Gambler Tax Return Preparation
To understand the treatment of gambler taxation, you must know TWELVE BASIC RULES and NINE MYTHS about Gambling.
Twelve Rules
1) Gambling income is not treated fairly in comparison to other types of income.
2) ALL TYPES OF GAMBLING INCOME IS TAXABLE.
3) ALL GAMBLING INCOME MUST BE LISTED ON THE RETURN TO AVOID AN UNDER-REPORTING NOTICE.
4) GAMBLING LOSSES CAN ONLY BE TAKEN UP TO THE LEVEL OF GAMBLING WINNINGS.
5) Some gambling winnings, but not all, are reported to the IRS by the gambling institutions.
6) YOU MUST BE ABLE TO PROVE YOUR GAMBLING LOSSES IN AN AUDIT
7) Other than in a "Session," you MAY NOT NET your winnings and losses
7) Winnings and losses should be tracked by SESSION AND TYPE for the best tax outcome
8) The GAMBLING INSTITUTION MUST WITHHOLD ON CERTAIN TYPES AND LEVELS OF WINNINGS
9) Professional Gamblers' rules differ significantly from those that apply to Casual/Recreations Gamblers.
10) An excess gambling loss from another year cannot offset an excess gambling gain in another year.
11) Gambling winning (business or personal), whether legal or illegal in your State, are STILL taxable income.
12) The courts have determined that certain gambling-related income (Tokes and Take-Offs) are taxable income but NOT GAINS FOR GAMBLING.
Nine Myths
1) Online Gambling is Different from Other Forms of Gambling
False. It makes absolutely no difference whether you are gambling at a concrete and steel gambling establishment or online; all forms of gambling are treated precisely the same.
2) You don't have to pay taxes as a U.S. Citizen on gambling winnings from offshore gambling establishments.
False. It does not matter that the gambling establishment is not located in the United States. Nor does it matter that the citizens of the country of the gambling establishment are not subject to tax on gambling winnings. All US Citizens must report and pay taxes on ALL gambling income from WHEREVER WON.
3. No tax is actually due until you repatriate (you can freely withdraw without restrictions) from the offshore accounts.
Absolutely False. The income is taxable as soon as you have constructive receipt of the account (you can freely withdraw without restrictions).
4) The IRS will never know you are gambling online.
This may be partially true, but is it worth the risk? Foreign gambling establishments will not issue you a W-2G. Much like the IRS has obtained the records and client information from financial institutions in foreign countries, they will eventually obtain the records of foreign gambling institutions. Now you are in a world of hurt! If you are playing this game, you're on borrowed time.
5. I only have to report the gambling winning if I receive a W-2G, Form 5754, or Form 1099.
False. ALL gambling winnings are reportable and, more importantly, taxable. These forms typically are a poor accounting of ALL of your gambling winnings.
6. I can just use the gambling institution's Win-Loss reports to prove my winnings and losses
Wrong. The Win-Loss reports are notoriously inaccurate for both the winnings and losses. Neither the Tax Courts nor the IRS auditor has to accept the Win Loss report as evidence of winnings and losses. Looking at the disclaimer with the report will tell you that not even they believe it to be accurate.
7. If I keep a gambling diary or log, I do not have to keep any supporting documentation.
Absolutely False. This lack of support will get most of your losses thrown out, and the Tax Court will not be any help.
8. I don't actually have to report my winning until I have an overall win for the year.
Absolutely False. You MUST annually report your winning and losses SEPARATELY on your tax return, regardless of whether you have an overall win or an overall loss. Where it gets reports (see below) depends on whether you are a casual/recreational or "Professional Gambler."
9. I have heard that gambling record-keeping is the key to improving the outcome of my return. I will just create the log or diary IF I get audited.
Bad idea. If you get audited, and do not have the support documentation to validate the losses you are taking, the AUDITOR WILL DISALLOW THE DEDUCTION. Other people will tell you you can just use the Cohan Rule to recreate your records. While the Cohan Rule is tax case law, if you look at any of the tax law cases that have had to use this ruling, they have paid the price for not having "contemporaneous" records to support their deductions.
Definition of Gambling
For something to be considered "gambling," three things MUST be present;
- A prize
- chance, and
- consideration
There have been some exciting studies and even some court cases that profess that "Poker is a Game of Skill" and is not considered gambling.
UNLV- Toward Legalization of Poker: The Skill vs. Chance Debate
Games of Chance and Games of Skill
Court Cases
Tschetschot, George E., et ux. v. Comm.
In August 2013, a federal appeals court reversed the decision and reinstated the judgment of conviction against the defendant DiCristina.
On February 24th, 2014, the Supreme Court declined to hear the appeal.
Impact of Supreme Court Decision
The Supreme Court summarily declined to hear DiCristina's appeal without issuing an opinion. Although it is difficult to speculate, the federal appellate court's decision reinstating the conviction is in accord with numerous federal courts that have rejected the "gambling is a game of skill" argument. Accordingly, with a lack of a "circuit split" on the question, the Supreme Court likely found no reason to hear the appeal.
For Most Individuals (Casual/Recreation and Professional), Your Activities Involve "Chance," Therefore They Would Be Considered "Gambling."
Most individuals who gamble are casual or non-professional gamblers, but the gambling activity for some will rise to the level of a trade or business. Significant changes have occurred in how the IRS handles the returns of “Professional Gamblers."
Before this change, here is how “Professional Gamblers” had to file.
- When a taxpayer can claim gambling as a trade or business, the gambling winnings, losses, and expenses are reported on Schedule C.
- Gambling losses were allowed ONLY up to the amount of the winnings.
Casual Gamblers
Here is how “Casual Gamblers” must file.
- For Amateur or casual/recreational gamblers, gambling winnings are reported as “other income” on line 21 of Form 1040. Gambling losses are reported on line 28 of Schedule A as miscellaneous itemized deductions, only up to the amount of the winnings.
IRM 165(d) Wagering losses. For purposes of the preceding sentence, in the case of taxable years beginning after December 31st, 2017, and before January 1st, 2026, the term "losses from wagering transactions" includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction. Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.
You Have to Report All Your Winnings
Whether it's $5 or $5,000 from the track, an office pool, a casino, or a gambling website, all gambling winnings must be reported on your tax return as "other income" (Form 1040). If you win a non-cash prize, such as a car or a trip, report its fair market value as income; see raffles and comps below.
Other Than Session Gambling (See Below), Netting Is Not Allowed, and ALL Winnings and Losses MUST Be Reported Separately
Regardless of whether you are a Professional Gambler or a Casual/Recreational Gambler, ALL gambling winnings and losses must be reported separately. You must report your gambling winnings and wagers on different lines of your tax return. Where you report your winnings and losses is different based on whether you are considered a casual/recreational gambler or a "Professional Gambler.".
Casual Gambler Professional Gambler
Gambling Winnings Line 21, Other Income Schedule C – Gross Receipts
Gambling Losses Schedule A Schedule C – Cost of Goods Sold
Is Taxable Yes Yes
Losses limited to Gambling Income Yes Yes
May Deduct Gambling Expenses No Yes1
Subject to Self-Employment Taxes No Yes
1. Pre The Tax Cuts and Jobs Act ("TCJA"), "Professional Gamblers" could take gambling expenses under Sec. 165(d), in excess of gambling income. TCJA affects taxable years after December 31st, 2017, and before January 1st, 2026. Under current law, "Professional Gamblers" can only take gambling expenses up to the amount of gambling income.
You should be aware that the IRS Criminal Investigation Division is actively investigating gamblers attempting to defraud the government by willfully and with an intention to under-report winnings or over-report losses (and/or deductions for "professional Gamblers").
Remember, not reporting income constitutes tax evasion!
Learn the lesson of Al Capone; it is easier to convict someone of tax evasion than to convict someone of more severe crimes!
Remember, when your sign your return, you are signing this statement; "Under penalty of law, I declare that I have examined the return and accompanying schedules and statements, and to the best of my knowledge and belief, that they are True, Correct and Complete'.
We believe the IRS will eventually subpoena the records of credit card and money transfer companies, like Safepay, NETeller, FirePay, and others, to discover unreported or under-reported gambler transactions. Enough said!
Taxable Income, Whether Legal or Not, In Your State
The Fifth Circuit in Humphrey, 162 F.2d 853 (5th Cir. 1947), held that wagering transactions include all gambling activities, whether legal or illegal or business or personal. As long as the losses derive from wagering transactions, they could be used to offset gains from any such transaction.
Internet Revenue Code Section 61 says, "gross income means ALL income from whatever source derived."
This means ALL gambling winnings from legal or even illegal sources worldwide, including raffles, lotteries, drawings, prizes, racetracks, casinos, and bingo parlors, regardless of whether in a physical location, Native American reservation, cruise ship, on the internet, or in another country.
Losses From a Previous Year CAN NOT Be Used To Offset Winnings In The Current Year
(Rusnak, T.C. Memo. 1987-249). However, an excess gambling gain in one year cannot be offset by an excess gambling loss in another year (Skeeles, 118 Ct. Cl. 362 (1951))
Income NOT CONSIDERED GAINS From Wagering Transactions
In addition, courts have considered the following gambling-related income sources not to be gains from wagering transactions:
Tokes
Casino dealers receive "tokes" from patrons who play at their tables. The patron places a bet for the dealer's benefit. Tokes are considered compensation for the recipient's services and, thus, should be treated as ordinary income rather than either wagering gains or gifts (Bevers, 26 T.C. 1218 (1956); Allen, 976 F.2d 975 (5th Cir. 1992); Olk, 536 F.2d 876 (9th Cir. 1976); and Williams, T.C. Memo. 1980-494). Reasoning, the dealer is not wagering; the patron is!
Take-offs
A take-off is a fee that the house charges card players to play poker at the casino. Because take-offs serve as seat rental charges, the house receives, it is not gains from wagering transactions and cannot be used to offset the house's losses from such transactions (Nitzberg, 580 F.2d 357 (9th Cir. 1978)).
Gambling-Related Potential Income
Comps
This is an area of tax law where size matters. The size or value of the comp determines how it should be treated. Smaller items like meals, hotel rooms, and show tickets are considered to be loyalty rewards and not addressed in IRS publications. Most tax experts believe they are not taxable, and the gambling institution has not been instructed to issue 1099s. However, comps with a much high fair market value, such as cars, would be considered gambling income.
Cashback
Cashback are gambling rewards based on a specific formula. The deciding factor on whether it is taxable as gambling income is whether it is statutory or not. Statutory, meaning if your account is closed (barred) with the gambling institution, would they have to pay out your cashback? If yes, then it is taxable gambling winnings. It would be taxable when redeemed if they would not have to pay your cashback if your account was closed.
Free Play
Free plans usually come in the form of credits that must be played through specific machines such as video draw poker or slot machines. It usually must be redeemed within a particular period. After playing it through the machine, we believe the actual proceeds should be recorded as a win listed in your session report. This is a gray area not addressed by the IRS in publication, nor have the tax courts directed addressed this.
Award and Prizes
These would be taxable as gambling winnings at the TRUE fair market value. Note gambling institutions tend to inflate the value for marketing purposes.
Where it is considered gambling winnings depends on the invite's criteria and if you must gamble on receiving future invites.
It would important to keep awards and prize literature that spells out how is connected to your gambling activities.
Tournament Wins
Most gambling institutions do not issue a 1099 MISC (mostly) or W-2G (rarely) until the tournament win (either individually or for the year) has exceeded $600. This would be considered gambling income. Remember, ALL gambling income is taxable regardless of the amount.
Note: Tournament win and entry fees must be reported separately (fees as a loss).
Whether it is considered gambling winnings depends on the invite's criteria and if you must gamble on receiving future invites.
It would be important to keep tournament literature that explains how it is connected to your gambling activities.
Your Losses Might Be Deductible
Gambling losses include the actual cost of wagers. Your gambling losses might be deductible if you itemize. For a casual/recreational gambler expenses incurred in connection with the conduct of the gambling activity, such as travel to and from a casino, are considered personal expenses and are not deductible.
First, unless you're a professional gambler (more on that below), you must itemize to deduct gambling losses (itemized deductions are claimed on Schedule A. Unfortunately, most people don't itemize. So, if you claim the standard deduction, you're out of luck twice — once for losing your bet and a second time for being unable to deduct your gambling losses.
Second, you can't deduct gambling losses that are more than the winnings you report on your return. For example, if you won $100 on one bet but lost $300 on a few others, you can only deduct the first $100 of losses. If you were down on your luck and had no gambling winnings for the year, you can't deduct any of your losses.
If you're a professional gambler, you can deduct your losses as business expenses on Schedule C without having to itemize. However, a note of caution: An activity only qualifies as a business if your primary purpose is to make a profit and you're continually and regularly involved in it. Sporadic activities or hobbies don't qualify as a business.
Why Do My Gambling Winnings Affect How Much of My Social Security Income is Taxed?
When you file a federal tax return as an individual, and your combined income (gambling income (and all other income outside of Social Security Income) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your income is more than $34,000, then up to 85% of your benefits may be taxable.
If you file a joint return—and you and your spouse have a combined income between $32,000 and $44,000—you may have to pay income tax on up to 50% of your benefits. If your income is more than $44,000, up to 85% of your benefits may be taxable.
Session Gambling
U.S. taxpayers, except for some professional gamblers, are not allowed to ‘net’ their wins and losses (that is, combine them and report only the total) but must add up their total wins from each gambling session and report the total as income (part of ‘Other Income,’ line 21 of Form 1040.) Losses in any year may be claimed, but only up to the amount of winnings reported that year, and then only if the taxpayer elects to itemize deductions rather than taking the standard deduction.
A taxpayer must determine winnings and losses separately. However, the Internal Revenue Code and supporting IRS precedent do not provide any specific guidelines on when a gambling activity begins and ends to determine whether the particular activity resulted in a win or a loss. The purpose of this article is to examine what precedent there is. That is, what constitutes a session of a particular gambling activity?
See more details and requirements about Session Gambling.
Sports Betting
Winnings From Online Sports Betting Sites Are Taxable
If you win money betting on sports from sites like DraftKings, FanDuel, or Bovada, it is taxable and reportable income. Those sites should also send both you and the IRS a tax Form 1099-Misc if your winnings exceed $600. If you take home a net profit exceeding $600 for the year playing on websites such as DraftKings and FanDuel, the organizers have a legal obligation to send both you and the IRS a Form 1099-MISC. If you receive your winnings through PayPal, CashApp, Zelle, or Venmo, the reporting form may be a Form 1099-K.
Report Winnings Even if You Don’t Receive Form 1099
The 1099 tax forms report your winnings to the taxing authorities and let you know the amount you must report on your tax return taxes. Even if you don’t receive a Form 1099, you must report the gambling income on your federal and state income tax returns. This includes the gambling income under the $600 reporting limit for the Form 1099-Misc. That is why it is critical that you keep a gambling log or diary.
The Federal IRS Form W2-G
All gambling establishments online or land-based in New Jersey, Pennsylvania, New Hampshire, and West Virginia are required by federal law to report winnings that come from gambling. They do this by reporting winnings to the IRS on Form W2-G.
The minimum amount won for filing the W2-G will vary, depending on the gambling from which the winnings are derived.
Here are some of the minimum amounts for taxes to be levied and the forms of gambling:
- Horse Racing: More than $600 won on a bet of $2 or 300x any amount that is a larger bet.
- Slots and Bingo: Winnings of more than $1,200 minus the amount bet.
- Keno: Winnings of more than $1500 minus the amount bet.
- Poker: Winnings of more than $5,000 minus the buy-in.
- Sports Betting: Winnings of more than $5,000 in a calendar year.
If a W-2G is required, the payer (sports betting parlor, casino, racetrack, lottery, etc.) must see two forms of identification. One of them must be a photo ID. You'll also have to provide your Social Security number or, if you have one, an individual taxpayer identification number.
In some cases, you'll get the W-2G on the spot. Otherwise, the payer must send the form to you by January 31. If your bet was with a casino, we're fairly certain you'll get the W-2G, but you should keep all W-2Gs received on the spot and match them up with what comes in the mail.
NOTE: When you provide the W-2Gs to your tax professional, try not to give duplicates (one received on the spot and the one received in the mail at year-end. Your tax professional cannot tell them apart, and they will both get entered on your tax return.
The W-2G tax forms report your winnings to the taxing authorities and let you know the amount you must report on your tax return taxes. Even if you don’t receive a Form W-2G, you must report the gambling income on your federal and state income tax returns. This includes the gambling income under the above reporting limits for Form W-2G. That is why it is critical that you keep a gambling log or diary.
Not Reporting Gambling Income
If you get W-2Gs or 1099-Miscs, you should not ignore them, even if the money from winnings was withheld. You must report ALL gambling winnings regardless of the gambling establishment's reporting requirements.
If you do not do this, you will likely receive Form CP2000 from the IRS. This form is a notice from the IRS for income that is not reported. You may have to pay additional taxes as well as penalties and interest.
Withholding Might Be Required
Generally, if you win more than $5,000 on a wager, and the payout is at least 300 times the amount of your bet, the IRS requires the payer to withhold 24% of your winnings for income taxes. (Special withholding rules apply for winnings from Bingo, Keno, Slot Machines, and Poker tournaments.) The amount withheld will be listed in Box 4 of the W-2G form you'll receive. You will also have to sign the W-2G stating, under penalty of perjury, that the information listed on the form is correct.
The rate for withholding money from gambling wins at a federal level is 24% across the board. The amount that is withheld at a state level will vary, and here are the percentages:
- California- 7% (non-residents only)
- Connecticut- 5% (no withholdings for anyone unless federal withholdings are required)
- Colorado – 4.63%
- Illinois- 4.95% (on lottery winnings of $5,000 or more (gross), certain gambling winnings of $5,000 where federal withholding is required, and winnings of non-resident professional gamblers
- Indiana- 3.4% (All W-2Gs)
- Iowa- 5% (All W-2Gs)
- Kansas- 4.5% (All W-2Gs)
- Louisiana- 6% (All W-2Gs)
- Maryland- 8.75% Residents, 7.5 Non-residents (Lottery and certain gambling winnings)
- Massachusetts- 5% (only where federal withholdings are required)
- Michigan- 4.35% (non-residents only and casinos, racetracks, and off-track betting only)
- Mississippi- 3% (non-refundable tax)
- Missouri- 4% (All W-2Gs)
- New Jersey – 3%
- Ohio – 4% (All W-2Gs)
- Pennsylvania – 3.07%
- West Virginia – 6.5%
States With No Taxes Withholdings or Low Tax Withholdings on Lottery Winnings
California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have lottery winnings withheld. This means that only federal tax rates would apply to winnings in these states.
Of states that do withhold tax winnings, North Dakota is the lowest at 2.9%. Pennsylvania (3.07%), Indiana (3.15%), and Ohio (3.99%) also have low rates of withholding on lottery winnings.
States With High Tax Withholdings on Lottery Winnings
Some states automatically withhold state taxes from any win that generates a federal Form W-2G. Other states withhold only from non-state residents. New York has the highest percentage of tax-winning withholding, with 10.9% withheld by the state. Other states and territories with high withholding percentages include New Jersey (10.75%), the District of Columbia (10.75%), Oregon (9.9%), Minnesota (9.85%), and Maryland (8.95%).
One important note is that if the winner buys a winning ticket in a state they do not live in, most states will not withhold the winnings. Out of the 43 states that participate in multi-state lotteries, only Arizona and Maryland tax the winnings of people who live out of state.
Below are the states that withhold and for whom they withhold
- New York - 8.82%
- Maryland - 8.75%
- New Jersey - 8%
- Oregon - 8%
- Wisconsin - 7.65%
- Minnesota - 7.25%
- Arkansas - 7%
- South Carolina - 7%
- Connecticut - 6.99%
- Idaho - 6.92%
States That Don’t Withhold Tax on Your Gambling Winnings
If you look at the gambling laws by state, nine states don’t collect taxes from your betting wins. That said, you’ll want to keep the following places in mind when planning your next gambling trip. This means if you have winning over certain limits, the gambling establishment is not required by the state to withhold taxes. Remember you may still have to reports gambling winnings in your resident state and All gambling winning are taxable on the federal return.
- Alaska
- Delaware
- Florida
- Nevada
- New Hampshire
- South Dakota
- Texas
- Washington
- Wyoming
Tennessee only taxes investment and dividend income, so it does not tax gambling income.
Check out Our Gambler's Tax Calculator
Below are some common questions about Casual Gamblers
Can You Claim Gambling Losses on Your Taxes?
What is Required for Proper Gambling Record Keeping?
How to Pay Taxes on Gambling Winnings and Losses?
Problematic States for Gamblers
Below is a list of the states with problematic tax laws for gamblers. Ensure you read the notes because while all these states have problematic tax systems for gamblers, some impact casual gamblers while others impact professional gamblers.
California [11]
Connecticut [1]
District of Columbia [12]
Hawaii [2] [11]
Illinois [1]
Indiana [1]
Kansas [1]
Maine [12]
Massachusetts [1]
Michigan [1]
Minnesota [3] [11]
Mississippi [4]
New York [5] [11]
North Carolina [1]
Ohio [6]
Oklahoma [10]
Pennsylvania [9]
Rhode Island [1]
Utah [12]
Washington [7]
West Virginia [1] [11]
Wisconsin [1]
New Hampshire [8]
NOTES:
1. CT, IL, IN, KS, MA, MI, NC, RI, WV, and WI do not allow gambling losses as itemized deductions. These states’ income taxes are written so taxpayers pay based (generally) on their federal Adjusted Gross Income (AGI). AGI includes gambling winnings but does not include gambling losses. Thus, taxpayers with (say) $100,000 of gambling winnings and $100,000 of gambling losses will owe state income tax on the phantom gambling winnings. (Michigan does exempt the first $300 of gambling winnings from state income tax.). See record keeping and session gambling as possible solutions.
2. Hawaii has an excise tax (the General Excise and Use Tax) that’s considered a sales tax. It is, but it is also a tax on various professions. A professional gambler is subject to this 4% tax (an amateur gambler is not).
3. Minnesota’s Alternative Minimum Tax (AMT) negatively impacts casual/recreational gamblers. Because of the Minnesota AMT design, amateur gamblers with significant losses effectively cannot deduct those losses.
4. Mississippi only allows Mississippi gambling losses as an itemized deduction.
5. New York has a limitation on itemized deductions. Phase-outs apply based on the filing status and level of income. Under the new law, individuals with New York State adjusted gross income over $1 million may not claim any itemized deductions except for 50% of their charitable deductions claimed for federal income tax purposes.
6. Ohio currently does not allow gambling losses as an itemized deduction. However, effective January 1, 2013, gambling losses will be allowed as a deduction on state income tax returns. Unfortunately, those gambling losses will not be deductible on the city or school district income tax returns, so that Ohio will remain bad for amateur gamblers. Ohio cities also do not allow gambling losses.
7. Washington state has no state income tax. However, the state does have a Business & Occupations Tax (B&O Tax). The B&O Tax has not been applied toward professional gamblers, but my reading of the law says it could be at any time.
https://dor.wa.gov/sites/default/files/2022-02/sn_05_gambling.pdf.
The State of Washington does not collect a gambling tax.
RCW 9.46.110 allows local cities, counties, or towns to tax gambling receipts.
Income Taxes on Gambling Income Outside of Your Home State
8. Professional gamblers who are residents of New Hampshire are liable for the state's business tax (8.5%) if they have more than $50,000 in gross receipts.
9. Pennsylvania nets gambling winnings reported on line 8 of the state form PA-40. Pennsylvania Lottery winnings are not taxable. Pennsylvania Lottery losses are not deductible.
10. Is there a limit on the amount of itemized deductions you can claim on the Oklahoma return? The itemized deductions allowed on the Oklahoma return are limited to $17,000. Charitable Contributions and Medical Expenses are not included in this limitation.
11. Phase-down: California, Hawaii, Minnesota, New York, and Virginia each apply itemized deduction phase-downs that reduce, by up to 80 percent, certain itemized deductions. All these provisions are applied broadly to the significant deductions for charitable giving, home mortgage interest, and state and local taxes, but they exclude medical expense deductions from their scope. New York and Virginia’s phase-downs are based on the Pease provision, as before the TCJA. At the same time, the other states’ limitations seem to be based, to varying degrees, on earlier iterations of Pease. Phase-down rates are set at 3 percent in most states, meaning that every dollar of income earned above the specified threshold triggers a 3 percent cut in itemized deductions. California, however, uses a steeper 6 percent phase-down rate. The starting points at which phase-downs begin to take effect vary from a low of $166,800 for married couples in Hawaii to a high of $401,072 for married couples in California as of 2019.
12. Phase-out: Maine, Utah, and the District of Columbia apply itemized deduction phase-outs. These work in much the same way as the phase-downs just described, except that they can eliminate the affected deductions entirely for high-income earners rather than reducing them by up to 80 percent. While D.C. exempts medical deductions from its phase-out, Maine and Utah apply their provisions to all major deductions. Utah phases out itemized deductions (and some other tax reductions) at a meager 1.3 percent phase-out rate, though its phase-out also starts at a much lower income level than in other states ($29,202 for married couples in 2019). Maine, by contrast, applies a more aggressive 20 percent phase-out rate, though it does not begin to take effect until income exceeds $162,950 for married couples.[37] In D.C., a 5 percent phase-out rate starts at $200,000 of income.
As a general rule, you must pay taxes on non-resident state gambling winnings (if you exceed the filing requirement for that state) for out-of-home state gambling winnings.
Example. You reside in California and go to Arizona to gamble at a tournament. You would have Arizona non-resident gambling income that may or may not be reportable, depending on the filing requirements in Arizona.
Note: If a W-2G is generated for the federal in a non-resident state, the gambling establishment must also send a copy of the W-2G to the state.
Also, Note: If you have non-resident state withholdings, the only way to get the withholding (or a portion thereof) returned is to file a return for that state.
Fortunately, most home states offer a credit for having paid taxes on the same income in two states. Other states do not offer this credit; you must file a non-resident return.
Check out Our Gambler's Tax Calculator
Professional Gambler Tax
A “Professional Gambler” is classified as a trade or business. A profit motive is necessary to classify an activity as a trade or business. All facts and circumstances concerning the activity must be considered in determining whether an activity is engaged in for profit. No one factor is crucial in making this determination. The following factors are considered:
Professional Gamblers
- A professional gambler is engaged regularly and continuously in a trade or business where he makes wagers solely for his or her own account to make a profit.
- Sporadic gambling, gambling as a hobby, or gambling for amusement does not qualify.
- The IRS will look at all the facts and circumstances in each case to determine if an individual is engaged in a trade or business.
- It is essential to keep accurate records to prove deductions taken.
- A professional gambler would report his or her losses to the extent of gains and any ordinary and necessary expenses of operating his or her business on Schedule C.
- The individual would be subject to self-employment taxes if the gains exceed the losses.
- If an individual wins a jackpot in another state, he or she may be required to file a nonresident form for that state, reporting the winnings and losses, depending on the specific state's laws.
All activities' facts and circumstances should be considered to determine whether a profit motive exists. Regs. Sec. 1.183-2(b) provides nine factors:
- The way the taxpayer carries on with the activity. If the taxpayer conducts gambling activities in a businesslike manner, such as maintaining complete books and records, this factor favors finding a profit motive.
- The expertise of the taxpayer or his or her advisers. Preparing gambling activities through extensive study and consulting with experts may indicate that the taxpayer has a profit objective.
- The time and effort expended by the taxpayer in carrying on the activity. A taxpayer who devotes much time and effort to conducting gambling activities may thereby show an intention to make a profit.
- The expectation is that assets used in the activity may appreciate in value. This factor might not apply to gambling since the assets are usually cash.
- The success of the taxpayer in carrying out other activities. A taxpayer’s success in converting other non-gambling business activities from unprofitable to profitable may indicate a profit motive for gambling in this venture.
- The taxpayer’s history of income or losses with respect to the activity. A history of substantial gambling losses may indicate that the taxpayer did not conduct the gambling activities for profit.
- The amount of any occasional profits. It is not unusual for an eventually successful business to have several unprofitable years before becoming successful. A few significant wins, however, can indicate a profit motive despite more routine losses of lesser amounts. Regarding items 6 and 7, they must be trending toward profitability. It is essential that the taxpayer can document, as part of the business plan, the changes made (i.e., reduction of expenses, additional education/instruction, etc.) in the pursuit of profitability.
- The taxpayer’s financial status. If a taxpayer does not have substantial income from non-gambling activities, it may indicate that the taxpayer engages in gambling for profit.
- The presence of elements of personal pleasure or recreation. Since gambling at a casino is commonly understood to be an amusement, a taxpayer must show there is no pleasure in gambling (for example, no friends or family members accompany the taxpayer).
The Supreme Court ruled in Groetzinger (480 U.S. 23 (1987) that an individual could be in the trade or business of gambling (a “Professional Gambler”) if he or she pursues gambling:
- Full-time
- In good faith
- With regularity
- As a livelihood rather than as a hobby
So, What Caused the Change In The IRS Rules
The Tax Court changed directions on the deductibility of non-wagering business expenses. The most significant Tax Court case is Mayo (136 T.C. 81 (2011)). In Offutt (16 T.C. 1214 (1951)) partially overruled its prior precedent.
Although IRC Sec.162(a) allows a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business, Sec. 165(d) specifies that deductible losses from wagering transactions are limited to the gains from such transactions. In the past six decades, the Tax Court has generally followed the Offutt rule, under which courts have applied Sec. 165(d) to limit the deductibility of professional gamblers’ trade or business expenses.
Contrary to Offutt and subsequent cases, the Mayo court allowed a professional gambler to deduct ordinary and necessary business expenses under Sec. 162(a), potentially more than gross receipts from gambling as a trade or business. In doing so, the court noted it followed recent IRS policy on the issue outlined in a 2009 IRS legal memorandum.
Under the holding in Mayo and the IRS' acquiescence, professional gamblers can fully deduct their non-wagering business expenses beyond wagering gains. Non-wagering business expenses may include transportation, meals and entertainment, admission, subscriptions, and other fees. In addition, if non-wagering expenses exceed wagering gains and other income, they may give rise to a net operating loss that may be carried back to previous or future-year returns. Professional gamblers must still substantiate the expenses' amount and business purpose to secure their deductibility (Presley, T.C. Memo. 1979-339).
Furthermore, in December 2011, the IRS acquiesced to the court’s holding and analysis (Action on Decision 2011-06).
For additional information, see IRS Chief Counsel Memorandum on Professional Gambler’s Wagering Losses and Business Expenses.
In December 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. Pre The ("TCJA"), "Professional Gamblers" could take gambling expenses under Sec. 165(d), in excess of gambling income. TCJA reversed Mayo. TCJA affects taxable years after December 31st, 2017, and before January 1st, 2026. Under current law, "Professional Gamblers" can only take gambling expenses up to the amount of gambling income.
Casual (Non-professional) Gambler
For taxpayers that are non-professional gamblers:
- You must itemize deductions on Schedule A to take advantage of gambling losses.
- Non-professional gamblers that do not itemize deductions lose the tax benefit of deducting their losses.
- Gambling losses are deductible only to the extent of gambling winnings reported on line 21 of Form 1040.
- You must be able to substantiate any losses claimed.
Gambling Losses
- The IRS looks at gambling losses closely and requires documentation to support deductions.
- Gambling losses are only deductible up to the amount of your gambling winnings.
- You can never show a gambling loss more than winnings for tax purposes.
- Gambling losses more than gambling winnings cannot be carried forward to offset earnings in any other year.
- Losses from one type of gambling transaction are deductible against winnings from another type.
- A husband and wife who file a joint return can pool their winnings and losses together, so the losses of one can offset the gains of the other.
- Allowable losses are deducted on Line 28, “Other Miscellaneous Deductions,” of Schedule A on your tax return.
- These are fully deductible as an itemized deduction and aren’t subject to the 2% of the adjusted gross income (AGI) floor.
- If you cannot itemize, your losses cannot be used to offset your winnings.
- You must keep track of losses separately and provide adequate records for your deduction.
Non-Professional Gambler Tax Rules and Guidelines
The AGI Problem for Non-Professional Gambler Taxpayers
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.
Below is a list of what can be affected by the treatment of gambling winnings and the inability to net (other than session tracking) losses;
- Alternative Minimum Tax
- The Affordable Care Act provisions, including the Net Investment Income Tax (NIIT) and subsidies
- Social Security taxability
- Medicare Premiums
- Deductible IRA contribution eligibility
- Allowable medical expense deductions
- Rental real estate deductions for those not considered a "Real Estate Professional."
- Child tax credits
- Earned income credits
- Investment interest
- American Opportunity Tax Credit
- Lifetime Learning Tax Credit
- Hope Credit
- Retirement Savings Contributions Credit
- Adoption credit
Computing Non-Professional Gambler Tax Winnings
Even if you do not receive a Form W-2G, Certain Gambling Winnings, or similar documents from the payer of the gambling winnings, your winnings are still considered taxable income. Gambling winnings must be considered in determining your filing requirements.
Winnings of any type are includible in income. Winnings include money and/or the fair market value of bonds, cars, houses, and other non-cash prizes.
Do not net winnings and losses. You cannot subtract your losses from your winnings when reporting your gambling income. The total income is reported on line 21 of Form 1040, and losses (up to the amount of winnings) are claimed by itemizing deductions on Schedule A.
Gambler Tax Wins and Losses Are Tracked by The Session
The basic rule for tracking wins and losses is that you must figure out how much you’ve won and lost during the entire year by keeping track of all your wins and losses for each gambling session you have separately. You add up all your winning sessions during the year to determine your winnings that are to be reported on line 21 of Form 1040 and then do the same by adding up your losing sessions to determine your annual losses and report those on Schedule A, "other miscellaneous deduction, not subjects to the 2% of AGI.
A basic definition of a gambling session for a gambler taxpayer is a period of continuous play without cashing out. However, a session cannot last more than one day.
Gambler Tax Proof of Winnings and Losses
If I were told I could provide gamblers with only one piece of tax advice, I would say this: Keep outstanding records. If the IRS or a state or city tax agency decides to examine a taxpayer's reported gambling losses, they will very likely be disallowed if the taxpayer presents insufficient records.
Revenue Ruling 77-29, 1977-2 C.B. 538 was written by the IRS to specifically address the required documentation to support a deduction for gambling losses.
The taxpayer should have an accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation, which will usually be acceptable evidence of substantiation of wagering winnings and losses. In general, the diary should contain the following information:
All professional and casual gamblers must keep appropriate records to document their wins and losses from gambling sessions. Professional gamblers also need to document their gambling-related expenses.
The session records might include a journal or diary listing:
- The date and specific type of wager or gambling activity. The location where the gaming took place
- The name of the gambling establishment
- The address or location of the gambling establishment.
- The name of the other person(s) present with you at the gambling establishment.
- Activity (i.e., slots, poker, etc.)
- Machine number (if applicable)
- Net win amount
- Net loss amount
- W-2G amount
- Save all documentation, such as losing tickets, canceled checks, cash machine receipts, bank withdrawal statements, and credit slips.
* Where possible, you should support this documentation with other documentation of the activity documentation, such as hotel bills, airline tickets, gasoline credit cards, etc.
Can I Deduct Gambling Losses as a Non-Business Casualty Loss Under Section 165?
No. As a recent Tax Court opinion demonstrates, Section 165(c)(3) allows taxpayers to deduct non-business losses that “arise from fire, storm, shipwreck, or other casualties, or theft.” The loss must be sudden, unexpected, and unusual.
Furthermore, section 165 only applies where the taxpayer’s property has suffered physical damage. Funds vanishing from a bank account due to gambling do not constitute physical property damage.
Therefore, even if gambling is a product of sudden, unexpected, and unusual incapacitation due to the onset of a disease or resulting from medication diminishing mental capacity, the taxpayer is not entitled to a deduction under section 165 for casualty losses.
Are There Any Other Barriers to Claiming a Deduction?
Non-resident aliens generally cannot deduct gambling losses. Session gambling is critical for non-resident aliens.
There is an exception for Canadian citizens who may deduct their losses to the extent of their winnings.
You may owe state or local taxes on your gambling winnings as well. You may be unable to deduct gambling losses on your state tax return. C.T., IL, IN, KS, MA, MI, NC, RI, WV, and W.I. do not allow gambling losses as itemized deductions. Session gambling is critical in these states.
Examples of additional documentation for the following games of chance:
a) Keno - Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment, copies of the taxpayer's casino credit records, and copies of the taxpayer's casino check cashing records.
b) Slot Machines - A record of all winnings by date and time that the machine was played (in Nevada, the machine number is the number required by the State Gaming Commission and may or may not be displayed in a prominent place on the machine. If not displayed on the machine, the number may be acquired from the casino operator).
c) 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 indicates whether the credit was issued in the pit or at the cashier's cage.
d) Bingo - A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.
e) Racing - Horse, Harness, Dog, Etc. - A record of the race, entrant's wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack
f) Lotteries - A record of ticket purchases, dates, winnings, and losses. Supplemental documents include unredeemed tickets, payment slips, and winning statements.
NOTE - IRS examiners may consider oral testimony and the taxpayer's credibility, but having documentation to back up many expenses will help. Also, where taxpayers have established that they sustained some gambling losses, Courts have determined the amounts under the Cohan rule. For the Cohan rule to apply, there must be sufficient evidence to satisfy that at least the amount allowed in the estimate was spent or incurred for the stated purposes.
Group Wagering
- When individuals pool their money together to increase the chances of winning, it is called group wagering.
- You need to report any winnings on Form 5754 so the tax burden is shared based on the portion of the winnings received.
- This form is also used to facilitate the issuance of a Form W-2G to each group member.
- Any federal or state taxes withheld from your winnings should be included on your tax return, with a copy of Form W-2G attached.
Note: This document must be submitted to the gambling institution to properly issue the W-2G to all the group members. Failure to do so means the primary person will receive the full W-2G. If you received the full W-2G for the group, listing only your portion of the win will GUARANTEE an underreporting notice from the IRS.
In addition to a diary, the taxpayer should also have other documentation. A taxpayer can generally prove gambler tax winnings and losses through the following items:
- Form W-2G, Certain Gambling Winnings
- Wagering tickets
- Canceled checks.
- Credit records
- Bank withdrawals
Form W-2G, Certain Gambling Winnings, is used by payers to report certain gambling winnings to the payee and IRS.
- Generally, gambling winnings (1) $600 or more and (2) at least 300 times the wger amount are reported on Form W-2G.
- For Keno, the reporting threshold is $1,500 (reduced by the wager), while for bingo and slot machines, it is $1,200 (not reduced by the wager).
- For a poker tournament, the reporting threshold is $5,000 in winnings (reduced by the wager or buy-in).
- When winnings exceed $5,000, payers generally must withhold income tax at the 25% rate. Tax withholding, if any, is shown on Form W-2G.
Comps
Taxpayers who gamble frequently enough and in such high amounts that complimentary items (such as tickets to shows, etc.) are provided to them by casinos are required to include these “comps” in income. The comps are treated as gambling winnings, so they increase the amount of potentially deductible gambling losses.
Comps. An exception to the narrow interpretation of wagering gains is comps. The taxpayer in Libutti (T.C. Memo. 1996-108) was allowed to include comps as a part of his wagering gains against which he could deduct his gambling losses. The Tax Court held that the comps were the taxpayer’s gains from wagering transactions because “winnings” is not the only meaning for the word “gains” in Sec. 165(d). Further, the court found that, although the taxpayer’s receipt of the comps was not directly related to the success or failure of his wagers, he received the comps incident to his direct participation in wagering transactions. Therefore, the relationship between the taxpayer’s comps and his wagering was “close, direct, evident, and strong,” such that the comps were sufficiently related to his gambling losses for the purposes of Sec. 165(d).
Non-Wagering Gains
Non-wagering gains (for example, “take-offs” or table fees paid by gamblers to a casino and sometimes passed along from the casino to an employee, who may also gamble) could not be used to offset wagering losses. Besides takeoffs, professional gamblers’ income sources not directly from their wagering activities may include “tokes” (tips to casino dealers, sometimes in the form of bets placed by gamblers for their benefit) and “comps” (complimentary goods and services a casino provides gamblers). Courts have also addressed the treatment of these income sources.
Take-offs. The taxpayer in Boyd (762 F.2d 1369 (9th Cir. 1985)) was a professional gambler managing a poker room in a casino. Under the contract with the casino, he participated in poker games with his own money to stimulate play. The casino gave him a portion of the take-offs as compensation. The IRS and the courts rejected Boyd’s attempt to offset his wagering losses against his take-off income. The Ninth Circuit noted that because a takeoff is a fee, it is not gain from wagers entered into by the casino or the taxpayer. Therefore, Boyd could not offset wagering losses against his contractual share of the take-offs. The take-offs received by the taxpayer should be treated as ordinary income, the court said.
Tokes. The Tax Court in Bevers (26 T.C. 1218 (1956)) held that wagering tokes received by a dealer were gains from his labor as a dealer, not from wagering transactions. The court said he would not have received the toke if the taxpayer had been merely an observer and taken no active part in the games. Therefore, tokes are compensation for the recipient's services and should be treated as ordinary income. Likewise, the Fifth Circuit in Allen (976 F.2d 975 (5th Cir. 1992)) concluded that a dealer receiving a wagering token has not entered into a wagering transaction since the dealer has no part in deciding to make the wager and stands to lose nothing from it.
EXECUTIVE SUMMARY
- The IRS acquiesced to the Tax Court’s recent holding that a professional gambler in the trade or business of gambling could deduct non-wagering expenses more than gambling winnings under Sec. 162(a).
- Historically, such costs more than gambling winnings have been disallowed under Sec. 165(d) and previous Tax Court precedent. However, such deductions may offset other income and even result in a net operating loss that may be carried back or forward to other tax years.
- To be considered a professional gambler, taxpayers generally must demonstrate to the satisfaction of the IRS that they are engaged in gambling as a trade or business rather than casually. The IRS and courts apply nine factors in regulations under Sec. 183, as well as all relevant facts and circumstances in making the determination.
- Non-wagering business expenses may include transportation, meals and entertainment, admission, subscriptions, and other fees. Wagering gains include wagering winnings and “comps” (the fair market value of complimentary goods and services) but not additional income to casino personnel in the form of “take-offs” and “tokes,” which are likely to be considered compensation or other, non-wagering income.