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The Gambler’s Tax Guide—How to Protect Your Winnings from the IRS

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Ever had a lucky night at the casino and walked away with pockets full of cash? If so, that means the government had a lucky night, too—your gambling winnings are taxable income.

But, wait—what happens at the casino stays at the casino, right? Nope. Casinos and other payers are required to report gambler winnings that exceed a certain dollar amount. That means you can count on the government asking you for a token of your good fortune.

So, beat the government at its own game. Having a strategy and knowing the rules will help you not only at the casino, but also when it comes to navigating the taxes on your winnings. Depending on your status as a professional gambler or amateur, the government allows you to take deductions for certain gambling business expenses and gambling losses, which can offset some or all of the tax you would otherwise have to pay.

This article gives you clear guidance for professionals and amateurs on the deductions you are entitled to take and the strategies you need to follow to cut your taxes on gambling income to the maximum extent allowable.

Three Basic Rules
Rule 1: Your winnings are taxable. Your gambling income is taxable.*
And—just as important—it’s reportable.**

For example, when you win $1,200 or more from a slot machine, the casino must report your winnings on Form W2G and send a copy to you and the government. This is similar to the Form W-2 employers must send their employees each year to notify them of their salary and other tax information. With that kind of tool, it’s very easy for the government to know when you don’t report enough income on your tax return.

But what happens if your slot machine losses exceed your winnings? The casino may still be required to report your winnings—putting you in a situation where you have to prove your losses or face a tax bill despite having zero actual income.

Rule 2: Keep records of your losses. You can offset your gambling winnings with your gambling losses—but you have to keep good proof of those losses. The IRS and courts expect you to maintain a “contemporaneous gambling diary.”***

That’s much, much simpler than it sounds. “Contemporaneous gambling diary” is just a fancy way of saying “jotting down a few notes.” If you don’t have a player card that substitutes for an activity record, then keep an accurate diary or similar daily record. Support that diary with verifiable documentation. This “verifiable diary” produces acceptable evidence that proves time spent and your gambling winnings and losses. Overall, your diary should contain at least the following information:

  • Date and type of specific wager or wagering activity
  • Name of gambling establishment
  • Address or location of gambling establishment
  • Names of other persons, if any, present with you at the gambling establishment
  • Amounts won or lost.

Rule 3: No net losses. If your gambling losses exceed your winnings, you get no deductions for your net loss. Further, the net loss does not carry forward. It simply disappears.

For example, let’s say you won $15,000 on a particularly good day at the casino, but over the course of the year you lost $20,000. You can report $15,000 of those losses (that is, up to the amount of your winnings). As for the
remaining $5,000 of losses, you can’t carry them forward or back. For tax purposes, they disappear.

What if you won that $15,000 on December 30 but didn’t rack up the $20,000 in losses until a few days later,on January 2 (that is, in the following year)? That’s not a good situation. You have to report the $15,000 in the year of your winnings, but the $20,000 can offset income only in the following year. You can’t carry the losses back. If you have no winnings to offset those losses, you’re simply out of luck for tax purposes.

Note that tax law allows a husband and wife to combine gambling winnings and losses on a joint return.You might benefit here in the event that you win when your spouse loses, or vice versa. Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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*     IRS Publication 525, Taxable and Nontaxable Income, dated Jan. 23, 2017.
**   Instructions for Forms W-2G and 5754, dated Apr. 27, 2017.
*** See, e.g., Ann M. LaPlante v Commr., T.C. Memo 2009-226 (“No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”).

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