Investing in the stock market involves risk, but for IRS purposes it's different from placing a bet at a racetrack or casino. Still, both types of activity can result in taxable winnings or deductible losses. You can't count money from the stock market towards or against your gambling losses and vice versa. The Internal Revenue Service, along with state tax agencies, maintains provisions in the tax code to outline how taxpayers can deduct losses from stock investments and gambling using different -- though related -- methods.
The IRS treats gambling losses and stock market losses differently because of the likely intentions behind each type of loss. In the case of stock losses, investors generally expect to earn money and select investments after careful consideration of the market's options and the risks involved. Gambling, on the other hand, is a form of recreation for most participants. Gamblers have access to information that demonstrates how casinos and other licensed gaming providers earn profits at the expense of players.
The IRS allows casual gamblers to deduct their gambling losses for each tax year as an entirely separate category from stocks and investments. However, your total gambling losses for a given year can't exceed your total gambling winnings. Since gambling winnings are fully taxable, this means that your losses can only reduce your winnings. Winnings include both money and prizes. For example, if you lose $1,000 on a weekend trip to Las Vegas but later win a vacation package in a raffle valued at $2,500, you must pay income taxes on $1,500 of gambling winnings once you deduct your loss.
Stock losses do not count against your gambling winnings. Instead, when you sell stock for less than you paid for it, you can claim a capital loss. This first allows you to reduce your capital gains from investment profits, much like gambling losses that offset winnings. However, you can apply up to $3,000 of capital losses to reduce your regular income if your losses outweigh your gains. Above the $3,000 limit, you can also carry over some capital losses to future tax years to reduce your taxable investment income further.
Claiming stock losses, or gambling losses, on your taxes can create complications when it comes time to file. When you receive taxable gambling earnings or sell stock, you'll receive tax forms from the casino or broker, respectively, but the IRS expects each taxpayer to account for her own losses. This means keeping records of your transactions such as bank withdrawals and receipts to prove that you experienced a deductible loss. In the case of stock, you'll need to report your original purchase price, known as cost basis, and the sale price to show that you didn't profit from a stock sale before claiming a loss.
- IRS.gov: Topic 419 - Gambling Income and Losses
- IRS.gov: Topic 409 - Capital Gains and Losses
- Bankrate; Reporting Gambling Winnings; Kay Bell; February 2011
- Internal Revenue Service. "Topic No. 419 Gambling Income and Losses." Accessed Aug. 19, 2020.
- Internal Revenue Service. "Publication 529: Miscellaneous Deductions," Page 10. Accessed Aug. 19, 2020.
- Internal Revenue Service. "About Form W-2 G, Certain Gambling Winnings." Accessed Aug. 19, 2020.