Gamblers understand the concept of win some, lose some. But the IRS? It prefers exact numbers. Specifically, your tax return should reflect your total year’s gambling winnings – from the big blackjack score to the smaller fantasy football payout. That’s because you’re required to report each stroke of luck as taxable income — big or small, buddy or casino.

Deduction Itemizers can continue to deduct losses to the extent of winnings. Of Gambling professionalLosses Limits gamblers deduction of losses and expenses to the extent of winnings, which was status quo prior to 2011 tax court ruling. Sunsets after 2025. Business Credits and Deductions Preserves R&D credit. Amortizes credit after 2021. The deduction of other gambling expenses will also now be limited to gambling winnings. Question: Why haven't we seen any recommendations (especially in high-tax states) to use your 'home as a. A gambler not in the trade or business of gambling (a 'casual gambler') can deduct wagering losses as a deduction not subject to the 2%- of - adjusted - gross - income threshold (i.e., not among miscellaneous itemized deductions the TCJA suspended for tax years 2018 through 2025) on Schedule A, Itemized Deductions, but only to the extent of the winnings. While you may be able to deduct your gambling losses, gambling winnings are not directly offset by gambling losses in your tax return. You must be able to itemize deductions on Schedule A to deduct gambling losses and can only deduct an amount up to the amount of your gambling winnings. Whether it's $5 or $5,000, from an office pool or from a casino, all gambling winnings must be reported on your tax return as 'other income' on Schedule 1 (Form 1040), line 8.If you.

If you itemize your deductions, you can offset your winnings by writing off your gambling losses.

It may sound complicated, but TaxAct will walk you through the entire process, start to finish. That way, you leave nothing on the table.

How much can I deduct in gambling losses?

You can report as much as you lost in 2019 , but you cannot deduct more than you won. And you can only do this if you’re itemizing your deductions. If you’re taking the standard deduction, you aren’t eligible to deduct your gambling losses on your tax return, but you are still required to report all of your winnings.

Where do I file this on my tax forms?

Let’s say you took two trips to Vegas this year. In Trip A, you won $6,000 in poker. In the Trip B, you lost $8,000. You must list each individually, with the winnings noted on your return as taxable income and the loss as an itemized deduction in Schedule A. In this instance, you won’t owe tax on your winnings because your total loss is greater than your total win by $2,000. However, you do not get to deduct that net $2,000 loss, only the first $6,000.

Now, let’s flip those numbers. Say in Trip A, you won $8,000 in poker. In Trip B, you lost $6,000. You’ll report the $8,000 win on your return, the $6,000 loss deduction on Schedule A, and still owe taxes on the remaining $2,000 of your winnings.

What’s a W-2G? And should I have one?

A W-2G is an official withholding document; it’s typically issued by a casino or other professional gaming organization. You may receive a W-2G onsite when your payout is issued. Or, you may receive one in the mail after the fact. Gaming centers must issue W-2Gs by January 31. When they send yours, they also shoot a copy to the IRS, so don’t roll the dice: report those winnings as taxable income.

Don’t expect to get a W-2G for the $6 you won playing the Judge Judy slot machine. Withholding documents are triggered by amount of win and type of game played.

Expect to receive a W-2G tax form if you won:

• $1,200 or more on slots or bingo
• $1,500 or more on keno
• $5,000 or more in poker
• $600 or more on other games, but only if the payout is at least 300 times your wager

Tip: Withholding only applies to your net winnings, which is your payout minus your initial wager.

What kinds of records should I keep?

Keep a journal with lists, including: each place you’ve gambled; the day and time; who was with you; and how much you bet, won, and lost. You should also keep receipts, payout slips, wagering tickets, bank withdrawal records, and statements of actual winnings. You may also write off travel expenses associated with loss, so hang on to airfare receipts.

Use TaxAct to file your gambling wins and losses. We’ll help you find every advantage you’re owed – guaranteed.

More to explore:

The ability to deduct expenses was curtailed by last year’s tax overhaul.

Professional gamblers' decadelong streak of being able to deduct a net loss from gambling as a trade or business was ended this year by P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017 (TCJA). Although a relatively minor facet of the wide-ranging tax reform package, the TCJA's amendment to Sec. 165 overturning a 2011 Tax Court decision and 2008 IRS memo is momentous for taxpayers who claim to be engaged in the trade or business of gambling by virtue of their participation at card tables, racetracks, or other wagering venues, real or virtual.

CHANGING FORTUNES

While all taxpayers are required to report gambling winnings in gross income, what related deductions they can claim and in what way depends on whether their gambling rises to the level of a trade or business. A gambler not in the trade or business of gambling (a 'casual gambler') can deduct wagering losses as a deduction not subject to the 2%-of-adjusted-gross-income threshold (i.e., not among miscellaneous itemized deductions the TCJA suspended for tax years 2018 through 2025) on Schedule A, Itemized Deductions, but only to the extent of the winnings. On the other hand, a gambler engaged in the trade or business of gambling ('professional gambler') can net gambling winnings against losses and business expenses on Schedule C, Profit or Loss From Business.

Before amendment by the TCJA, Sec. 165(d) stated only, 'Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.' For many years before 2008, the IRS interpreted 'losses from wagering transactions' to include professional gamblers' business expenses, so that they were deductible, along with wagering losses, only to the extent of gambling winnings. Consequently, professional gamblers were not allowed to generate a net operating loss (NOL) from gambling activities. The Tax Court in Offutt, 16 T.C. 1214 (1951), sustained the IRS's perspective and followed this ruling in subsequent cases.

But the Tax Court did not do so consistently, as discussed below. Meanwhile, the Supreme Court in Sullivan, 356 U.S. 27 (1958), allowed business deductions of an illegal gambling enterprise (generally denied previously on public policy grounds). Then, in Groetzinger, 480 U.S. 23 (1987), the Supreme Court distinguished between Sec. 165(d) wagering losses and Sec. 162(a) business expenses of a taxpayer in the trade or business of gambling.

In 2008, the IRS in Chief Counsel Advice Memorandum AM 2008-013 concluded that the IRS should no longer follow Offutt. The Tax Court in Mayo, 136 T.C. 81 (2011), then likewise abandoned its Offutt holding, allowing a professional gambler to deduct business expenses in excess of net gambling winnings (while maintaining that direct wagering losses could still be deducted only to the extent of wagering gains under Sec. 165(d)). Therefore, professional gamblers were able to generate an NOL from gambling activities — until the TCJA amended Sec. 165(d). (For more on Mayo and factors by which courts determine whether gambling is a trade or business, see 'Better Odds for Pro Gamblers' Business Deductions,' JofA, April 2012.)

TAX REFORM RESETS THE RULES

The TCJA, however, put an end to professional gamblers' ability to deduct nonwagering business expenses in excess of net wagering income. It amended Sec. 165(d) by inserting the following sentence after the original one:

Gambling Deductions Tax Reform 2019

For purposes of the preceding sentence, in the case of taxable years beginning after December 31, 2017, and before January 1, 2026, the term 'losses from wagering transactions' includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.

The House of Representatives described this provision in its committee report (H.R. Rep't No. 115-409, 115th Cong., 1st Sess. 167 (Nov. 13, 2017)):

The provision is intended to clarify that the limitation on losses from wagering transactions applies not only to the actual costs of wagers incurred by an individual, but to other expenses incurred by the individual in connection with the conduct of that individual's gambling activity. The provision clarifies, for instance, an individual's otherwise deductible expenses in traveling to or from a casino are subject to the limitation under section 165(d). [footnote omitted]

The report further noted that the provision was intended to reverse Mayo (id., fn. 135). Consequently, the deduction of professional gamblers' nonwagering business expenses is limited by Sec. 165(d) under the new law. The following example and the chart, 'Before and After the TCJA,' illustrate the amendment's effects.

Before and after the TCJA

Example

Assume that G had the following expenses related to his gambling activities in both tax years 2017 and 2018:

Gambling winnings: $10,000

Losing wagers: $12,000

Transportation: $3,000

Meals and entertainment: $1,500

Legal and professional services: $1,000

Lodging: $2,500

Subscriptions and books: $900

Telephone and online charges: $600

Depending on whether G is a professional or casual gambler, either of two tax treatments could result for each year. If G is a casual gambler, the amendment of Sec. 165(d) has no effect on him. He should report his gambling income of $10,000 on Form 1040, U.S. Individual Income Tax Return, and $10,000 of his wagering losses on Schedule A in both 2017 and 2018. If G is a professional gambler, he could claim an NOL of $9,500 from gambling activities in 2017, as shown in the chart. However, under the amended Sec. 165(d), G may deduct his wagering losses and nonwagering gambling-related business expenses only to the extent of his gambling winnings, for a net zero income from gambling activities in 2018.

GAINS FROM WAGERING TRANSACTIONS

Amended Sec. 165(d) changes the definition of 'losses from wagering transactions' but not the meaning of 'gains from wagering transactions,' which may not always be clear. Courts generally have held that 'gains from wagering transactions' within the meaning of Sec. 165(d) must be the actual product of wagers entered by the taxpayer.

Gross income does not include the return of capital (Doyle v.Mitchell Bros. Co., 247 U.S. 179 (1918)). A gambler thus would be entitled to exclude the cost of a winning ticket from its associated gross winnings. Nevertheless, such recovery of capital could not include the cost of tickets that did not win (Hochman, T.C. Memo. 1986-24). In the past, courts have considered various items as gains from wagering transactions. The annual payments lottery winners receive are treated as their gambling winnings in the year the payments are received (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)).

The Fifth Circuit in Humphrey,162 F.2d 853 (5th Cir. 1947), held that wagering transactions include all gambling activities, regardless of whether they are legal or illegal, or whether they are business or personal. As long as the losses derive from wagering transactions, they could be used to offset gains from any such transaction.

It is not necessary for the wagering gains to be related in any way to the losses (Scott-Nickels Bus Co., T.C. Memo. 1956-120). For example, the taxpayer in Presley, T.C. Memo. 1979-339, an owner of an illegal casino, was allowed to use the losses from his other personal gambling activities to offset his gains from the casino (see also Jennings, 110 F.2d 945 (5th Cir. 1940), and Joseph, 43 B.T.A. 273 (1941)).

Gamblers could use gambling losses to offset the value of complimentary goods and services ('comps') they receive from a casino. Comps constitute gains from wagering transactions because the relation between the comps and the gambler's wagering is 'close, direct, evident, and strong' (Libutti, T.C. Memo. 1996-108).

INCOME THAT IS NOT GAINS FROM WAGERING TRANSACTIONS

In addition, courts have considered the following income sources to not be gains from wagering transactions:

Tokes

Traditionally, casino dealers receive 'tokes' from patrons who play at their tables, in the form of bets the patron places 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).

Take-offs

A take-off is the fee that the house charges card players to play poker at the casino. Because take-offs serve as seat rental charges, those the house receives are 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)). Similarly, the taxpayer in Boyd, 762 F.2d 1369 (9th Cir. 1985), ran the poker room in a casino that awarded him a portion of the take-off collected in the card room. The contractual share of take-offs the taxpayer received was not his gains from wagering transactions and could not be offset by his losses from those transactions.

Theft income from stolen betting tickets

The taxpayer in Collins, T.C. Memo. 1992-478, aff'd,3 F.3d 625 (2d Cir. 1993), worked as a ticket seller at an off-track betting station. Without making any payment, he placed several personal bets that had a fair market value of $80,280 and resulted in winnings of $42,175 (for a net loss of $38,105). He returned the entire winnings to his employer and turned himself in at the end of the day. The Tax Court ruled that the taxpayer should recognize net theft income of $38,105. Further, the court held that the theft income from the stolen tickets was ordinary income and not gain from a wagering transaction. Therefore, the taxpayer could not use his losses from wagering transactions to offset his theft income.

LOSSES FROM WAGERING TRANSACTIONS

Professional gamblers can deduct business expenses against their gains from wagering transactions (again, subject now to limitation under the TCJA) even if illegal gambling activities are involved. For example, in Harbin, T.C. Memo. 1958-190, the owner and operator of an illegal lottery business was allowed to deduct gambling losses, business expenses, and the federal excise tax on gambling against his income from the gambling operations. When the losses from wagering transactions exceed the gains, the excess losses cannot be carried back to previous years (Estate of Todisco, T.C. Memo. 1983-247). Casual gamblers cannot claim a gambling loss deduction for nonwagering expenses, such as transportation, meals, and lodging (Whitten, T.C. Memo. 1995-508).

Courts have considered the following items losses from wagering transactions, such that their deduction is limited to wagering gains:

Unsold tickets

The taxpayer in Miller, 792 F.2d 392 (3d Cir. 1986), was a lottery dealer in the Virgin Islands, where the lottery distribution system did not allow dealers to return unsold tickets. The Third Circuit noted that the taxpayer retained the tickets and continued to buy more tickets than he could sell, indicating that he was betting that one or more of the unsold tickets would be drawn. Therefore, the cost of these unsold tickets should be treated as gambling losses rather than ordinary business expenses, the court held.

Losses by shills

Typically, casinos engage persons referred to as 'shills' to whom they agree to provide a certain sum of money or chips to play. The casino will absorb any loss, but gains are split between the shill and the casino. The Tax Court in Nitzberg, T.C. Memo. 1975-228, held that when shills' losses were greater than their winnings, the net loss was deductible as the casino's ordinary and necessary business expense under Sec. 162. However, on appeal, the Ninth Circuit (Nitzberg, 580 F.2d 357 (9th Cir. 1978)) reversed the ruling, noting that shills acted on the casino's behalf when placing bets and, therefore, the casino's losses were losses from wagering transactions.

State tax assessment

A state income tax assessment on gambling income of an individual in the trade or business of gambling is tied directly to a taxpayer's gambling activities and, hence, is subject to the limitation of Sec. 165(d) (Estate of Todisco, 757 F.2d 1 (1st Cir. 1985)).

Buy-in and rake

Tournament poker players are required to pay the tournament organizer a 'buy-in,' or entrance fee. The casino retains a portion of this amount as an administrative fee, and the remainder goes directly into the prize fund 'pot' that will be paid out to the tournament's winners. The Tax Court in Tschetschot, T.C. Memo. 2007-38, considered tournament poker a wagering activity and treated poker players' loss of the buy-in as losses from wagering transactions. However, the IRS in Hom, T.C. Memo. 2013-163, conceded that poker entry fees and rake fees (charged per hand to play poker online) were business expenses of a professional gambler. While the Tschetschot and Hom cases are inconsistent, this inconsistency is irrelevant under amended Sec. 165(d). Regardless of the nature of buy-in and rake fees, both are subject to the Sec. 165(d) limitation under the TCJA.

Takeout

In horse-race betting, 'takeout' refers to the share of the entire betting pool that the event manager (the track) is specified to receive. The track uses the takeout to pay its expenses, such as purse money for the horse owners, taxes, license fees, and other state-mandated amounts, and keeps any remaining amount as its profit. As a professional gambler, the taxpayer in Lakhani, 142 T.C. 151 (2014), aff'd, Nos. 14-72576, 14-72577 (9th Cir. 5/10/18), argued that his pro rata share of the takeout the track remitted to the state and local tax authorities constituted his business expense and was not a loss from wagering transactions. The Tax Court noted that the taxes, license fees, and other expenses discharged from the takeout were expenses imposed upon the track, not the bettors. Therefore, the taxpayer was not allowed to deduct his share of the takeout.

POTENTIAL ISSUES

Taxpayers should be aware of the following potential issues, some of which may require more clarification by either courts or the IRS:

Treatment of 'fee to play'

The courts treat the 'fee to play' inconsistently, as it may be referred to as take-off, buy-in, or rake. The Ninth Circuit in Boyd held that take-offs the casino received or awarded to a contract player were not gains from wagering transactions. The Tax Court in Mayo implied that take-offs gamblers paid were nonwagering business expenses. On the other hand, the Tax Court in Tschetschot considered poker players' losses of the buy-in as losses from wagering transactions, while in Hom, rake was treated as a business expense.

This inconsistency raises two issues. First, there is no statute or theory to support the different tax treatments of the entry fees based simply on whether the taxpayer is the recipient or the payer. Second, for professional gamblers, the inconsistency between the Tschetschot and Hom cases does not matter under Sec. 165(d) as amended by the TCJA. For casual gamblers, however, this inconsistency has created chaos. Naturally, casual gamblers prefer to follow the Tschetschot case and treat their fees to play as losses from wagering transactions, as they are not allowed to deduct any gambling-related nonwagering expense.

Treatment of tokes

Are tokes that dealers receive considered the giver's winnings and losses? The courts have held that tokes are not dealers' gains from wagering transactions, as noted above. However, there is no precedential ruling with respect to the giver's treatment of the toke. As a toke belongs to the giver until the bet is won (Bevers, 26 T.C. at 1219), theoretically, the loss or winning of the toke should be considered the giver's gambling loss or winning.

Reportable gambling winnings

In Regs. Sec. 1.6041-10, the definition of 'reportable gambling winnings' for information-reporting purposes depends on the type of game. In bingo and slot machines, the amount of the reportable gambling winnings includes the amount wagered. Conversely, it is reduced by the amount wagered for keno. Taxpayers should be aware of this difference when they receive Form W-2G, Certain Gambling Winnings.

AN END TO NOLs

Gambling Deductions Tax Reform Rules

Before the TCJA, under the Tax Court's holding in Mayo, professional gamblers were allowed to fully deduct their nonwagering business expenses beyond wagering gains. By amending Sec. 165(d) in the TCJA, Congress reversed Mayo, allowing professional gamblers to deduct their wagering losses and nonwagering business expenses only to the extent of their gambling winnings, and no longer allowing them to generate an NOL from their gambling activities. Although, under the TCJA, the amendment to Sec. 165(d) is scheduled to expire at the end of 2025 along with most of its other provisions affecting individual taxpayers, Congress may extend it further. In the meantime, professional gamblers' winning streak apparently has come to an end.

About the authors

Wei-Chih Chiang, CPA, DBA; Yingxu Kuang, DBA; and Xiaobo Dong, Ph.D., are all associate professors of accounting in the School of Business Administration, University of Houston—Victoria at Katy, Texas.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com or 919-402-4434.

AICPA resources

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