Tax Tips for Claiming Gambling Income & Losses

Tax Tips for Claiming Gambling Income & Losses
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Let's face it. Gambling is fun. It could be betting in the office pool on the Super Bowl, or playing a full night of blackjack at the casino. It’s fun when you win, but the bad news is that when you win, the IRS is going to want their share of your gambling income. The IRS doesn't care whether you won ​$5 or $5,000​, they consider all gambling winnings as taxable income.

Here are a few tips on how to manage your gambling winnings and gambling losses and not run afoul of IRS regulations.

You Must Report All Winnings

The IRS doesn’t care how you won the money or prizes; they just insist you report on your tax return all winnings from:

  • Casino games
  • Lotteries
  • Poker tournaments
  • Raffles
  • Horse and dog races
  • Keno
  • Bingo
  • Sweepstakes
  • Sports betting

You report winnings on Page 1 of Form 1040 as “other income.”

In some cases, the gambling establishment issues you a Form W-2G with the amount of your winnings. However, you must report all your winnings even if you do not receive a Form W-2G.

All non-cash winnings, such as cars and trips, must be reported at fair market value.

All Winnings Are Fully Taxable

All winnings are taxable, and none are exempt, even non-cash prizes and awards. Even though you didn’t receive cash, non-cash winnings are treated as income, and you have to pay tax on their value. Oddly enough, if you don't have enough cash on hand to pay the tax, you may have to sell the award just to pay the tax.

Receive IRS Form W-2G

The IRS requires gambling institutions to issue you a Form W-2G if your winnings are above a certain threshold and are subject to federal income tax withholding. The threshold varies with the type of game.

A gambling establishment must issue you a Form W-2 G if you win:

  • $600 or more​ when the amount is at least ​300 times​ the wager. This type of winning can happen, for example, if you win a trifecta at the horse track.
  • $1,200 or more​ playing the slot machines or bingo. Winnings are not reduced by the wager.
  • $1,500 or more​ from keno winnings (reduced by amount of wager).
  • $5,000 or more​ from a poker tournament, reduced by wager or amount of buy-in.

When Does the IRS Require Withholding?

Generally, the IRS requires the gambling establishment to issue a Form W-2F and require withholding if your winnings, minus the amount of the wager, are:

  • More than ​$5,000
  • At least ​300 times​ the amount of the wager

The payer withholds federal taxes at a flat rate of ​24 percent​. Your copy of Form W-2G shows the amount of your winnings and the amount of federal tax withheld.

Itemize Your Deductions on Schedule A

You cannot deduct gambling losses if you take the standard deduction. You must use Schedule A and enter losses as “other itemized deductions.”

The Tax Cuts and Jobs Act of 2017 increased the standard deduction for single filers from ​$6,500 to $12,400​ for tax year 2020. As a result, many more taxpayers are taking the standard deduction on their tax returns rather than itemizing their deductions.

If the amount of your total itemized deductions, including your gambling losses, does not exceed the standard deduction, it would not make sense to use the itemized method, and you would lose the ability to deduct your gambling losses.

You must have gambling winnings in order to deduct losses. You cannot deduct gambling losses to offset your other taxable income. So if you have no gambling winnings, then there's no deduction for losses.

Reporting large gambling losses without reporting winnings is a sure way to trigger an IRS audit.

Report Winnings and Losses Separately

You cannot “net” your gambling losses against your winnings. For example, if you won ​$100​ at a session of playing Blackjack but lost ​$250​ during another playing session, you can only report your losses up to ​$100​. You cannot deduct gambling losses in excess of your winnings.

The IRS does not want to subsidize your losses by allowing you a tax break when you lose money.

What Is a Session?

If you’re playing blackjack or poker for several hours, it would be impractical to keep a log of each hand and whether you won or lost each time. Therefore, the IRS allows you to consider a period of playing time as a “session” instead of trying to record each individual hand.

The net result of a playing session could be recorded as either winning or losing. Because the IRS does not clearly define what a session is, you have the latitude to define your own playing session as long as you can back it up with good records and documents.

A playing session could be a few hours, a day or a trip. You just have to be able to define and validate your “session” to the IRS with good records.

Keep Good Records

The best policy is to document, document and document some more. As long as you can document your gambling activities, the IRS will likely accept your version of winnings and losses.

You should keep:

  • Any receipts, tickets or any other records that show the amount of your winnings and losses
  • An accurate diary with records of your winnings and losses
  • Canceled checks and credit card statements

Your diary should include:

  • Date of gambling activity
  • Type of gambling activity
  • Name and address place of place where you were gambling
  • Names of other people who were with you at the time of your gambling
  • Amount of winnings and losses

Check If You Have to Pay State and Local Taxes

Generally, most states require you to pay gambling taxes in the state where you won the money. These states tax all winnings earned in their state. Your own resident state may require you to report your winnings, but offer a deduction or credit for taxes you have already paid to a non-resident state to avoid double taxation.

Be aware that the gambling establishment issuing the W-2G also sends a copy to the state where the money was won, and they'll be expecting to receive your non-resident tax return.

Follow these tips, and you won’t draw the attention of the IRS, so you'll save yourself the pain of an audit.