Millions of Americans gamble every day and in all sorts of ways. Examples include playing games of chance at casinos, placing wagers on horse and dog races, and buying lottery and raffle tickets. Sometimes you win, and sometimes you lose. There are tax consequences for both.
All Gambling Winnings Are Taxable Income
All gambling winnings are taxable income—that is, income subject to both federal and state income taxes (except for the seven states that have no income taxes). It makes no difference how you earn your winnings--whether at a casino, gambling website, church raffle, or your friendly neighborhood poker game.
It also makes no difference where you win: whether at a casino or other gambling establishment in the United States (including those on Indian reservations), in a foreign country such as Mexico or Aruba, on a cruise ship, Mississippi river boat, or at an online casino hosted outside the U.S.
Gambling winnings include not only the money you win, but the fair market value of any prizes or “comps” you receive as well.
All Your Winnings Must Be Listed On Your Tax Return
If, like the vast majority of people, you’re a casual recreational gambler, you’re supposed to report all your gambling winnings on your tax return every year. You report the amount as “other income” on the first page of IRS Form 1040. You may not subtract your losses from your winnings and you only report the amount left over, if any. You’re supposed to report every penny you win, even if your losses exceeded your winnings for the year.
You Can Deduct Gambling Losses Up to the Amount of Your Winnings
Although you must list all your winnings on your tax return, you don't necessarily have to pay tax on the full amount. You are allowed to list your annual gambling losses as a miscellaneous itemized deduction on Schedule A of your tax return. If you lost as much as, or more than, you won during the year, your losses will offset your winnings. For example, if you lost $10,000 and won $8,000 during various trips to casinos, you can deduct $8,000 of your losses, which is the amount up to your gain. What about the remaining $2,000 of unclaimed losses? It simply disappears. You can't use it to offset your gambling gains in other years.
However, you get no deduction for your losses at all if you don’t itemize your deductions. Only about one/third of all taxpayers itemize. You should only itemize if all your personal deductions, including gambling losses, exceed your standard deduction for the year.
Some Gambling Winnings Must Be Reported to the IRS By the House
Casinos, race tracks, state lotteries, bingo halls and other gambling establishments located in the United States are required to tell the IRS if you win more than a specified dollar amount by filing a tax form called Form W2-G with the IRS. You’re given a copy of the form as well. When a W2-G must be filed depends on the type of game you play and how much you win. For example, the casino must file a W2-G if you win $1,200 or more playing slots; but only if you win $1,500 or more at keno. If this income is not listed on your tax return, you’ll likely hear from the IRS.
You Must Be Able to Prove the Amount of Your Wins and Losses
If you’re audited, your losses will be allowed by the IRS only if you can prove the amount of both your winnings and losses. You’re supposed do this by keeping detailed records of all your gambling wins and losses during the year. This is where most gamblers slip up—they fail to keep adequate records (or any records at all). As a result, you can end up owing taxes on your winnings even though your losses exceed your winnings for the year.
The IRS says that whenever you gamble you should keep a diary or log book recording the:
- name and address (or location) of the gambling establishment
- type of wagers you made
- amounts you won or lost during each gambling session, and
- names of any other people with you during the session. (Rev. Proc. 77-29.)
Your log can be handwritten in a notebook, appointment book, calendar, or any other piece of paper in which you write down how much you won or lost for each gambling session. You can also purchase gambling log books.
It is also wise to have documentation to back-up your gambling log. This should include:
- evidence that shows that you really were at the casino or other gambling establishment at which you claim you gambled—for example, dated parking receipts, hotel reservations and billing statements, dinner and snack shop receipts
- copies of all IRS Form W-2G casinos or other gaming establishments gave you when you won more than a threshold amount
- Copies of IRS Form 5754, Statement by Person(s) Receiving Gambling Winnings, that is used when you win more than a threshold amount on a group wager
- wagering tickets
- canceled checks you wrote to pay for wagers
- credit records showing advances of credit to you from casinos or other gaming establishments
- bank withdrawal records (including ATM receipts), and
- statements of actual winnings or payment slips provided to you by gambling establishments.
Are You a Pro?
If you gamble full-time to earn a living, you may qualify as a professional gambler for tax purposes. Professional gamblers get many tax deductions and other tax breaks that casual recreational gamblers don’t have. Unlike casual gamblers, professionals only report on their tax return (IRS Schedule C) their net income from gambling-that is, they get to subtract their losses (and other expenses) from their winnings. Professional gamblers whose expenses are equal to or greater than their winnings will have zero gambling income to list on their tax return and pay tax on.
Also, professional gamblers get to deduct their business expenses from their winnings. These include not only their gambling losses, but expenses such as travel, hotels, dealer tips, and internet and cell phone costs. Casual gamblers get no such deductions. However, unlike all other businesses, professional gamblers are not allowed to deduct their losses against non-gambling income.
Questions for Your Attorney
- I forgot to deduct my gambling losses last year. Can I file an amended return?
- I can't exactly calculate how much money I won or lost from gambling. Should I guess the amount, or only report the amount I can prove?