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Claiming Gambling Winnings and Losses On Federal Tax Returns

Winnings from gambling of any kind are fully taxable under federal law. Gambling income includes, but is not limited to, winnings from lotteries, casino, raffles, sweepstakes, horse races and other sports betting. The taxable value is generally the cash winnings (minus the wager, bet or buy-in) and the fair market value of tangible property won (e.g. cars and vacations). All gambling winnings are recorded on Line 21 ("Other Income") of your Form 1040 individual tax return.

Can you deduct gambling losses? Yes, but ONLY if you itemize your deductions on Schedule A of your Form 1040. If you claim the standard deduction, you cannot deduct any gambling losses. Also, the amount of gambling losses you deduct cannot be more than the amount of gambling income you reported on your return. The Tax Cuts and Jobs Act of 2017 eliminated most miscellaneous itemized deductions allowable that are over 2% of adjusted gross income (AGI) in tax years 2018 through 2025, but gambling expenses are preserved. In fact, allowable deductions in 26 U.S.C §165(d) related to wagering are expanded to include transportation and admission fees.

Before you consider hiding that big jackpot from your taxable income, know that some winnings are required to be reported to the Internal Revenue Service. The payer must furnish Form W-2G to you and the IRS if you were paid any of the following:

  • $1,200.00 or more in winnings from bingo or slot machines;
  • $1,500.00 or more in winnings from keno;
  • $5,000.00 or more in winnings from a poker tournament (reduced by the wager or buy-in);
  • $600.00 or more from gambling winnings (not from bingo, keno, slot machines and poker tournaments) and the payout is at least 300 times the amount of the wager; or
  • Any other gambling winnings subject to federal income tax withholding.

Additional, if your winnings are reported on Form W-2G, federal taxes are withheld at a flat rate of 25% (28% if you don't give the payer your taxpayer ID number). Withholding federal taxes is required when the winnings (minus the bet, wager or buy-in) is more than $5,000.00 or at least 300 times the amount of the bet.

If you are a professional gambler engaged in a trade or business, you report your income differently than an amateur gambler. The professional gambler reports winnings and losses for federal taxation on Form 1040, Schedule C ("Profit or Loss From Business"). In Commissioner v. Groetzinger, 480 U.S. 23; 107 S.Ct. 980; 94 L.Ed.2d 25 (1987), the United States Supreme Court first recognized the professional gambler as a trade or business for the purposes of the Internal Revenue Code. The taxpayer in that case "spent a substantial amount of time studying racing forms, programs, and other materials,... devoted from 60 to 80 hours each week to these gambling-related endeavors, ... never placed bets on behalf of any other person, or sold tips, or collected commissions for placing bets, or functioned as a bookmaker." "He gambled solely for his own account, ... [and] had no other profession or type of employment." This taxpayer "kept a detailed accounting of his wagers and every day noted his winnings and losses in a record book". The U.S. Supreme Court determined that, while this may not be considered a legitimate means of business to most people, this taxpayer devoted "his full-time activity to gambling, and it is his intended livelihood source", so "basic concepts of fairness (if there be so much of that in the income tax law) demand that his activity be regarded as a trade or business just as any other readily accepted activity".

Given that the professional gambler is a recognized trade or business, the taxpayer is "allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on [said] trade or business" according to 26 U.S.C. §162(a). Yet, this language seems to conflict with the allowable gambling deductions in 26 U.S.C §165(d) being limited to the amount of winnings. Is the professional gambler capped on deductible expenses?

In Mayo v. Commissioner, 136 T.C. 81 (2011), the taxpayers reported on their Schedule C over $120,463 from gambling winnings and $131,760 in wagering expenses (a net $11,297.00 loss). The taxpayers also claimed $10,968.00 in business expenses that included car and truck, office expenses, travel, meals and entertainment, telephone and internet, subscriptions, entry fees and ATM fees. The Internal Revenue Service contended that the $10,968.00 business deduction should be disallowed because they could not be deducted from gambling winnings as required by 26 U.S.C §165(d) due to the already-declared net loss on wagering. The U.S. Tax Court ruled that losses from wager costs as contemplated in 26 U.S.C §165(d) do not include the trade and business expenses of a professional gambler. As a result, the business deductions are allowable under 26 U.S.C. §162(a) even if there is a net loss on gambling earnings. The IRS declined to appeal the decision further and acquiesced to this holding in December 2011.

Neglecting to report gambling winnings to the Internal Revenue Service on your personal tax return can lead to significant penalties and interests. If you have questions about the tax treatment of your gambling earnings or losses, do not hesitate to contact the tax professionals at Kershaw, Vititoe & Jedinak PLC.

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