The United States is currently experiencing a gambling boom. As gambling expands across the U.S. in the form of casinos, sports betting, fantasy sports leagues, lotteries and more, it’s important to understand the income tax implications of gambling winnings and losses.
All income, unless specifically excluded by the IRS, is considered taxable income. Gambling winnings are considered taxable income at the ordinary income tax rate. All gambling winnings, regardless of amount, must be reported on your federal tax return. The IRS requires that gambling establishments, such as casinos, report any winnings over $1,200 on a form W-2G. For example, if the payout on a single spin of a slot machine pays over $1,199 then the machine will “lock up” and a casino attendant will come by to get the necessary information to issue the W2-G. The casino will not issue a form W-2G on wins of less than $1,200 but it’s important to remember that these wins are still reportable as taxable income.
If a taxpayer itemizes deductions on Schedule A (Form 1040), the taxpayer can deduct gambling losses for that year, but only up to the amount of their winnings. The taxpayer cannot claim a net gambling loss. If the taxpayer claims the standard deduction ($12,950 for single filers and $25,900 for married couples filing jointly for 2022), then all the gambling winnings will be taxed, and the losses will be lost forever. The losses are not able to be carried forward to reduce taxation on future winnings.
The “Session” Method
Gamblers may net their wins and losses over the course of a session to determine whether that session was a win or loss for income tax purposes. It is not necessary to track every spin of a slot machine and sum all winning spins with all losing spins. It is unnecessary to net wins and losses as you switch from machine to machine. A session means a continuous, uninterrupted gaming session at a single gaming establishment. For example, a gambler arrives at Casino A at 9:00 am and gambles until 11:30 am before stopping to have lunch and drive over to Casino B. During this time, though the gambler plays multiple slot machines on the casino floor, it would be considered a single gambling session. The gambler could then add their net win or loss to their gambling diary or log (more on this later) for that session. When the gambler arrives at Casino B, a new session begins.
Taxpayers must keep a detailed gambling diary or log to support any gambling loss deduction on their tax return. This documentation should be as detailed as possible. At a minimum, records should include the date and type of gambling activity, the name and address of the gaming establishment, and the amount of net win or loss per session. Additional recommended information to keep includes the length of time spent gambling, people you gambled with, and the machine number of machines you played. This should be a contemporaneous log kept throughout the year. See Revenue Procedure 77-29 for more guidance.
There are different rules for taxpayers who meet professional gambler criteria based on facts and circumstances. Taxpayers whose gambling activity is pursued in good faith and with regularity to produce income for a livelihood, and is not a mere hobby, may be considered a trade or business. Professional gamblers report wins and loss on Schedule C (Form 1040). Unlike amateur gamblers, professional gamblers may deduct ordinary and necessary business expenses in connection with their production of income, such as travel and other costs. Although professional gamblers can net their wins and losses, and deduct expenses, they still cannot claim an overall loss.
It is important to remember that gambling yields state income tax consequences in addition to federal income tax issues. While every state’s treatment of gambling income cannot be explained here, taxpayers should educate themselves on their state’s income tax treatment of gambling income, so they don’t find themselves facing a large state tax bill. North Carolina, for example, does not allow amateur gamblers to deduct gambling losses against gambling income as an itemized deduction. This means that a taxpayer would owe North Carolina income tax on all gambling winnings, even though the taxpayer may have an overall gambling loss.
The IRS has an Interactive Tax Assistant (ITA) to help answer questions about your gambling winning. The ITA can be found at https://www.irs.gov/help/ita/how-do-i-claim-my-gambling-winnings-andor-losses.
Contact the professionals at Gilliam Bell Moser with questions on how your gambling activities may affect your taxes.