Over 4.2 billion people have gambled at some point in their lives.
On average, over 1 billion individuals gamble each year.
Gambling offers everyone an opportunity to gain massive amounts of cold, hard cash. Unfortunately, it can also steadily deplete your bank account!
A lot of people assume gambling is a private affair. However, if you have gambled recently, you will likely have to report this activity when you file your annual tax return(s).
This is because gambling losses and wins do count as income and expenditures, both of which the Internal Revenue Service (IRS) is interested in.
Don’t worry, though. You can deduct those gambling losses when you file next and accurately report your gambling income.
Keep reading to learn more about how to ensure you know how to deduct gambling losses properly!
How Tax Deductions Work
What is a tax deduction or “write-off”?
A tax deduction is essentially a reduction in your taxable income. Your taxable income refers to any money you’ve made in a given year that the IRS can tax.
Everybody wants to reduce their taxable income. Reductions mean you ultimately pay fewer taxes, which means more money in your pocket at the end of every tax season.
It may feel as if the IRS can tax pretty much everything. But it’s important to keep in mind the IRS also gives American consumers a lot of opportunities to deduct certain expenses.
These tax credits or write-offs are plentiful. What’s more, many of them apply to common situations, such as childcare or educator expenses, home mortgage interest, and home office use.
In fact, most tax credits take into account certain “expenses” you’ve made, particularly those related to medical care or business purposes.
For a full list of the eligible deductions available to U.S. consumers, we recommend checking out this page on the IRS’s website. (Need a translation of all of that tax language? We can help.)
Keep in mind tax deductions are apt to change every year. This is because tax laws are constantly shifting. We just underwent a huge tax overhaul in America, for example.
However, the IRS is pretty good about releasing these many months in advance.
We’ve actually known about eligible 2020 deductions since March!
Can I Write Off Gambling Losses on My Taxes?
So, at the end of the day, can you deduct those monetary losses from the time you spent at the casino?
The short answer is…. yes!
You can absolutely deduct those gambling losses. However, you can only do so based off of how much you’ve won in cold, hard gambling cash.
This means in order to write off your losses, you will have to accurately report the amount of money you made from gambling in a given year.
This can make some people wary. After all, if those winnings were in cash, does it really matter?
Think about it this way. In order to deduct losses, you essentially have to “prove” you lost this money. The best way to show this proof is by reporting your total gambling income.
Tax deductions also lower your overall tax liability. As a result, it is always wise to fully report income in order to claim as many tax deductions as possible.
In fact, all taxpayers essentially have to “prove” they qualify for certain deductions. The way they do this is by submitting specific tax forms and saving receipts of purchases made.
The IRS won’t knock on every taxpayer’s door demanding additional proof for expenses incurred.
However, they can audit taxpayers at any time. We talk about this at the end of this post, so keep reading for more.
The most important thing that you need to keep in mind for deducting gambling losses is the following: you need to itemize your expenses rather than taking the standard deduction.
Professional Gambler Tax Requirements
Considering yourself a professional gambler by trade, means your sole income is based off earnings from gambling. Professional gamblers are required to file a Schedule C (Form 1040), and can often find themselves in hot water with the IRS for not complying or correctly reporting their losses. It is in the best interest of anyone who falls under this category to pair themselves with a tax professional that can help guide them through the process.
If you happen to be a professional gambler who has not been diligent with reporting their winnings (or losses) and has been threatened with an audit, fears they might be audited or wants to catch up on their taxes before the IRS gets involved. Contact an attorney right away – you do not want to face the IRS without professional representation.
Casual Gambler Tax Requirements
It is the responsibility of anyone who casually gambles to keep track of their potential losses throughout the year and report them (on Line 21 of Form 1040) when filing taxes. Gambling establishments will automatically supply you with Form W-2G when your winnings exceed a certain amount, this must be included when filing. Casinos and other gambling establishments report any money that comes in or goes out, so if you received Form W-2G for winning a larger amount and do not report it; it will likely catch up with you.
If you are someone who only gambles randomly for entertainment, it’s possible you didn’t even realize these regulations existed. Don’t let this discourage you from enjoying a fun night out at the casino, just be cautious of your winnings and make sure to report them!
How to Keep Track of Your Gambling Losses
The IRS recommends that you keep a diary or logbook of all your gambling wins and losses. You do not need to itemize the individual transactions between you and other players in a game like poker. But you need to record each overall win and each overall loss.
Along with the amount you lost, you will also need to record:
Besides this diary, you must also collect and file proof of these transactions. This could include:
Types of Gambling Losses You Can Deduct
In addition to these general forms of proof, the IRS also stipulates specific forms of proof that you will need to keep, depending on which type of betting you are taking part in.
When playing keno, you will need to keep copies of the tickets that you purchased (they need to be validated by the establishment), a copy of any casino credit records you might have as well as copies of check cashing records from your casino.
2. Slot Machines
If you are playing slots, to be IRS compliant, you will need to create a record of the machine number on which you are playing. You also need to note the date and time of all the winnings that you accrue while on the machine.
With bingo what you need to keep are the receipts showing the cost of tickets purchased. You will also need to record the amount of winnings collected on winning tickets and the number of games played. To supplement this documentary evidence, you can also save things like miscellaneous receipts from the casino or parlor.
4. Table Games
Games such as blackjack, poker, craps, baccarat, and roulette fall under table games. For these, you will need to record the number of the table you were playing at and keep a copy of credit card data which indicates whether credits were incurred at the table or with the cashier.
When playing the lottery you are advised to keep a record of the tickets you bought and on which dates, as well as any winnings. Back up documentation for this can be things like unredeemed tickets, winnings statements, and payment slips.
6. Sports or Racing
If you are betting on any kind of sports or racing you also need to keep a record of the dates, amounts wagered and winnings and losses. To provide proof of this, you must keep things like payment records from the race track and unredeemed tickets.
What Is the Standard Deduction?
A standard deduction is one of two ways the IRS tries to reduce consumers’ tax liability.
It refers to the total money taxpayers can subtract from their annual income—all before income tax is applied! What does this mean? The standard deduction reduces your taxable income. (Thanks, IRS!)
You can qualify for the standard deduction even if you aren’t eligible for other tax credits or deductions.
The standard deduction dollar value changes often. Right now, it’s $12,000 for individual filers and $24,000 for married people filing jointly.
It is definitely really easy to choose the standard deduction. This can be vital for people looking for a hassle-free way of filing their taxes!
However, itemizing could save you more money. This is good news as it is the way to go if you are reporting gambling income or losses.
It is also good news if you have a lot of expenses to report or want to claim a tax credit for things like paying mortgage interest.
What Does It Mean to Itemize?
You can either itemize or take the standard deduction when you file your tax return. Unfortunately, you can’t do both.
Itemizing definitely takes more time. It also often puts you at risk for an IRS audit.
Remember, though: if you do everything correctly, an audit should be no problem. If it ends up being a problem, there are always solutions, too.
The biggest benefit of itemizing lies in the fact that it allows you to claim a larger deduction. When you itemize, you can also write off a lot of expenses that aren’t deductible under the standard deduction.
For example, did you pay home mortgage interest last year? You can write this off when you itemize. The same goes for any charitable donations you made and property tax you paid.
The list goes on and on.
The most important thing you can deduct here? Gambling losses!
Now, it’s important to make sure your itemized expenses are greater than the standard deduction ($12,000 for individual filers). This will save you the most money.
You will also have to fill out a special tax form when filing if you itemize. This will involve a Form 1040 and a Schedule A where you total expenses.
Tips for Deducting Gambling Losses
Now you know everything there is to know about tax deductions. What comes next?
Here are some tips for deducting your gambling losses and income.
1. Keep a Diary of Your Gambling Losses
The IRS requires frequent gamblers to keep track of all of their winnings and losses.
This will ultimately be helpful for when you have to fill out that Schedule A form detailing your losses and deductible expenses. An accurate diary can also mean a sweat-free audit (if one happens at all).
What should go into your diary?
First things first, you’ll want to date every gambling experience. You’ll also want to list the address of the place you’ve gambled as well as the type of gambling itself.
Detail how much money you’ve won and lost per gambling experience. You may even want to list who was with you when you gambled and the form of the transactions (cash, card, check, etc.).
This may seem quite excessive. However, accurate record-keeping is important to ensure you qualify for the highest possible deduction of those gambling losses.
2. Know What Qualifies as a Loss in Gambling
The IRS describes gambling losses or winnings quite broadly.
In general, these refer to any cash earned or lost in raffles, lotteries, poker and casino games, and sports betting (including horse races).
This is good to know—most people assume gambling wins and losses occur only in casinos.
But if you also like to visit the horse track regularly, you may have even more losses to deduct.
3. Back Your Gambling Losses
When in doubt, it’s always wise to back up the losses you’ve kept track of. You can do this by holding onto any receipts from transactions made at racetracks or casinos.
The same goes for records of credit card and check payments.
Some gaming organizations will also have to submit a W-2G, a tax form that officially reports gambling winnings on your behalf. Most of these are submitted for winnings more than a certain amount, such as $1,200.
If you aren’t sure if you’ve received a W-2G or not, contact the gaming organization(s) that issued your winnings.
4. Explore Other Tax Credits
Are you looking for ways to maximize your deductions further? Make sure you explore all other tax credits available to you.
This means itemizing like a boss. Consider all other tax situations that apply to you, including health care expenses, education, business costs, and more.
These can lower your tax liability, helping you hold onto more of those gambling winnings in the long run.
We can help you with your tax credit exploration via tax consulting.
Other Things to Know for Deducting Gambling Losses
Here are a few more things that you should keep in mind when reporting gambling income and losses on your tax return.
1. Limits to Loss Deductions
There is one golden rule to keep in mind when deducting gambling losses on your tax return.
You can’t, unfortunately, deduct losses that total more than your winnings.
So, if you made $10,000 on gambling last year but lost $12,000, you can only deduct $10,000 in losses (nothing more).
This can be a bit of a bummer, but don’t worry. You will be itemizing anyways, and this can set you up for some other great tax credits.
2. The Tax Deadline
It’s always wise to file your taxes before the IRS’s deadline. This year, it is April 15th.
What’s more, do your best not to save that filing until the last minute. This is especially important because you will be itemizing your expenses, which can take a lot of time.
To save time and boost accuracy on your itemizing, we recommend using e-filing software. Filing your returns electronically can keep you from making any errors, and it can also help you explore other tax credits.
This is not to be underestimated. Paper returns have a 21% error rate!
3. IRS Audits Can Happen to Anyone
The IRS can audit anyone at any time and for any reason. In general, the IRS tends to audit returns that look a bit suspicious or underreported.
If you are worried about the IRS auditing any of your tax returns, we are on your side. Check out this post about 2019 tax audits to start.
It’s also possible to hire attorney services to defend you throughout the auditing process.
This can help mitigate the amount of paperwork you’ll have to submit. An attorney can also reduce any penalties or even criminal charges if these should arise.
You can learn more about getting an IRS defense audit here.
4. Set Goals for 2021 (and beyond)
If you anticipate gambling more this year, get on track with your record-keeping now. This will make your reporting all the easier in 2021 and reduce your risk of an audit.
Keep track of how much you win and lose per gambling session at all times. You can do this manually (with a good old-fashioned ledger!) or electronically.
Apps like Gambling Tracker can make this pretty easy.
Whatever tool you use, make sure you incorporate dates into your reporting.
If you are self-employed, a financial tool like QuickBooks can also be helpful here. QuickBooks can help you keep track of all income and expenses, easily categorizing these for when it’s time to itemize.
5. Gambling Losses When You're From Canada
IF you’re a nonresident (aka Canadian or any other nationality other than American), you typically report income “effectively connected” with a US business by using Form 1040-NR-EZ.
Gambling winnings don’t qualify, though. They do not fall under the “effectively connected” label, and thus you need to report on Form 1040-NR.
Typically non-residents are subject to a flat rate of 30%. And while the nonresident alien must pay tax on his or her winnings, he or she cannot deduct gambling losses.
Final Thoughts: Deducting Gambling Losses & Income
If you are an avid gambler, make sure you keep track of your annual winnings and losses. These will be important numbers to input on your upcoming tax return.
Don’t sweat this step, however. You can easily deduct any money you lost on gambling efforts if you follow the tips in this post.
Remember: tax deductions reduce the total amount of taxes you have to pay on any income you receive!
Be sure you itemize your expenses when you are filing your return to qualify for a deduction of your losses. Make sure you can prove these values, too.
At Silver Tax Group, we are the real tax attorneys. We have helped scores of clients eliminate or reduce tax problems!
If you’ve run into any issues with reporting your gambling losses or winnings, we’re here to help. With Silver Tax, you get a complimentary consultation to start things off.