contributions
- Losses for actively-managed rental real estate
- Hope & lifetime learning credits
- Earned income credit
- Student loan interest
- College tuition deduction
- Child and dependent care credit
Gambling Record-Keeping
For gambling loss deductions, more than almost any other type of tax deduction, careful record-keeping is critical to secure the deductions you are entitled to. This applies equally to professional gamblers and non-professional gamblers.
One of the most important factors is keeping a contemporaneous log or diary. "Contemporaneous" means that information recorded throughout the year on each day of gambling – don't wait until later in the year or after year-end to record the information.
Taxpayer should keep two types of records of gambling activities, which the IRS calls
- "Diary/Logbook"
- "Verifiable Documentation".
Diary/Logbook
The most important gambling record is the diary or logbook.
- A pocket notebook, updated contemporaneously, is best. This information can be transferred to electronic format, but the original paper logbook should be retained as evidence.
- Even for nonprofessional gamblers who cannot deduct any gambling-related expenses other than bets lost, it is recommended that the records be kept of all gambling-related expenses in order to better substantiate that the gambling activities (and related losses) actually occurred.
San Diego CPA Michael Fitzsimmons recommends recording the following information in your logbook with a separate entry for each gaming session:
- Date
- Time of day (approximate) that the wagering took place (approximate start and end time of session(s))
- Type of wagering activity (what game was played, which slot machine(s), etc.)
- Name of gambling establishment
- Address or location of gambling establishment
- Name(s) of other person(s) (if any) present with you at the gambling establishment
- Amount won or lost (it is sufficient to record your beginning and ending bank roll – the difference between those is your winnings or losses for the session)
- Automobile odometer readings for trips to and from gambling locations
- Any expenses related to gambling, such as hotel, airfare, toll road, taxi, meals, etc.
It’s also a good idea to keep advertisements for gambling tournaments in which you participate.
Verifiable Documentation
Verifiable documentation means documents showing that the gambling activity occurred and indicating dollar amounts involved, such as cancelled checks, casino credit / players club account reports or receipts, ATM withdrawal receipts, hotel bills, airline tickets, etc.
Professional Gambler
Requirements to qualify as a professional gambler:
- Full time activity, with continuity or regularity, as primary source of support/livelihood.
- Maintenance of extensive and orderly records.
- Study of accepted business practices and consultation with experts.
- Intention to make a profit.
How a professional gambler is taxed differently from a non-professional gambler:
- Gambling losses reduce Adjusted Gross Income (AGI), avoiding "The AGI Problem".
- In addition to wagering losses, a professional gambler can deduct other related expenses, such as travel, meals, lodging, consultants, etc.
- Self-employment tax up to 15.3% is owed on net profit from the gambling business.
- Can make a tax-deductible retirement plan contribution for years in which there is a net profit from gambling and the taxpayer otherwise qualifies.
VERY IMPORTANT: Unlike most other businesses, a net loss from gambling business cannot be deducted against any other type of income and cannot be carried over to an earlier or later tax year. This is very different from the tax law on other types of businesses and similar to the tax treatment of losses of non-professional gamblers.
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