Updated January 1, 2021
A taxpayer may not reduce his gambling winnings by his gambling losses and just report the difference. Instead, gambling winnings are reported in full as income, and losses (subject to limitation as discussed below) are deducted on Schedule A. Therefore, if a taxpayer does not itemize his deductions, he is unable to deduct gambling losses.
Frequently, taxpayers with winnings will expect to report only those winnings included on Form W-2G. However, those winnings reported on W-2G forms generally do not include all winnings for the year, and the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is generally always an issue in a gambling loss audit.
A taxpayer may deduct as a miscellaneous itemized deduction (not subject to the 2% of AGI limitation) gambling losses suffered in the tax year, but only to the extent of that year’s gambling gains. In other words, you can never show a net loss.
Gains – “Gains” include “comps” (complimentary goods and services the taxpayer may receive from a casino).
Losses – Losses from one kind of gambling are deductible against gains from another kind. The IRS has ruled that transportation and meal and lodging expenses incurred while engaged in gambling activities are nondeductible personal expenses that cannot be deducted against gambling winnings. Individuals deduct gambling losses (to the extent of gambling gains) only as miscellaneous itemized deductions (but not subject to the 2%-of-AGI floor).
Comps – Gambling casinos often provide their customers with complimentary goods and services (“comps”) to encourage future patronage. The IRS says that extraordinary comps, such as autos and jewelry, are taxable income. But it reserves the question of whether “normal comps,” such as food, drink, lodging and entertainment, can be excluded from income as purchase price adjustments.
Netting Specific Wagers – The amount of income from a winning bet or wager is the full amount of the winnings less the cost of placing that specific winning bet or wager. Thus, the winner of a sweepstakes includes as income the amount by which the prize money exceeds the ticket price, and the winner of a horse race includes as income the amount of prize money less the cost of the winning race ticket. In computing the amount of income from winnings, the cost of losing tickets (or other forms of wager) is not netted against the winnings.
Proving Gambling Losses – An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information:
(2) Name of gambling establishment;
(3) Address or location of gambling establishment;
(4) Names of other persons (if any) present with the taxpayer at the gambling establishment; and
(5) Amounts won or lost.
Verifiable documentation includes wagering tickets, canceled checks and credit records. Where possible, the IRS says the documentation should be backed up by other documentation of the activity or visit to a gambling establishment; e.g., hotel bills, airline tickets, etc. Affidavits from “responsible gambling officials” (not further defined) regarding gambling activities can also be used.
Other supporting documentation – Winnings and losses may be further supported by the following items:
- Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.
- Slot Machines – A record of all winnings by date and time that the machine was played.
- Table Games – Twenty-One (Blackjack), Craps, Poker, Baccarat, Roulette, Wheel of Fortune, etc. – The number of the table at which the taxpayer was playing. Casino credit card data indicating whether credit was issued in the pit or at the cashier’s cage.
- Bingo – A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets.
- Racing – Horse, Harness, Dog, etc. – A record of the races, entries, amounts of wagers and amounts collected on winning tickets and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
- Lotteries – A record of ticket purchase dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winnings statements. Winnings from lotteries and raffles are gambling and therefore are included in gross income. In addition to cash winnings, the taxpayer must include income bonds, cars, houses and other noncash prizes at fair market value. If a state lottery prize is payable in installments, the annual payments and amounts designated as interest on the unpaid balance must be included in gross income.
Gambling Sessions – There is a concept of gambling “sessions” where the IRS allows netting of gain and losses. However, the record-keeping requirements are so stringent that they make its application extremely limited, and it is not covered in detail in this article. The concept basically allows gamblers to net gains and losses from gambling sessions. However, a gambling session is very limited in scope. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus if a taxpayer entered a casino and played slots for an hour, then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities because two locations were involved. Plus all of that must be adequately documented.
Charity Raffles – The IRS considers raffles, bingo, lotteries, etc., to be gambling, even if the sponsor of the activity is a charitable organization. So winnings and losses are treated the same as for any other gambling activity, and the amounts paid to buy raffle or lottery tickets or to play bingo or other games of chance are notdeductible as a charitable contribution.