Most individuals who gamble are casual or nonprofessional gamblers, but the gambling activity of some will rise to the level of a trade or business. The individual’s status impacts where on the gambler tax return gambling winnings and losses are reported and the outcome on the gambler tax return.
- When a taxpayer can claim gambling as a trade or business, the gambling winnings, losses and expenses are reported on Schedule C.
- For all other taxpayers (amateur or casual gamblers), gambling winnings are reported as “other income” on line 21 of Form 1040, and gambling losses are reported on line 28 of Schedule A as miscellaneous itemized deductions.
In either case, the gambler tax deduction for gambling losses for both professional and casual gamblers is limited to the amount of gambling winnings.
Professional Gambler Tax
A professional gambler is classified as a trade or business. A profit motive is necessary for an activity to be classified as a trade or business. In determining whether an activity is engaged in for profit, all facts and circumstances with respect to the activity are to be taken into account. No one factor is crucial in making this determination. The following factors are considered:
- Manner in which the taxpayer carries on the activity: If the taxpayer conducts gambling activities in a businesslike manner, such as maintaining complete books and a gambling log or diary, this can be indicative of a profit motive.
- Expertise of the taxpayer or his advisors: Preparing for gambling activities by extensive research and consulting with experts may indicate that the taxpayer has a profit objective.
- Time and effort expended by the taxpayer in carrying on the activity: A taxpayer who devotes much time and effort to conducting gambling activities may show an intention to make a profit.
- Expectation that assets used in activity may appreciate in value:
- Success of the taxpayer in carrying on other similar activities
- Taxpayer’s history of income or losses with respect to the activity: A history of substantial gambling losses may indicate that the taxpayer did not conduct the gambling activities for profit.
- Amount of occasional profits, if any, which are earned
- Financial status of the taxpayer: If a taxpayer has substantial income from non-gambling activities, it may indicate that the taxpayer does not engage in gambling for profit. Gambling must be the taxpayer’s primary source of livelihood.
- Elements of personal pleasure or recreation: Since gambling at a casino is commonly understood to be an amusement, a taxpayer has to show there is no pleasure in gambling (for example, no friends or family members accompanied the taxpayer).
The Supreme Court ruled in Groetzinger that an individual could be in the trade or business of gambling (a professional gambler) if he pursued gambling:
- In good faith
- With regularity
- As a livelihood rather than as a hobby
Professional Gambler Tax Deductions
Professional gamblers can deduct their ordinary and necessary business expenses, in addition to their wagering losses, on Schedule C. However, wagering losses cannot exceed gambling winnings. Any excess gambling losses over gambling winnings cannot be carried forward or carried back to offset gambling winnings from other tax years. This is a significant benefit for the professional gambler tax return. A few common professional gambling tax deductions include:
- Subscriptions to gambling magazines and newspapers
- Travel and meal costs during tournaments
- Legal and professional fees
Self-Employment Taxes For Professional Gamblers
Since gambling winnings are normally considered miscellaneous income for casual gamblers, they are not subject to self-employment tax. However, professional gamblers do incur self-employment tax on a gambler tax return.
For additional information, see IRS Chief Counsel Memorandum on Professional Gambler’s Wagering Losses and Business Expenses.
Casual (Non-professional) Gambler
For taxpayers that are non-professional gamblers:
- You must itemize deductions on Schedule A in order to take advantage of gambling losses.
- Nonprofessional gamblers that do not itemize deductions lose the tax benefit of deducting their losses.
- Gambling losses are deductible only to the extent of gambling winnings reported on line 21 of Form 1040.
- You must be able to substantiate any losses claimed.
Gambler Tax Rules and Guidelines
The AGI Problem for Gambler Tax Payers
Gambling winnings increase Adjusted Gross Income (AGI) but gambling losses do not decrease AGI except for a Professional Gambler. Even if an equal amount of gambling winnings and losses are on the tax return, taxable income can be higher than if the gambling winnings and losses did not exist. This is because the higher AGI can cause the partial or total loss of many tax deductions and credits.
Thus, a primary motive of designation as a professional gambler is the ability to lower AGI (adjusted gross income). Since “gross” gambling winnings are included in AGI for casual gamblers before any deduction for gambling losses, it can result in various negative consequences including:
- Increased medicare costs that are based on AGI
- Reduced tax benefits such as other non-gambling deductions and credits
- And more
For professional gamblers, the “net income” from gambling activity (gross winnings less gambling losses and deductions) is included in AGI instead of the total gross winnings (before any deductions). This results in a lower AGI.
Computing Gambler Tax Winnings
Even if you do not receive a Form W-2G, Certain Gambling Winnings, or similar document from the payer of the gambling winnings, your winnings are still considered taxable income. Gambling winnings must be considered in determining your filing requirements.
Winnings of any type are includible in income. Winnings include money and/or the fair market value of bonds, cards, houses and other non-cash prizes.
Do not net winnings and losses. You cannot subtract your losses from your winnings when reporting your gambling income. The total income is reported on line 21 of Form 1040 and losses (up to the amount of winnings) are claimed by itemizing deductions on Schedule A.
Gambler Tax Wins And Losses Are Tracked By The Session
The basic rule for tracking wins and losses are that you must figure out how much you’ve won and lost gambling during the entire year by keeping track of all your wins and losses for each gambling session you have. You add up all your winning sessions during the year to determine your winnings that are to be reported on line 21 of the Form 1040 and then do the same by adding up your losing sessions to determine your annual losses.
A basic definition of a gambling session for a gambler tax payer is a period of continuous play without cashing out. However, a session cannot last more than one day.
Gambler Tax Proof of Winnings and Losses
All gamblers, both professional and casual, need to keep appropriate records to document their wins and losses from gambling sessions. Professional gamblers also need to document their gambling related expenses.
The session records might include a journal or diary listing:
- The date
- The location where the gaming took place
- The names any people who also attended with you
- Activity (i.e. slots, poker, etc)
- Machine number (if applicable)
- Net win amount
- Net loss amount
- W-2G amount
In addition to a diary, the taxpayer should also have other documentation. A taxpayer can generally prove gambler tax winnings and losses through the following items:
- Form W-2G, Certain Gambling Winnings
- Wagering tickets
- Cancelled checks
- Credit records
- Bank withdrawals
For specific wagering transactions, a taxpayer can use the following items to support winnings and losses.
Copies of the keno tickets purchased that were validated by the gambling establishment, copies of casino credit records and copies of casino check cashing records.
A record of the machine number and all winnings by date and time the machine was played.
The number of the table where the taxpayer was playing, as well as casino credit card data indicating whether the credit was issued in the pit or at the cashier’s cage. This includes table games such as blackjack, craps, poker, baccarat, roulette, wheel of fortune, etc.
A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.
A record of the races, amount of wagers, amount collected on winning tickets and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
A record of ticket purchases, dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winnings statements.
Form W-2G, Certain Gambling Winnings, is used by payers to report to the payee and IRS certain gambling winnings.
- Generally, gambling winnings that are (1) $600 or more and (2) at least 300 times the amount of the wager are reported on Form W-2G.
- For Keno, the reporting threshold is $1,500 (reduced by the wager), while for bingo and slot machines, it is $1,200 (not reduced by the wager).
- For a poker tournament, the reporting threshold is $5,000 in winnings (reduced by the wager or buy-in).
- When winnings exceed $5,000, payers are generally required to withhold income tax at the 25% rate. Tax withholding, if any, is shown on Form W-2G.
Taxpayers who gamble frequently enough and in such high amounts that complimentary items (such as tickets to shows, etc) are provided to them by casinos are required to include these “comps” in income. The comps are treated as gambling winnings so they increase the amount of potentially deductible gambling losses.
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