Determining Basis for Gambling Losses




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 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.

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 winnings.

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 netted.

As might be expected, the biggest issue taxpayers face when reporting winnings and losses is documentation.

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 following:

Date and type of specific wager or activity.

Name of the gambling establishment.

Address of the gambling establishment.

Name(s) of any other person(s) who were present with the taxpayer at the establishment.

Amounts won.

Amounts lost.

Revenue 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.

For a 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


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