When Ryan Gordon won $321,000 at a year-long raffle in Hudson, South Dakota, he probably knew immediately that he wouldn’t be bringing home $321,000. After all, raffle winnings are taxable.
He probably didn’t know that he could also deduct the cost of his tickets on his 2020 taxes, because many consumers do not ask the question, “Are gambling losses tax deductible?”
Taxes are tricky. We all know what we can deduct on our taxes. Kids. Daycare. Charitable contributions. Medical expenses. And yes, gambling losses.
Because you’re spending money to earn money, your costs are tax deductible. Your gambling losses are also tax deductible.
As you look ahead at the year, take the time to educate yourself about taxes.
Gambling Losses and Winnings – What Are They?
For A Professional Gambler
You qualify as a professional gambler if your primary source of income comes from gambling. If you gamble to make a profit, and you’re involved in it regularly, then you qualify. This also means you have the pleasure of reporting your losses as business expenses on Schedule C.
For The Casual Gambler
If you gamble for fun and not as your primary means of income, you qualify as a casual or amateur gambler, and the rest of this article applies to you.
What Is A Loss?
Simply put any time you spend money to gamble and do not have a return, you have a gambling loss.
Let’s say you have a regular Friday night poker night with your friends. You typically gamble up to $200 in the game. On a particular night that you bring home just $40 in your pocket, you sustained a $160 loss.
However, if you have a lucky night and come home with $220 in your pocket, you sustained a $20 win.
Are Gambling Losses Tax Deductible?
Believe it or not, you can deduct gambling losses.
In the same way, you have to report your gambling winnings, you can also report the gambling losses. The key here lies in two parts:
You need to make sure you properly document your winnings and losses. This means you need to keep a diary with specific information about your gambling.
Your diary should document each of the wins and losses including but not limited to:
- horse and dog races
- casino games
- cash winnings
- the fair market value of prizes (like cars and trips)
Also, you need to include the date and type of gambling you participate in. You should include the names of the people you gambled with along with the name and address of the establishment where you gambled. And of course, you need detailed information on the amount you won and lost.
How Much Can I Deduct?
You also cannont deduct any more loss than your winnings. So if your winnings total $5000 for the year and you sustained $10,000 in gambling losses, you can only claim $5000 in deductions.
How Do I Report Gambling Winnings and Losses?
You cannot simply deduct your winnings from your losses and report the losses. If gamblers did this, the IRS would ultimately be paying the individual for gambling.
Like with everything else in the government, you must fill out the proper forms and provide documentation.
A payer must provide you with Form W-2G if your winnings qualify for federal withholding. The following circumstances qualify:
- $1,200 or more in gambling winnings from bingo or slot machines
- $1,500 or more in gambling winnings (reduced by wager) from keno
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament.
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager
- Any other gambling winnings subject to federal income tax withholding
The IRS also requires you to report all winnings in the “other income” category of Form 1040, Schedule 1, which you must then attach to Form 1040. You must report all winnings here, even those not reported on Form W-2G mentioned earlier.
In the same way, you must report your winnings, you may report your deductions. However, you cannot just estimate how much you lost. As stated earlier, you need documentation.
The IRS requires detailed record keeping to prove that you actually spent more than you earned.
So whenever you’re feeling the itch to gamble, break out the designated diary for gambling. Be meticulous. Write down everything.
Also, keep everything. Save all of the stubs, tickets, receipts, statements, and basically any record of your activity if you want to help yourself out in the end.
You cannot receive a tax deduction for the losses alone. But you can, essentially, cancel out the taxes you would have to pay on your earnings by proving that you spent as much as you earned.
What If I’m 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 1040NR_EZ.
Gambling winnings don’t qualify, though. They do not fall under the “effectively connected” label, and thus you need to report on Form 1040NR.
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.
Canadians are the exception. A tax treaty between Canada and America allows Canadians to deduct their losses.
Does Gambling Tax Exist?
Yes. A gambling tax does exist. After all, you just earned extra income.
Typically the IRS requires the payer to withhold a 25% flat amount on your winnings. However, as stated earlier, some winnings are subject to federal withholding.
If your payer withholds, they will also send you a Form W2-G.
Seek Help When Filing
You may not love paying your taxes. You may hate it. And no one wants to pay more taxes than he or she needs to.
Thus you need to understand the tax laws and the what qualifies for deductions.
We can help you with this. Contact us with your tax questions, and we’ll help you avoid having to pay any more than you’re legally required to. We can effectively help you answer the question, “Are gambling losses tax deductible?”