Published on: May 10, 2019 Last modified: August 13, 2020

A Comprehensive Guide to Deducting Your Gambling Income & Losses

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    Do you like to gamble? Do you ever win? Do you lose sometimes?

    If the answer to any of these questions is yes, then you should know that the IRS knows that as well. Most people aren’t aware that the government requires you to report all the money you win when you gamble.

    The same applies to your gambling losses. You can only get a tax break off your winnings if you take the time to itemize your gambling loss deduction. It may sound complicated but it’s quite a straight forward process.

    Gambling is more than just a form of entertainment or hobby; according to the IRS it is also considered a form of income. Since income must be reported for taxes, any winnings you receive from gambling must also be reported. These winnings can be anything from casinos, lotteries, horse races and raffles to cars, trips and other cash prizes.

    Professional gamblers and casual gamblers are classified in two different groups and have separate requirements for reporting taxes.

    Professional gamblers 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 winnings (or 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 winnings 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!

    Gambling Winnings

    All gambling winnings are categorized as taxable income. This means that both state and federal income taxes are applied to the amounts.

    It also doesn’t matter where or how you earned your winnings. If you gambled and won at your local church raffle, at your favorite online casino, or your weekly neighborhood poker tournament, you can expect Uncle Sam to come knocking.

    A federal income withholding tax rate of 25% applies to all gambling winnings. The IRS requires that all casinos report gambling winnings when they exceed a certain amount. There’s no escaping it.

    So you’ll have to do your part. These are usually reported on line 21 of page 1 of your tax return form W-2G. The reporting thresholds are as follows:

    • If you win more than $1,200 at a bingo or slot machine game you’ll have to report the amount. However, it’s important to note the money you placed in bets does not reduce this amount.
    • If you win more than $1,500 while playing a game of Keno, the winnings have to be reported as well. In this case, however, the amount you placed in your wager can reduce this amount.
    • If you like to play Poker and occasionally take home some modest wins, listen up. The IRS needs to know about any amount you won that exceeds $5,000. The amount you placed in bets, however, can reduce this amount.
    • If you placed any bet in a casino that ended up winning you 300 times the amount you wagered, then the IRS requires you to report this as well. However, this is only if the winnings amounted to $600 or more.

    Once you report your winnings, you can go ahead and do the same for your gambling losses. The treatment for these is slightly different as you’ll see below.

    Gambling Loss Deduction

    Gambling losses don’t affect your tax return nearly as much as your winnings do. If you think about it, your losses are partially offset by the tax effects of your winnings.

    The age-old question when it comes to gambling losses is: Can I deduct gambling losses if I don’t itemize? The answer is no, you can’t.

    So, are gambling losses deductible? Yes, they are.

    They are claimed as an itemized deduction since, if you really think about it, why would the IRS tax you on an amount that you lost? It wouldn’t make any sense.

    Nonetheless, you may not be able to totally write off gambling losses, but, there’s a cap on the amount you can claim as a loss. This depends on the amount you won.

    For instance, say that the casino reports $7,000 worth of wins. But, in the course of the year, you spent a total of $8,000 and only won back $7,000. This, in reality, means you lost $1,000. However, you cannot claim that $1,000 loss on your return.

    You report all your gambling losses which include betting expenses, lottery tickets and wagers as itemized deductibles on Schedule A as “Other Miscellaneous Deductions”. This means that they are not bound by the 2% threshold of the MAGI.

    It’s important to mention at this point that in order to claim gambling losses, you have to prove that you actually lost the amount. So, it’s important to keep all your gambling records straight.

    This means keeping all receipts that show your wagers, winnings, and losses. Without them, you might as well say sayonara to your deductions.

    Remember, you deduct the losses so that you don’t have to pay income taxes on your winnings. But, there’s a bigger picture here to consider. It has everything to do with how those gambling winnings affect your MAGI. 

    Who’s MAGI

    MAGI stands for Modified Adjusted Gross Income. Based on all your other tax deductions, the MAGI determines whether you pay more tax in certain areas and/or lose out on some deductions.

    Remember, you report all your gambling winnings on the first page of your tax return form. The winnings must first be reported before any losses can offset them – in a manner of speaking.

    The overall effect this action has on your MAGI immediately becomes clear: It increases it. This means that your MAGI is calculated way before you can benefit from any itemized deductions.

    Your MAGI goes up even if you didn’t actually win anything when you compare your losses to your winnings. If you are a regular gambler, you can see how this may end up costing you a couple of dollars more in taxes even if you won and even if your gambling losses offset those winnings.

    How to Keep Accurate Records of Your Gambling Activities

    As highlighted before, you must keep your gambling records straight to be able to claim your deductions. These records should reflect your bets and your winnings. This should be in a journal that shows:

    • The date when you gambled
    • The name, address and physical location of the casino you gambled at
    • The names of the individuals who were with you when you were gambling
    • What gambling activities you took part in while you were at the casino
    • The specific bet you placed in the games you played while you were there
    • The total amounts you won or lost in each game you played

    It sounds pretty detailed but that’s what’s required. In addition to this, the IRS needs you to provide them with what they term “Proof of Winnings and Losses”.

    This means that in addition to your records journal, you need to be able to prove that your entries are valid. This is done using the following documents:

    • Form W-2G which represents “Certain Gambling Winnings
    • Form 5754 which is a “Statement by Person(s) Receiving Gambling Winnings
    • Wagering Tickets
    • Payment receipts, given to you by the casino
    • Statement of factual winnings also provided by the casino
    • Bank Withdrawals
    • Credit Records
    • Checks: Whether they’re canceled checks or substitute checks

    It doesn’t end there. Specific betting transactions require additional documents to support your claim.

    For instance, if your game of choice in casinos is Slots, you need to provide proof of the slot machine number alongside the date and time you played the machine. This is obviously in addition to a list of all the winnings on that specific machine.

    It’s no different for table games like Blackjack, Poker, Roulette, Baccarat, Craps and Wheel of Fortune. You need to provide the IRS with the table number at which you were playing.

    If you got casino credit, you need to provide data that shows where the credit was issued. This could have been at the cashier’s cage or at the pit while you were playing.

    For Bingo, you need to provide, a record of the tickets you purchased, the amount you spent buying them, and the total number of games you played during the time you were at the gaming parlor. You’ll also need to show receipts from the casino and the amounts you collected on winning tickets.

    The IRS also requires you to provide validated copies of Keno tickets you purchased. The gaming establishment where you played needs to validate the ticket copies. You also have to provide copies of both your check cashing and casino credit records.

    If you play the lottery, you aren’t exempt either. You need to have a record of your ticket purchases, the dates of the purchases and any winnings or losses you incurred. Unredeemed tickets and payment slips for the amount you won are also included.

    Finally, for those who love the racing tracks, here’s what you need to provide as proof. A full record of the races and the amounts spent on bets. You also need to show the total amounts you collected on winnings as well what you lost on losing tickets.

    What Is the Tax Treatment for Shared Gambling Winnings

    You’ve most likely come across scenarios where multiple people win a jackpot. In the event this happens, the casino divides the winnings among the lucky players. These winnings are then reported to the IRS on Form W-2G with a list of all the winners.

    Online Casino Winnings

    In the modern era, you no longer need to leave the confines of your home to gamble. Online casinos bring the gambling parlors right to your doorstep.

    However, as far as the IRS is concerned, winnings are winnings. It doesn’t matter where you got them. So, just because your favorite online casino isn’t hosted in the US, you need to include your online winnings in your tax return form.

    Professional Gamblers

    Who qualifies as a professional gambler? Well, the short answer is: If you gamble full time and that’s how you earn a living, then for tax purposes, you qualify as a professional gambler.

    For this reason, their tax treatment differs slightly from that of recreational players. They actually enjoy better tax perks than amateurs.

    If you are a professional gambler, you need to report your gambling income and all related expenses you may incur on Schedule C. This is classified as self-employment income. All income declared on Schedule C is subject to self-employment tax, state income tax, and federal income tax.

    Gamblers in Retirement

    If you are retired and enjoy regular gambling to pass time, you should know how this activity impacts your taxes. You may not be aware of this, but, you actually end up paying more in hidden taxes and increased Medicare Part B premium annually.

    How does this work? Well, the hidden taxes come about because your gambling winnings increase your gross income. But, remember that gambling losses are only deductible if you itemize deductions.

    When you do the math, you’ll quickly realize that even if your gambling losses are more than the amount you get in winnings, the winnings are included in your gross income. This effectively increases the amount of tax you pay on your social security benefits and increase the amount you pay in Medicare health plans. It may also mean losing out on subsidized health insurance premiums.

    Uncle Sam Is Always Watching

    You’re probably wondering: How will the IRS know I owe taxes from my winnings if I keep it secret? Well, there’s no way out of it. All gambling establishments located in the US must disclose all winnings beyond the thresholds listed earlier in this article.

    It is their legal obligation to fill in Form W2-G with the IRS. Only winnings and not IRS gambling losses are disclosed. The establishments also give you a copy of the form as well.

    Nevertheless, a W2-G form is filled based on the type of game you play. For instance, if you win $1,200 playing Slots and $1,500 playing Keno, the casino will file the form with the IRS. That’s how they’ll know you owe them some money.

    On the flip side, suppose you won the same $2,700 spread across several games in the casino that individually, don’t meet the threshold. Then you may just slip under their radar. That being said, remember, tax evasion is a felony.

    The Bottom Line

    When you lose money at the tracks or at a casino, it doesn’t in itself reduce the amount you owe IRS in tax. Tax owed in winnings is given precedence over the deductions you’re entitled to as a result of your losses.

    So, speaking objectively, a gambling loss deduction only allows you to avoid paying tax on the income you get from your gambling winnings. If the IRS simply allowed you to offset your losses from your winnings it is, in actual, fact subsidizing taxpayer gambling which wouldn’t make any sense for Uncle Sam.

    If all this sounds complex, it may be time to bring in the professionals. Looking for more tax-related information? You should definitely check out our blog.

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