With the proliferation of legal
types of gambling (lotteries, casinos, horse and
dog racing, jai alai, bingo, etc.), many more
taxpayers are in the (enviable) position of having
to report winnings on their tax returns. While
many taxpayers may generally know that they can
deduct their losses up to their winnings,
recreational gamblers (i.e., those not in the
trade or business of gambling) may be unclear
about how this needs to be done.
WINNINGS AND LOSSES
Winnings and losses are reported
differently. Under the Internal Revenue Code, all
income from wagering (legal or illegal) is
includible in gross income, whether or not the
taxpayer receives form W-2G, Certain Gambling
Winnings. Taxpayers are required to report
“gross” winnings (i.e., unreduced by losses, and
not including the amount bet) as “other income” on
page one of form 1040.
Losses are tracked
separately. They should be deducted as “other
miscellaneous deductions” on form 1040, schedule
A, Itemized Deductions, and are not
subject to the 2%-of-adjusted-gross-income limit.
In addition, the amount of losses deductible is
capped by the total amount won. Thus, if a
taxpayer takes the standard deduction (i.e., does
not itemize), he or she cannot deduct any losses.
Also, a taxpayer can never have an overall
gambling loss for tax purposes, but can only lower
the amount of winnings.
“NETTING” NOT ALLOWED
Because of the different ways winnings and
losses are treated, just because a taxpayer
incurred a net loss for the year does not relieve
him or her of the obligation to report gross
In addition, many (if not most)
taxpayers who gamble view—and keep track of—their
wagers on the basis of a final tally (be it at the
“end of a day at the track” or “for the year”).
The IRS’s position is that each individual bet is
a gambling transaction. Winnings should be
reported for each successful bet; they cannot be
As might be expected, the biggest issue
taxpayers face when reporting winnings and losses
In general, taxpayers
must keep the records needed to verify items
reported on their returns. To substantiate
wagering winnings and losses, a taxpayer must
maintain an accurate diary or similar
contemporaneous record, supplemented by verifiable
documentation. According to IRS Revenue Procedure
77-29, the diary should contain all of the
Date and type of specific wager or
Name of the gambling establishment.
Address of the gambling
Name(s) of any other person(s) who
were present with the taxpayer at the
Procedure 77-29 also states that, whenever
possible, this information should be supported by
other documentation, including (but not limited
to) hotel bills, airline tickets, gasoline credit
cards, canceled checks, credit records, bank
deposits and bank withdrawals.
detailed discussion of issues in this area, see
“Establishing Basis for Gambling Losses,” by
Donald Morris, CPA, Ph.D., in the June 2007 issue
of The Tax Adviser.
—Lesli S. Laffie, editor
The Tax Adviser