March 7, 2023
What is a Gambling Session
What is a “Gambling Session”?
Section 165(d) of the Internal Revenue Code provides that losses from wagering transactions are allowed only to the extent of the gains from such transactions.
Focusing on the term “transaction”, the Courts and the IRS refuse to let gamblers report their gambling activity in total.
On the other hand, the Courts and the IRS also recognized that it is impractical and onerous to record every roll of the dice, spin of the wheel, draw of a card or pull of a handle.
Consequently, the concept of a gambling session has evolved.
A gambling session requires a gambler to organize and report his or her gambling transactions by time, place and activity. For example, if a gambler plays the slot machines at two separate casinos in the same day, the gambler has two gambling sessions. If a gambler plays the slot machines in the morning, blackjack in the afternoon and poker in the evening all at the same casino, the gambler has three gambling sessions. But on the other hand, if a gambler plays in a three-day poker tournament, the tournament counts as one gambling session. And by the way, every individual horse or dog race counts as a separate gambling session.
Advice Memorandum 2008-11
In 2008, the IRS published Chief Counsel Advice Memorandum 2008-011: Reporting of Wagering Gains and Losses. In this document, the IRS summarizes the case law relating to gambling sessions and provides ten examples of how to calculate the amount of wins and losses for gambling session.
In essence, the IRS is not concerned with the fluctuating wins and losses. There is no accession to wealth until the gambling session is concluded and the wagering gain or loss can be definitively calculated.
REMEMBER: The more detailed and specific you can describe each of your gambling sessions the more likely you are to prevail against the IRS! For more information, please consult with a qualified tax professional.
If the gambler played those slots in the same casino. If that’s the case, the gambler could claim this as a slot machine session for the day and report $500 in winnings for the day (versus the $2,000 of winnings and $1,500 of losses).
In Advice Memorandum 2008-011 the IRS said slot machine winnings/losses are calculated based on comparing the amount of money you pay in during your casino visit with the amount you take home. In other words, you recognize a wagering gain or loss on the slots at the time you redeem your tokens.
The IRS rationale for this is that your fluctuating wins and losses left in play are not accessions to wealth until you redeem your tokens. It’s at that time that you can definitively calculate the amount of your win or loss from your slot machine activities.
Notice 2015-21
In Notice 2015-21, the IRS issued a safe-harbor method for electronically tracked slot machine play.22 Under this notice:
Gross income from a slot machine wagering transaction is determined on a session basis.
A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game, before the end of the same calendar day (midnight to 11:59 p.m.).
To use this revenue procedure, a US resident taxpayer must write “Revenue Procedure 2015-X” on line 21 of Form 1040, U.S. Individual Tax Return. The “X” is in place because the IRS has not finalized this revenue procedure, which is contained in Notice 2015-21.
Recordkeeping for Casual Gamblers
Casino gamblers are rewarded with Forms W-2G to report winnings of $1,200 or more for Bingo or slot machines and $1,500 for Keno. The winnings from the W-2G are reported to the IRS to be taxed as miscellaneous income.
Losses from gambling are deductible as itemized deductions only to the extent of the gambling income. Total winnings and losses for the year can not be netted.
The sessions approach to recordkeeping
An IRS chief counsel advice memorandum from 2008 suggests that casual gamblers keep a log of gambling by session. This memorandum was reinforced by a more recent court case Shollenberger vs Commissioner.
A session is the time between buying in and cashing out. It would most commonly last a day unless the gambler changes location or gambling activity.
The IRS lists the following items as essential for recordkeeping for a casual gambler:
· Date of the wagering
· Name and address of the gambling establishment
· Names of others present
· Amounts won or lost
Keeping records by session would satisfy the above IRS requirements if a log as shown in the example below was kept. Keep funds for food and entertainment separate from gambling cash.
Gambling Session Method Worksheet: The general public’s knowledge of gambling winnings and losses and the records required for tax purposes are primarily misunderstood or outright wrong. All gambling winnings are taxable whether you win enough at one time to generate a tax form W2G or not. A win of $500 or even a scratch-off win of $1, neither of which would trigger a tax Form W2G, are just as taxable as one over $1,000, which would trigger a tax form. Likewise, your losses are deductible, but only if you have a record or log of your gambling activities. You are expected to keep adequate records, not only on winnings but also on losses.
Further, if you have a significant win of $2,500 but gamble it all away later, you are stuck with a W2G on which you will be taxed. Unless you can prove that you put all the money back, you are stuck with the $2,500 win. The tax code and case law acknowledge that keeping a record of each spin or hand of cards is impractical. The IRS and many states allow you to use the “session” method to help report your actual gambling activity. While the law does not allow you to net wins and losses for the year, it does allow your to report your net wins or losses by gambling “session. A “session” is defined as a period of continual play with only a short break in play (for example a restroom break, beverage break, table/machine change, game change, etc.). Leaving and going to lunch or dinner would break the “session,” when you returned, you would start another “session.” The Key to this is keeping a log of how much money you start the session with and any amounts added during the session (this means any new money of yours outside of any casino wins, like an ATM). Our worksheet is designed to help you keep these records and has two examples at the top to help you.
In the first example, you start with $300, went to the ATM, got another $200, and gamble from 9 am to 10:30 am. During that “session,” you happened to have two big wins of $1,200 and $1,300, from which you would have been issued two W2Gs. But by the end of the “session,” you had only $350 left after having gambled away the large wins and any smaller ones. You also activated an $18 bonus and requested a withdrawal of $100 but later canceled $50 of the withdrawal request. The law allows you to net this “session,” which means you have a “session” loss of $118. You can refute the two large wins with proper records for which you have W2Gs. Total session loss, up to the amount of total session winnings can be reported on Schedule A, gambling losses
In the second example, you start with $100, went to the ATM, got another $50, and gamble from 4 pm to 8 pm. During that “session,” you had no big wins But by the end of the “session,” you had $600. You did not activate any bonus and requested a withdrawal of $200 but later canceled $100 of the withdrawal request. The law allows you to net this “session,” which means you have a “session” win of $550. You can refute the two large wings with proper records for which you have W2Gs. The law allows you to refute the wins with proper records, for which you have W2Gs, down to the Total session wins.
NOTE: THE WIN/LOSS REPORT FROM THE CASINOS SHOWS YOUR NET ACTIVITY FROM YOUR PLAYER CARD FOR THE YEAR AND IS NOT AN ADEQUATE RECORD. IT MEANS NOTHING FOR TAX AND WILL NOT BE ACCEPTED BY THE IRS FOR SUBSTANTIATION OF YOUR LOSSES. Some casinos can provide a more detailed record of your activities, but they will not provide it unless you request it, usually several times. It would help if you also kept any ATM receipts for new money added and any bank or credit card statements showing withdrawals or checks written that substantiate the starting wager amount.
Instructions
If starting cash + Cash Added + Bonus Activated + Withdrawal Request- Cancelled Withdrawal Request< Ending Cash it would be considered a Session Win and should be reported on Line 21 of the 1040
If starting cash + Cash Added + Bonus Activated + Withdrawal Request- Cancelled Withdrawal Request > Ending Cash it would be considered a Session Loss and would be reported on Schedule A Gambling losses, up to the total amount of session wins
Form 8275- Disclosure Statement should also be completed entering the net income answer of Line 21 of the 1040 as Colum F of Form 8275
By keeping records this way, the sessions with income would be added and taxed, and the sessions with a net loss would be recorded as an itemized deduction. The income to be included on the tax return would be $700, not $2,000 as the W-2G states. Keeping records with a session log will in many cases result in less income subject to tax.
Relying on Player’s Club card statements can be accurate documentation only if all gambling activity is included and no one else uses the card.
Conclusion: Casual gamblers should keep track of gambling with a log by session for the best and most accurate tax result.
Consider Filing Form 8275
For those of you not familiar with Disclosure Statement, Form 8275 is used by taxpayers and tax return preparers to disclose items or positions that are not otherwise adequately disclosed on a tax return to avoid certain penalties. So long as the tax reporting position has a reasonable basis, a properly completed Form 8275 will (i) immunize taxpayers from an accuracy-related penalty due to disregard of rules or to a substantial understatement of income tax for non-tax shelter items, (ii) eliminate exposure to a 40% penalty for transactions lacking in economic substance, and (iii) mitigate return preparer penalties for tax understatements due to unreasonable positions or disregard of rules. All of this may be accomplished in one single Form.
Form 8275, however, is not just a good penalty-defense maneuver. It is also a cost-savings mechanism. Generally speaking, there are two ways to support a tax position: with substantial authority or with reasonable basis accompanied with a Form 8275. Substantial authority requires that the weight of authorities supporting the tax position must be substantial compared to those not supporting it. This requires more expansive research analysis to evaluate compared to determining reasonable basis, which requires only that the position be reasonably based on one or more tax authorities taking into account the relevance and persuasiveness of the authorities, and subsequent developments. Less work means less professional fees, which, putting self-interest aside, is a better result for my clients.
Truth be told, I’ve not always been friends with Form 8275. Early in my career, I viewed Disclosure Statement as the equivalent of a “Kick Me” sign placed on the back of a book-smart school kid (a not-so-fun flashback for some of us). In other words, I was convinced it was an audit flag for the IRS. And there was some legitimacy to that concern given the tax/IRS climate of the day and lack of widespread use of the form. But in today’s era of aggressive IRS enforcement, more practitioners are filing Form 8275 – sometimes only as a precautionary measure. And with the IRS labeling an increasing number of transactions as abusive and requiring annual disclosures of such “reportable” transactions on Form 8886, the addition of a Form 8275 to a tax return is more akin to a ripple than a splash in the IRS audit pool.
On the topic of Form 8886, let me make an obvious but important point: It is not a Form 8275. And that matters because without a Form 8275, the taxpayer is exposed to a potential 40% penalty for a nondisclosed noneconomic substance transaction. IRC Sec. 6662(i). Stated differently, even when a Form 8886 disclosure form is included with the return, such as to disclose participation in a microcaptive transactions, the taxpayer is still exposed to a potential 40% penalty. This is a real threat, as the IRS is frequently attacking transactions based on a lack of economic substance under Code Section 7701(o), codified in 2010. In my experience, the IRS is asserting a 40% penalty as a matter of routine in virtually all microcaptive audits based on the alleged finding of lack of economic substance.
Why is this important?
Before we answer this question, let’s see why the question is important.
The gambler who does not attain status as a professional gambler must report both winnings and losses. (There’s no net income for the casual gambler.)
This means the winnings produce above-the-line gross income. Losses are below-the-line itemized deductions. This creates trouble for the casual gambler:
Winnings reported above the line add to adjusted gross income (AGI). The higher AGI increases the phaseouts of AGI-adjusted tax deductions, and that causes higher taxes.
·
Losses reported as itemized deductions benefit only those who itemize deductions. (If you don’t itemize, you simply pay more in taxes because of the winnings.)
Example. Sam has reportable gambling winnings of $30,000 and losses of $25,000. If Sam were in business (as a gambler or otherwise), he would have taxable net income of $5,000. But Sam is not in the business of gambling, so he reports $30,000 as gross income above the line and $25,000 in itemized deductions below the line.
That $30,000 of gambling income adds to other income and can trigger phaseouts that reduce the benefits of the following deductions, among others:
·
Adoption credit/exclusion
American Opportunity Tax Credit
Alternative minimum tax exemption (AMT)
·Child credit
Coverdell Education Savings Accounts
Dependent care credit
Earned income credit
Education loan interest deduction
Elderly/disabled credit
Itemized deductions
Lifetime learning credit
Passive loss of up to $25,000 allowed with modified AGI of $100,000 or less (phased out 50 cents on the dollar for each dollar in excess of $100,000)
Passive activity rehab credit
Personal exemptions
Retirement contribution credit
Roth IRA deduction
Savings bond interest exclusion
Social Security benefits (AGI increase causes more benefits to be taxed)
Traditional IRA deduction
Also, if Sam is on Medicare, the $30,000 of added AGI can cause him to pay more for his Medicare. And remember, he netted only $5,000, but Medicare is going to look at AGI, not the net. For 2017, Medicare premiums vary from a low of $134 to $428.60 per month, depending on AGI two years prior.
Now that you see the AGI impact, you will see the answer to this question with clarity.
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