11.3 Gambling Winnings and Losses

Gambling winnings are taxable but losses are limited.

If you are not a professional gambler, gambling winnings must be reported as “other income” on Line 21 of Form 1040. You cannot reduce the winnings by your losses for the year.

Losses from gambling are deductible only up to the amount of gambling winnings. You may not deduct a net gambling loss even though a particular state says gambling is legal. Nor does it matter that your business is gambling. You may not deduct a net loss from wagering transactions even if you are a professional gambler (see below).

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Winnings Paid in Installments
Gambling losses are deductible as miscellaneous deductions up to the amount of your gambling winnings. Lottery winnings paid in installments qualify as such gambling winnings. If you receive lottery installments in 2012, for instance, you may deduct any gambling losses incurred in 2012 up to the amount of the installments. Lottery winnings paid in installments do not lose their characteristic as gambling winnings.
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If you are not a professional gambler, the gambling winnings included on Form 1040 as “other income” (Line 21) may be offset by gambling losses if you itemize deductions. Gambling losses (not exceeding the amount of the gains) are deductible on Schedule A as a miscellaneous deduction (Line 28) that is not subject to the 2% AGI floor (19.1). Keep records that document your losses in case your return is questioned by the IRS.

Professional gamblers.

According to the Supreme Court, a gambler is considered to be engaged in the business of gambling if he or she gambles full time to earn a livelihood and not merely as a hobby.

A professional gambler reports winnings and losses (lost wagers and gambling transaction expenses) on Schedule C. However, the Tax Court and federal appeals court have consistently held that lost wagers from gambling are deductible only to the extent of wagering gains even if the gambling activity is a business. The specific statutory limitation on gambling losses trumps the general statute allowing full deductibility for ordinary and necessary busines expenses.

Gambling-related expenses other than lost wagers are not limited to gambling winnings. At one time, the IRS argued that the limit did apply, but in 2011 it agreed to follow a Tax Court decision that allowed a horse-race gambler to fully deduct as a business expense his gambling-related car expenses, admission fees, meals, subscriptions, and horse-handicapping data.

Casual slot machine players.

According to the IRS, a casual slot machine player on a day trip to a casino determines gain or loss at the end of slot play, disregarding the winning and losing bets along the way (Chief Counsel Advice 2008-011). Gains on the winning days during the year must be reported as gross income and the losses on the losing days are deductible only if the taxpayer itemizes deductions and only to the extent of the reported winnings (claimed as miscellaneous deductions not subject to the 2% floor). The Tax Court has repeatedly rejected attempts by casual gamblers to net gambling gains and losses realized at different times. See Example 1 below for a Tax Court decision that adopts the IRS method on the way casual slot machine players should report gambling gains and losses.

EXAMPLES
1. The Shollenbergers withdrew $500 from their checking account to take to the casino on March 29, 2005. They hit a $2,000 jackpot on a dollar slot machine that apparently was reported to the IRS on a Form W-2G. The IRS initially determined in its notice of deficiency that the full $2,000 jackpot on the dollar slot machine should have been reported as gambling income. However, after the Tax Court found as a fact that the Shollenbergers entered the casino with and bet $500 and left the casino with $1,600, the IRS conceded that $1,100 was the amount of winnings that should have been reported. Once the $500 and $1,600 amounts were determined, the IRS’s own methodology in Chief Counsel Advice 2008-011 required that the reportable amount be $1,100 and not $2,000 since the Chief Counsel Advice uses an “enters with/leaves with” approach, and not a bet-by-bet approach. The Tax Court accepted the method in the Chief Counsel Advice and held that the “net win” for the day of $1,100 was taxable gambling winnings.
Since the Shollenbergers claimed the standard deduction for 2005 rather than itemizing deductions, they could not offset the $1,100 of gambling income with gambling losses from other casino trips. They claimed to have incurred $2,264 of losses throughout 2005. They argued in the Tax Court that it was unfair not to allow them to net their 2005 slot machine gains and losses. The Court held that permitting a casual gambler to net all wagering gains or losses throughout the year would render superfluous the Code requirement that non-professional gamblers may claim gambling losses, if at all, only as a miscellaneous itemized deduction (not subject to the 2% floor for itemized deductions) and subject to the limitation (applicable to professional and nonprofessional gamblers alike) that the losses cannot exceed gambling income.
2. Tschetschot, a professional gambler, argued that her losses from poker tournaments should not be limited to her winnings because tournament poker, unlike traditional poker is not “gambling,” but a sports and entertainment activity like a golf or tennis tournament. Her tournaments were distinguishable from “wagering activities,” she argued, because tournament players have a limited monetary stake in the form of a buy-in entrance fee, they receive the same number of chips, and the highest place finishers receive cash prizes in predetermined amounts. The Tax Court, however, held that despite the differences between tournament play and other types of poker, the basic nature of the game remains a wagering activity, as bets are still played on each hand and each betting round has consequences. The Court also held that it is not unconstitutional to treat gambling losses differently from losses in sports tournaments, but it implied that Congress might want to reconsider the restriction on gambling losses given the increased acceptance of gambling in our society and improvements in the IRS’s ability to accurately track winnings and losses.
3. To appear on Wheel of Fortune, Whitten traveled from Chicago to Los Angeles, spending $1,820 for transportation, meals, and lodging. When he won cash prizes of $14,850 plus an automobile, he tried to offset his winnings by the travel costs, claiming they were gambling losses on Schedule A not subject to the 2% AGI floor. The IRS and Tax Court disagreed; travel costs are not like wager or bet losses.
4. Trump Casino in Atlantic City gave Libutti, a high roller at its gaming tables, over $2.5 million in “comps” during a three-year period in which he lost over $8 million. The comps included 10 expensive automobiles, jewelry, European vacations, and tickets to sporting events. Libutti reported the comps as income and then claimed a matching miscellaneous deduction for gambling losses not subject to the 2% floor. The IRS disallowed the deduction, claiming that the comps were not gambling income because they were perks given to stimulate his desire to gamble at Trump’s, and not winnings from the success of his wagers.
The Tax Court disagreed. Libutti would not have received the comps unless he gambled at high stakes in Trump’s casino. Although the comps did not directly hinge on the success or failure of his wagers, the comps were sufficiently related to his gambling losses to allow the deduction.
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