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.

When you win, you have income that you have to report on your tax return. Of course, more income generally means more income taxes you'll have to pay for the year. If you lose, you can take a tax deduction. This deduction can help offset some of the additional taxes you owe on the winnings. However, there are certain restrictions on the tax deduction. The amount you can deduct is limited. In addition, you have to be able to prove the amount of your deduction.

Losses and Taxes in General

Under the federal tax code, you can generally take a tax deduction for losses you have as result of, among other things:

  • Your trade or business
  • Any non-business activity you undertake "for profit," that is, to make money or produce income

Losses as the result of gambling or wagering are generally deductible because gambling is an activity to produce income. The legality or illegality of the gambling doesn't impact the deductibility of your wagering losses.

Deduction is Limited

The tax code specifically and very clearly limits the amount of gambling losses you can deduct. You can take a deduction up to the amount of your gambling gains. Under this method, you're taxed on only your net income from gambling for the year. For example, say you lost $10,000 and won $8,000 during various trips to a casino. 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.

Reporting Requirements

You have to report all of your gambling winnings as income for the year on Form 1040. You can't subtract your losses from your winnings and then report the difference.

You take the deduction for your losses with an itemized deduction on Schedule A. You use the line for "other miscellaneous deductions." You can't deduct any of your gambling losses if you don't itemize your deductions. No gambling losses can be deducted if you take the standard deduction.

Are You a Pro?

The taxes rules are similar even if you're a professional gambler. You can only take a deduction for your losses up to the amount of your gains. You claim your losses as business expenses and winnings as business income on Schedule C.

Your losses aren't treated the same as deductions for "business losses" other trades and businesses may take on Schedule C. For example, a small business that makes widgets had gross income of $85,000 and $100,000 in expenses. On its tax return, the business reports a $15,000 loss, which reduces its tax bill significantly. As a professional gambler who won $85,000 and lost $100,000, you can't actually take a deduction for the "extra" $15,000 loss. Like an amateur or casual gambler, you can only deduct enough to offset your $85,000 gain.

Records You Need to Keep

You need to keep detailed records of your gambling activities. It's important that your records show your losses and winnings separately. It's a good idea to keep a diary or log book that tracks the:

  • Date and type of gambling activity or wager you placed
  • Name and address of the place you gambled
  • Names of other people with you while you gambled
  • Amount you won or lost

In addition, you should keep other documentation that shows your winnings and losses, such as:

  • Form W-2G, which is given when gambling winnings exceed certain dollar amounts for various types of games and wagering, or Form 5754, which you get when there's more than one person sharing the winnings, such as a group of friends sharing a lottery ticket
  • Wagering tickets or slips
  • Checks and bank statements
  • Statements showing your winnings or receipts showing your payments that are issued by the gambling establishment

Questions for Your Attorney

  • Do I have to report lottery winnings if I won less than $500?
  • 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?

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