Gambling Tax Laws

For this tax season, 2024, we have seen an increase in inquiries about gambling tax laws. With interest in writing off gambling losses, claiming gambling winnings and general questions about tax rules when it comes to gambling. See our recent posts, Can I Write Off My Gambling Losses? and When Do I Report Gambling Winnings to the IRS?"

So in this post we go back to the basics and re-post an article from almost 10 years ago that still applies to gambling tax laws today. Let's cover general guidelines when it comes to how the IRS treats gambling income and losses.

U.S. Government Models Gambling Tax Law after Vegas Casinos

Up until recently (before casinos and sports betting was legal in Ohio) the people of Ohio didn't much think about the tax implications of gambling, but in Las Vegas they've become the experts and have been claiming their gambling winnings and losses and balancing the books for their professional gambling business for decades.

According to statistics from the University of Nevada, Las Vegas (UNLV) Center for Gaming Research, your gambling friends are almost certain to lose over the long haul.

But the odds in Vegas look downright outstanding when you compare them with the tax law treatment of your gambling income and losses.

IRS House Edge

Many non-business gamblers (recreational gamblers) discover they owe tax despite having zero net gambling income. This IRS “house edge” is the result of a combination of factors:

Just ask Ann Laplante about the IRS house edge. According to both the lawyer that prepared her tax return and the IRS, she had a net loss from her time playing the slot machines. So it was a big surprise to her when the IRS sent her a $1,808 additional tax bill.

Betting Line

Your gambling winnings are taxable. You report them as “other income” on line 21 of your Form 1040 (winnings are “above the line”).

Your losses are deductible but, because you are a recreational gambler (rather than a professional gambler), only as itemized deductions and only up to the amount of your winnings (losses are limited to winnings, and you deduct losses “below the line”).

You might ask, and you should ask, “How do you measure gains and losses?”

The general rule is that you measure your gambling gains and losses at the time you cash out. Generally, you do this daily or perhaps after a couple of days, depending on the gambling session.

In Ms. Laplante’s case, she determined, and the IRS agreed with, a calculation of gain or loss for each of her 25 or so trips to the casino during the year.5 Both parties used the cashing out (redemption of the tokens) as the time for the gain or loss calculations.

Example. Say you take two trips to the casino during the year. You win $2,000 during one trip and lose $3,000 on the second trip. For the year, you report $2,000 of taxable income and deduct $2,000 in itemized deductions for your losses. (Remember, you can’t deduct more losses than winnings.) You lose the extra $1,000 of losses forever. You can’t carry unused gambling losses forward or back to other years.6

Need to Know About Gambling Tax Laws

As a recreational gambler (gambling tax laws are different for a professional gambler), the gains above the line and losses below the line trigger tax return activity that you should know.

On the gambling winnings that you report above the line, here are four things to know:

The gambler who is in the business of gambling offsets his or her winnings and losses above the line, so this person follows a different path in tax planning. For more on the professional gambler, see Tax Court Ruling to Give Professional Gamblers Tax Breaks.

Let’s return to recreation. The recreational or “non-business” gambler claims gambling losses as itemized deductions. Here are three things to know about reporting gambling losses below the line, two of which are better than you would expect:

One-Sided Reporting by Casinos

The government requires casinos and other payers to report gambling income when a gambler wins more than a threshold amount.

The reporting requirement for winnings creates a problem for the gambler who doesn’t keep the records required by the IRS. Say, for example, that you win $2,000 at the slots three times in one night, reinvest and lose all those winnings, and also lose $1,000 out of pocket. For the night, you lost $1,000. That’s what really happened. But all the IRS knows about this one night comes from the casino when it reports to you and the IRS that you won $6,000.

If the IRS wants to know more about your night of gambling, it will send you an audit notice of some type and perhaps invite you for a visit. To protect yourself, you need the required records to show that you did not make $6,000, but lost $1,000.

Planning tip. Keep the gambling records required by the IRS, or you’ll pay taxes on income that you don’t have. The records are not difficult to keep, as you will see. But when you keep bad records, the IRS has the casino information and you have nothing.

Here’s what the IRS is going to know: The casino or other organization must report gambling winnings to the IRS for

In some instances, you can get more than one reporting document from one gambling session. For example, if you won at the slots three times in one night, as in the example above, the casino could give you three individual reporting forms, one for each of the wins.

Casino Reports Winnings on a Form W-2G

Ann Laplante spent 48 years working first as a bookkeeper and then as an office manager. You could guess, and probably bet, that she knew how to keep track of her gambling wins and losses. Knowing and doing are two different things, however, and Ms. Laplante became a victim of the records requirements.

When Ms. Laplante retired, she and her friends passed the time by taking a couple dozen or so trips to a nearby casino, where they would spend at least eight hours a day. Sometimes they stayed longer and returned home after spending two or more full days at the casino. Ms. Laplante played the slot machines.

She won some but lost more. But every time she won more than $1,200 with a single pull of the lever (or push of the button), the casino reported her winnings on a Form W-2G.

At tax time, she received 26 Form W-2Gs, totaling $56,200. Ms. Laplante gave the W-2Gs to the attorney who had prepared her tax returns in prior years and also the year before the court. The attorney offset the gains and losses from each visit to the casino, consistent with the IRS view of how it would calculate Ms. Laplante’s winnings and losses. On this basis, the attorney reported $4,000 in winnings above the line and $4,000 in losses below the line.

Keep Accurate Records of Gambling

The $4,000 reported by the attorney as winnings and losses represented the correct gambling income and the correct gambling losses. But the correct amounts were lost because of bad records.

Ms. Laplante’s gambling records were not kept on a timely basis and did not represent adequate proof. Result: both the IRS and the court had to ignore the inadequate records.

With no records that proved the gains and losses per visit, the IRS used the W-2Gs and other records to reconstruct the winnings and losses at $30,170 of gambling winnings and $30,170 of gambling losses.

For Ms. Laplante, this increase from $4,000 to $30,170 in “above the line” income caused an automatic computational increase in the Social Security benefits that she had to include in taxable income and that increased her taxes by $1,808.

Lesson 1—Keep a Gambling Diary

The court did not believe Ms. Laplante’s evidence. Although she presented a record of her wins and losses, she created the record after the fact.

The court ruled that there’s “no valid reason for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log.” The IRS laid out the need for gamblers to keep a diary in Revenue Procedure 77-29.12

Here is what the diary should include:

Lesson 2—Prove Your Gambling Diary

Support your diary with corroborating evidence such as bank statements, ATM records, and wagering tickets. IRS Publication 529 gives examples of documents that help for each type of gambling activity.

Planning tip. Be sure to reconcile your diary and proof with any Form W-2G you receive from the casino.

Lesson 3—Get Help from Your Friends

Ms. Laplante gambled with friends but did not invite any of them to testify in her defense. The court concluded that her friends would not support her story and used this as evidence against her.

Don’t let this happen to you. If you gamble with friends and have to defend your losses in court, make sure you take a friend to court with you who can support your activity.

The Burden of Proof Is on You

Don’t gamble with your tax records. Keep the records required.

Sketchy records don’t work well, as Lori Lamb learned when the court allowed less than 50 percent of her and her husband’s claimed losses.14 In this case, the court followed the Cohan estimation rule of bearing heavily against the taxpayer with faulty records.

But you can’t hope for even 50 percent if you have really bad records as Joyce Linzy found out in her trip to court. In her case, the court found her gambling records so poor that it refused to follow Cohan to make any estimates and gave her a zero offset to her gambling winnings.15

If you are going to gamble, you need to keep the required tax records. Here’s the good news: the records always pay off.

Don't Let Gambling Winnings Lead to Unexpected Tax Bills

Gambling has tax implications and can, for the uninformed, lead to unexpected tax bills and complications. If you want to discuss the tax implications of your gambling activities, fill out the form on this page or call us at 440-777-2207.