Taxation on Gambling Winnings and Losses

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December 3, 2009

Gambling winnings, like other forms of income, are taxable to the recipient. For casual gamblers (i.e., non-professional gamblers), gambling winnings are reported on line 21 of Form 1040. For professional gamblers, gambling winnings are reported on Schedule C (as income). Many gaming institutions will give taxpayers a Form W-2G each year to report to them the amount of gambling winnings from that institution.

Gambling losses are generally deductible, but only to the extent that a taxpayer has gambling winnings. For casual gamblers, gambling losses are reported as an itemized deduction on Schedule A; for professional gamblers, gambling losses are reported on Schedule C.

As an example, X (a casual gambler) wins $10,000 in Vegas playing poker and receives a Form W-2G reflecting $10,000 of winnings. In the same year, X loses $25,000 in Atlantic City playing craps. X would report $10,000 of gambling income on Form 1040 and, assume he itemizes deductions (which he should), he would report $10,000 of gambling losses. The remaining $15,000 of gambling losses would not be deductible and cannot be carried over to future years.

Recordkeeping is important here! Gambling winnings are generally reported to the IRS via Form W-2G, but there is no reporting mechanism for losses. As a result, taxpayers are cautioned to keep detailed, contemporaneous records of gambling losses (such as a daily journal with backup, including gambling tickets, canceled checks, withdrawal slips, etc.). That way, on audit, you can prove the amount of your gambling losses to the IRS.

In a Tax Court summary opinion released today, a taxpayer, who was a compulsive gambler, kept meticulous records of his gambling losses (following an IRS audit). He provided these records to his tax preparer. Unfortunately the tax preparer made errors on his return, and the return was audited - the IRS believed he understated income and did not have enough additional losses to offset the extra income. Unfortunately as well, the tax preparer never returned his records, so he couldn't substantiate his additional losses.

Luckily for him, the Tax Court found that, because he was a compulsive gambler who typically gambled away (and lost) his winnings, and because he was mostly being supported by his children, he likely had additional losses sufficient to offset the incremental income, even though he no longer had records to prove it. This is, perhaps, one of the few upshots of being a compulsive gambler!

However, it does show (1) the importance of maintaining good, contemporaneous records (if the taxpayer had still had the records, he probably wouldn't have had to go to Tax Court); and (2) how important it is to choose a professional, reliable tax preparer.

If you have any questions on this, please feel free to contact us.