Deducting Gambling Losses with the New Tax Bill

All gambling wins are reportable income. Avoid unnecessary taxes by deducting losses without itemizing using gambling sessions. Sessions also allow you to avoid state taxes, too.

All gambling wins are reportable income. Avoid unnecessary taxes by deducting losses without itemizing using gambling sessions.

The Tax Code doesn’t treat casual gamblers very well. On the one hand the odds are stacked against you winning (those fancy casinos were built on losers, not winners). And on the other hand winning can be worse than losing when the taxman gets a hold on you.

Recent tax law changes turned a bad situation worse. The higher standard deduction means fewer people will benefit from deducting gambling losses since you need enough itemized deductions to exceed the standard deduction before the gambling losses reduce your tax liability.

Then we have issues with state tax returns. If the federal tax return doesn’t treat casual gamblers with respect, state tax returns can be down right rude. Wisconsin, for example, doesn’t allow any gambling losses against wins as an itemized deduction: if you lose, you lose; if you win, you lose.

Before we explore strategies for deducting gambling losses we need to review the rules as they stand.

 

Gambling Wins and Losses on a Tax Return

Gambling wins are reported on the front page of Form 1040 for tax years 2017 and prior. Gambling wins are reported on Schedule 1, Line 21 for tax year 2018.

All gambling wins are required to be reported even if the casino doesn’t report the win to the IRS. Gambling wins are reported on a W-2G for:

  • bingo or slot wins of $1,200 or more (not reduced by the wager),
  • $1,500 or more (reduced by the wager) for Keno, or
  • $5,000 or more (reduced by the wager or buy-in) for poker,

There are certain instances where a W-2G is issued for other gambling winnings of $600 or more.

Losses are allowed as an itemized deduction dollar for dollar against the gain. Gambling losses cannot be greater than gambling wins for the tax year.

Example: John wins $23,500 during the year playing slots and other casino games. His gambling losses are $37,900. John reports his $23,500 of wins on Schedule 1 and $23,500 as an itemized deduction on Schedule A. The additional losses are not deductible. If John doesn’t have any other itemized deductions and is married he is better off taking the $24,000 standard deduction. He derives no additional benefit from the gambling losses while he pays tax on the wins.

When it comes to state taxes some states do not allow any gambling losses, even against gambling wins. This creates a unique situation. In Wisconsin, for example, you can win a million dollar jackpot and go on a gambling spree losing it all and end up with a huge state income tax bill because none of the losses can offset the win. For federal you would report the income and deduct the losses on Schedule A; very little additional tax, if any, would result on the federal tax return.

Gambling wins reported on Form 1040 can cause other serious tax issues even if you can deduct losses on Schedule A. Many credits are affected by adjusted gross income. Losses are deducted further down the return so gambling wins can reduce or eliminate:

  • Education credits,
  • the Earned Income Credit, and
  • the Premium Tax Credit

In addition to lost credits, gambling wins can reduce or eliminate:

  • IRA deductions or Roth contributions allowed
  • Passive Activity losses, and
  • affect the Alternative Minimum Tax

And if this isn’t enough, your Social Security benefits could be taxed more and Medicare premiums pushed higher.

The above lists are not inclusive either! The tax issues from a gambling win can hurt you in many more ways.

But there is a solution to all the tax pain.

Gambling Sessions

When you consider the tax implications of a casino win you might want to think twice about gambling. While I’m not a fan of gambling, since it isn’t conducive to financial independence, I still understand some people enjoy casino games as a form of entertainment. A certain accountant once tried his hand at card counting to reasonable success. 

I’m not here to judge. If you gamble I want to assure you have the best information to reduce your taxes on wins.

Gambling wins can cause other taxes to go up and reduce or eliminate other deductions. Learn how gambling sessions allow you to deduct losses before they add to your tax bill.

Gambling wins can cause other taxes to go up and reduce or eliminate other deductions. Learn how gambling sessions allow you to deduct losses before they add to your tax bill.

The basic tax rules above (report all gains and itemize losses to the extent of gains) are valid, but there is a better way. Enter gambling sessions.

The IRS in 2008, and later clarified in 2015, created rules for deducting gambling losses called gambling sessions.

The idea was a gambling win wasn’t really a true win until the session was completed. The Tax Court ruled it is impractical to record each and every wager (pull of the lever, deal of the cards or throw of the dice) and therefore wins and losses can be tabulated for each gambling session versus each hand of cards played, et cetera.

gambling session starts when you make your first wager of the day for a specific type of game and ends when the last wager of the day is made on the same type of game.

Gamblers need to take extra caution not to mix different types of wagers when calculating sessions. Slot machines are different from blackjack, blackjack different from poker, and poker different from craps.

Example: You play slots in the morning and take a break for lunch and return to the one-armed bandit. This is still the same session.

Example: You play slots for an hour and then move to craps. The slots and craps wagers are different sessions. If you later return to slots the same day you are still on that day’s slots session.

Tax Tip: IRS guidance says a gambling session ends when the clock strikes midnight. This is somewhat true. Playing late into the evening could cause two separate sessions in the same sitting. You can choose to use a calendar day or any 24 hour period as long as it is consistent. Consistency is the key. You can call a day from noon to noon the next day or 5 p.m. to 5 p.m. the next day. Your day should be consistent for the entire year for all gambling sessions.

Extra Gambling Deductions

Let’s use a live example to illustrate the valuable deductions allowed with sessions and an extra deduction for losses not allowed by sessions.

John’s gambling sessions log.

The above sessions log is for a casual gambler who had four sessions throughout 2017. For calculating a session you can use your starting “money in” and netting your “money out” at the end of the session to determine your gain or loss for the session. Inside each session large wins could exist. For example, on February 2nd John may have won a $12,000 jackpot and received a W-2G, but by the end of the session he had only $700 left for a net $200 sessions gain.

John will report $900 of gains on his tax return regardless the gains inside a single session. Losses are not allowed against gains for between sessions.

The $900 gain will end up on Schedule 1 (Form 1040) and will be subject to tax and may affect other deductions and credits on the return. You can also deduct $900 of the additional losses on Schedule A if you itemize! (The $900 sessions gains on Form 1040 can be still be deducted from other losses on Schedule A.) The sessions will always break even (unlikely) or net out as a gain because losses are not allowed between sessions. But unused losses from sessions can be deducted on Schedule A against session gains.

Reporting Sessions Without Getting Audited

Reporting gambling sessions can cause a problem with the IRS computers and cause an unwanted envelope arriving in your mailbox.

Remember when we said you could have a gambling session with a $200 gain (February 2nd above)? Well, inside that small gain could exist a large gain with a W-2G issued. If you only report a $200 gain when the IRS has W-2Gs showing thousands in wins you will get a bill for the difference.

Don't let a gambling win turn up a tax joker. Don't lose all your gambling wins to taxes. Use the trick professionals use to deduct all gambling losses. Deduct your gambling losses without itemizing.

Don’t let a gambling win turn up a tax joker. Deduct your gambling losses without itemizing.

Yes, in the above example only $900 of gains are reportable. But you need to tell the IRS computer what it wants to hear. You could always attach a statement to the return, but the IRS computer may not pick it up before a nasty gram goes out or a full audit triggered.

The best way to handle this is by modifying your sessions reporting on the tax return. Let’s assume the February 2nd session above contained a $10,000 win. Your log will read exactly as above if those are your “money in” and “money out” numbers. But you will report the February 2nd W-2G gain of $10,000 and $9800 of “money in” called gambling losses on the return for a net of $200 again.

Let me see if I can make this clearer.

When I prepare a tax return I enter all the W-2Gs first. This tells the IRS computer I didn’t miss any gambling wins. Then I go the the client’s log and net the difference to arrive at the correct answer.

I still attach the log to the return. This nips an audit before it begins. The attached log allows an auditor to reconcile your sessions without opening a full audit, saving you time and aggravation.

The thing to remember is that your gambling sessions bottom line must be accurate. Adjustments sometimes need to be made so the IRS computers don’t start smoking.

From the above example you can combine all sessions when reporting on the tax return. (Still attach your sessions log to verify the reported sessions gains.)

Let’s assume for our final example that John started with $500 on February 2nd, won a $10,000 jackpot and kept playing until he had only $700 left. The other sessions had no W-2G wins.

Here is how I’d report John’s sessions on his tax return:

  • Gambling Income: $10,000
  • Gambling Sessions Losses: $9,100

The tax return only needs this one simple combined sessions reporting to arrive at the correct $900 of gambling gains. Remember to deduct the excess allowed on Schedule A (losses up to total gains not reduced by sessions losses).

 

Gambling can be exciting and fun. Winning is best of all. Just make sure you don’t pay a penny more in tax than you have to. The deck is already stacked against you by the IRS and casino. Don’t throw your winnings away, too.

 

 

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Keith Taxguy

24 Comments

  1. WI Girl in CO on December 18, 2018 at 9:27 pm

    This post was so interesting to me as my spouse did amazingly win a five figure sum on a $60 poker hand with a royal flush this year! The taxes were taken out of his payout right away and he was issued the tax docs at the casino and given a wad of cash. He also had to pay the taxes on the $5 chip he gave/bet for the dealer (not sure how this works since I don’t gamble) that turned into $5k vs the dealer paying. We had no idea you could deduct losses from that session. Might need a new accountant for our ‘18 taxes 🙂

  2. Derrick on December 23, 2018 at 6:47 pm

    Interesting post, just wanted to thank you for your blog. I have learned a lot and what questions to ask local accountants. Finding someone who is competent with tax related questions for someone who runs an online business, invests in stocks and alternative investments line Fundrise, LendingClub etc.. is tough.

    Personally I am not much of a gambler.

  3. atush on February 12, 2019 at 8:30 pm

    First time trying to do taxes with gambling wins/ loss. This article was extremely helpful , however, still looking for an accountant who could get this done for me. Turbotax did not work.

  4. doug on March 20, 2019 at 12:49 am

    Keith, you mention Wisconsin is a State that does not allow gambling losses to reduce revenues on winnings. What about Oklahoma? Do you know if Oklahoma allows gambling losses to offset winnings?

  5. Mark Hazlett on April 8, 2019 at 6:41 pm

    Hi Keith,
    I really enjoyed this article but have a question. Using the sessions method described in the article lets say you hit 2 jackpots during 2 gamblings sessions and the total was $15,500 in W-2Gs but your net win after all your play turned out to be $4000. If you enter the total of the 2 W-2Gs on line 21 of Schedule 1 (form 1040) of $15,500 where can you deduct the two session losses which added up to $11,500 (15,500 gross win less 11,500 session loss) to properly show the $4000 net session win? There is no room on the schedule 1 to show this and line 22 is a sum of lines 1 thru 21. Lines 23 thru 36 are adjustments to income but i do not see any lines there that are for a gambling session loss. Thanks very much for the article.

    • Keith Taxguy on April 8, 2019 at 7:23 pm

      You attach a statement showing the gambling wins and the sessions losses. Remainder goes on Schedule A.

      • Tami on August 16, 2019 at 11:09 am

        If you do not have enough expenses to get on Schedule A, where on the 1040 do you put your “net gambling session” number? What line? I understand what you are saying but cannot understand where does the actual number go in order to reduce the tax amount on the actual form?

        • Keith Taxguy on August 16, 2019 at 11:17 am

          Tami, for 2019, Schedule 1, Line 21. Add all the gambling income and then a second number on the same line as a negative listed as gambling sessions.

          • Tami on August 16, 2019 at 2:54 pm

            thank you for that, but if I have entered W-2Gs into the return the income is already there. If I enter the net number of gambling sessions on line 21 sch 1 I will be entering the income 2x, no?



          • Keith Taxguy on August 16, 2019 at 4:13 pm

            Tami, enter the W2Gs OR directly on Line 21, not both. If you direct enter make sure you use the line in your software indicating it is gambling income so it matches the IRS’ computer. Direct enter the gambling sessions on Line 21.

            Each software is a bit different so you will have to check the software’s instruction for this. Regardless, you should see in view mode gambling income listed and the gambling sessions subtracted below that.



          • Tami on August 17, 2019 at 1:09 pm

            Thank you for the details. I appreciate you.



          • Tami on August 16, 2019 at 3:46 pm

            Oh, maybe what you are saying is that I should NOT enter the W-2g’s as the software wants me to, but just list them on line 21 sch 1 in total as winnings and on the same line list the losses with the NET number being reported in box 21 flowing to the 1040 and complete the Disclosure form 8275. Yes?



  6. Sanping Pan on April 9, 2019 at 4:49 am

    Since you have to attach a statement, then you can not e-file your tax through Turbo Tax? Also, in Mark Hazlett’s case, what will go on Schedule A? He did not have a loss.

    Instead of attaching Gambling Session Log to our tax, can we just attaching the casino win and loss statements?

    Thank you for your reply in advance. It is an wonderful article you wrote!!

    • Keith Taxguy on April 9, 2019 at 8:40 am

      I don’t use TurboTax so you would have to ask their support how this is handled in their software. My software generates a statement automatically.

  7. Ceje on April 10, 2019 at 1:38 am

    Great article. I understand the necessity to adjust the numbers based on W-2G’s. I would appreciate a little more information on the Gambling log / statement you attache to the return. Is it just a document showing: Session; Date; MoneyIn; MoneyOut; GainLoss? OR is there additional information? Thaanks

  8. ceje on April 10, 2019 at 8:48 am

    I would appreciate your feedback on the following scenarios.
    Scenario 1: Money in 100; Money out 100; Gain/Loss 0; Jackpot 10,000; Withholding 0; Cashier Gave me 10,000. and I lost it all except for $100.
    This changes the Money in to 10,000; Money out to 10,000 Gain/Loss 0. Correct?
    Scenario 2: Based on cash in hand: Money in 100; Money out 100; Gain/Loss 0; Jackpot 10,000; Withholding 2,000; Cashier Gave me 8,000. I lost it all except for $100
    This changes the Money in to 10,000; Money out to 12,000? Gain/Loss to 2,000? Correct?

    Also, I must mail my returns to attach the Gain/Loss statement. What form would I attach the statement to?

    Thank you very much for your help

  9. Sanping on April 11, 2019 at 5:29 am

    Your example:
    Gambling Income: $10,000
    Gambling Sessions Losses: $9,100

    On Sch 1, where do you put the “Gambling Sessions Losses: $9,100”? Which column?
    Someone suggested column 17 (hobbies) on Sch 1 Other Income , put as a negative number. Will you agree?

  10. GREGORY ANTHONY CARNAGO on May 26, 2019 at 3:51 pm

    Keith
    I am being Audited for deducting my Session loses.
    Do you have a Specific court case or a tax ruling/reg. that I can show to support this position?
    Thanks for any help you can give me.

    • Keith Taxguy on May 26, 2019 at 8:50 pm

      Greg, who is doing the auditing? The IRS should not audit you for using gambling sessions, but they might audit your records to verify your gambling sessions reported are accurate. Some states might not accept gambling sessions.

      Section 165(d) covers the Code and here is legal precedence (Shollenberger, T.C. Memo. 2009-306; LaPlante, T.C. Memo. 2009-226). Also review IRS Notice 2015-21. Record keeping is covered in Rev. Proc. 77-29. If you are a professional gambler you have additional options.

      • robert granger on June 3, 2019 at 7:54 pm

        Which states dont accept gambling sessions?

      • Dee on July 16, 2019 at 3:01 pm

        What are the options for professional gamblers? Spouse & I have a Partnership LLC that Wisconsin doesn’t like – have not been able to show a profit so they say it can’t be used – meet every other criteria. Also only want to allow 75% of expenses claiming they are excessive. Have receipts for all. Advise?

        • Keith Taxguy on July 16, 2019 at 3:09 pm

          Without a full review I have no idea what Wisconsin is considering excessive. LLC or not, gambling losses are only allowed to the extent of wins and can not be carried to a future year. Use Schedule C for gambling expenses (not gambling losses): travel, training, hotel, et cetera. If you meet the criteria then your only recourse is appeal and then court.

  11. LISA PORZIO on June 20, 2019 at 7:04 pm

    Will Social Security accept my win/loss statements to show proof I played all my winnings back ?
    Because I received a notice from them stating I am being cut off SSI because I received to much income because Of my Winnings so I sent them copy’s of my w-2G forms and my win / loss statements.. That is also what I’m sending the IRS with my tax forms. I also forgot I had to file taxes in 2017 so now I have to do that. THANK YOU

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