Update on Tax Rules for Amateur Gamblers

Gambling remains an ever-popular U.S. pastime. But it’s more than just fun and games — gambling can also have serious tax implications. Here are the most important issues involving the federal tax treatment of an amateur gambler’s winnings, losses and gambling-related expenses, along with information on a recent favorable development from the IRS.

IRS Proposes New Rules for Electronically Tracked Slot Machines

In March, the IRS released Notice 2015-21, which proposes an optional safe-harbor method for slot machine players to determine wagering gains and losses for federal income tax purposes.

The proposed rules, which are summarized below, indicate that the IRS won’t challenge a taxpayer’s use of the per-session method to calculate wagering gains and losses from electronically tracked slot machine play if the taxpayer meets these requirements:

Uses Electronically Tracked Play System. This is controlled by the gaming establishment (such as through the use of a player’s card or similar system) and records the amount a player wagers and wins on slot machine play.

Uses the Same Session of Play Definition. This is defined as a period that begins when the player places the first wager of the calendar day on a particular type of game and ends when the player completes the last wager on the same type of game before the end of the same calendar day. A session always refers to a specific 24-hour period that starts at midnight and ends no later than 11:59 PM. The same session of play is continued if the player stops and then resumes electronically tracked slot machine play within a single gaming establishment during the same calendar day. For each gaming establishment, a player must use the same definition of “session of play” for all electronically tracked slot machine play during the same tax year.

Tracks Gains and Losses. To determine wagering gain or loss from electronically tracked slot machine play at the end of a session, a player must:

  1. Recognize a gain if the total dollar amount of payouts exceeds the total dollar amount of wagers placed during that session, or
  2. Recognize a loss if the total dollar amount of wagers exceeds the total dollar amount of payouts during that session.

If the IRS finalizes the proposed rules, the regulations generally would be effective for tax years ending on or after the date of publication. However, some adjustments are possible. For example, many gamblers would appreciate a more flexible definition of “session of play,” because play often isn’t interrupted by the end of a calendar day. Contact your tax professional for the latest news on reporting online gambling activities.

Report Winnings in Full

Theoretically, the full amount of an amateur gambler’s winnings must be reported as gross income on the miscellaneous income line of Form 1040. Winnings include cash and prizes collected from lotteries and raffles, as well as installment payments.

For most types of gambling at legitimate gaming facilities, you’ll be issued Form W-2G, “Certain Gambling Winnings,” if you win $600 or more and the amount won is more than 300 times the amount wagered. However, a $1,200 tax-reporting threshold applies to winnings from slots and bingo, a $1,500 threshold applies to keno winnings and a $5,000 threshold applies to poker tournament winnings. When winnings exceed $5,000, federal income tax withholding is generally required, except for winnings from slots, bingo or keno.

Important Note: Because the IRS also gets a copy of Form W-2G, make sure gambling winnings reported on your return at least equal the collective amounts reported on Forms W-2G.

Limited Deduction for Wagering Losses

An amateur gambler’s wagering losses can be claimed only as a miscellaneous itemized deduction. Losses for the year can’t be netted against winnings for the year with only the net figure reported as gross income on page 1 of Form 1040. Amateur gamblers who don’t itemize can’t claim gambling loss deductions.

In addition, the itemized deduction for wagering losses is limited to the amount of gambling winnings. Any excess losses for a year can’t be carried forward. For a married couple filing jointly, the wagering winnings of both spouses are combined to determine the allowable itemized deduction for combined wagering losses incurred by both spouses.

There’s no requirement for losses to be from the same types of gambling activities as winnings. For example, slot machine losses can be deducted against poker winnings, subject to the losses-cannot-exceed-winnings deduction limitation.

For example, suppose you go to Las Vegas several times in 2015 to gamble. Early in the year, you win $10,000 playing poker and blackjack. Later in the year, you have a cold streak playing the slots and lose $15,000. On your 2015 federal tax return, you must report the $10,000 of winnings as miscellaneous income. You then report the $10,000 allowable wagering loss (equal to your winnings for the year) as an itemized deduction. However, the $5,000 excess loss can’t be deducted in 2015 or carried forward.

No Deductions for Out-of-Pocket Expenses

Only the cost of an amateur gambler’s losing wagering transactions are considered gambling losses. Out-of-pocket gambling-related expenses — such as transportation, meals and lodging — don’t count as gambling losses and can’t be written off. They’re considered nondeductible personal expenses.

Documenting Wagering Losses

Gambling wagering losses must be adequately documented to be deductible. Under IRS Revenue Procedure 77-29, an amateur gambler must record the following information in a log or similar record:

  1. Date and type of specific wager or wagering activity,
  2. Name and location of the establishment, and
  3. Amount won or lost.

Also record the names of any other people present with you at the gaming establishment. Obviously, this isn’t possible when gambling at a public venue, such as a casino or race track.

The guidance allows taxpayers to substantiate income and losses from wagering on table games by recording the number of the table played and keeping statements showing casino credit issued to the player. For lotteries, you can document winnings and losses with winnings statements and unredeemed tickets.

Keeping Records by Gambling Session

Until recently, the IRS claimed that an amateur gambler must report the full amount of winnings from each roll of the dice and every spin of the slot machine on page one of Form 1040. This results in higher adjusted gross income (AGI) than just reporting net winnings from each gambling session. It also can potentially trigger undesirable AGI-based phase-out rules. For example, it could reduce college tuition tax credits or decrease tax-free Social Security benefits.

Of course, nobody actually tracks each roll of the dice and every spin of the slot machine. Thankfully, the IRS allows casual slot players to simply record the net winning or net loss from each gambling session. A session is deemed to end when the player cashes out or runs out of money. At that point, it’s possible to calculate how much was won or lost during that session. If the player then reports the sum total of the net winnings from all winning sessions as gross income on page one of Form 1040 and keeps track of the sum total of the net losses from all losing sessions for purposes of claiming the itemized deduction for gambling losses, the IRS will consider that methodology close enough to recording winnings and losses from each spin of the slot machine.

In a 2009 decision, the Tax Court appeared to endorse this per-session approach to recordkeeping for casual slot players. (Shollenberger v. Commissioner, T.C. Memo 2009-306) Presumably, the concept of recording per-session net winning and loss may also be considered sufficient for other forms of amateur gambling.

Gambling on Your Taxes Can Be Costly

There’s no place for gambling when it comes to preparing your federal tax return. Play it safe and contact your tax professional today about how to accurately track gambling-related winnings, losses and expenses on your 2015 federal tax return. Start tracking your winnings and losses as soon as possible. Waiting until year end to recreate the required records can be difficult and time consuming.