If you are a person who gambles, it is important that you understand the IRS requirements and rules regarding gambling winnings and losses. The law requires taxpayers to report all gambling winnings in full as income, and defines that income as coming from lotteries, horse and dog races, raffles and casinos, among other sources. Also included is the fair market value of non-cash prizes, including cars, houses and trips.



Don't make the mistake of thinking that you can subtract losses from winnings and report the difference: losses from gambling cannot be used to reduce the income from winnings. You can only deduct losses on Schedule A, subject to certain limitations, but that is only true for those who itemize their deductions.



Tax Form W-2G is available for reporting gambling winnings, and some taxpayers think that only those that are reported on that form need to be included on their tax return, but that is not the case. All winnings for the year need to be reported, particularly when the return includes deductible gambling losses. Failure to do so is a common problem in gambling-loss audits, which are often conducted when deductible gambling losses are included on a return. Those who wish to deduct gambling losses as a miscellaneous itemized deduction must keep in mind that they are not subject to the 2 percent of AGI limitation and that losses can never exceed the year's gambling winnings.



The IRS includes many of the extraordinary comps that casinos provide as gains. These would include items such as automobiles or jewelry, which are to be reported as taxable income. More moderate comps such as a free service, food, lodging or entertainment used to encourage or reward a gambler for their continued patronage may not be counted as income if they are cited as purchase price adjustments.



The IRS does allow gambling losses to be deducted against gains for different types of gambling. In other words, losses at a blackjack table can be deducted against horse-race gambling gains, but they can only be deducted as miscellaneous itemized deductions. Expenditures for transportation, food and lodging incurred while or as part of gambling activities cannot be deducted as personal expenses or as expenses against gambling gains.



Placing a bet generally comes at the cost of the bet or the price of a raffle ticket or winning race ticket. Gains from a bet or wager can be calculated as the full amount of the winnings minus the cost of the bet or ticket. However, losing tickets placed on the same race and wagers placed up until the time of the winning bet cannot be deducted as an expense against the winnings.



Gambling audits do take place, and substantiation of gains and losses are required. The IRS permits a diary or journal to be used as evidence if it also has other verifiable documentation, but the expectation is that specific information is included in those records. The specifics required are the date and type of gambling activity, the name and address of the place where the gambling took place, the names of anybody else who was present with the taxpayer, and the amount won or lost.



Additional proof such as canceled checks, credit card records or ATM withdrawals from within a casino, and wagering tickets should also be maintained and provided, as should other types of backup such as hotel or restaurant receipts, airline tickets and signed statements of officials from the gambling establishments, all of which can also be extremely helpful during an audit.



Additional back-up items can include validated keno tickets, records of winning on slot machines that include the date and time that winnings were paid, the table number of any table game at which the gambler was playing or casino credit card data showing that credit was issued to the taxpayer. It is recommended that bingo players keep careful records of how many games they played and what they paid, as well as how much they won. Horse-, harness- and dog-racing gamblers should keep records of the specific races that they bet on, including how much they wagered and how much they collected and lost on races in which they held winning and losing tickets. Any supporting documentation such as unredeemed tickets or racetrack payment records are also acceptable.



For those who have lottery winnings, it is suggested that records be kept of ticket purchases for those that represent both wins and losses. Unredeemed tickets, winning statements and payment slips should all be maintained, and it should be remembered that lotteries and raffles of all kinds are considered gambling. Winnings must be recorded as income, whether they are cash or noncash items such as vacations, houses, cars or any other item of value. Use fair market value as the income amount, and if you win a state lottery that is payable in installments then any amounts that are paid as interest on the unpaid amount must also be reported as gross income.



The IRS looks at the reporting of gambling gains and losses in terms of individual gambling sessions, and understanding what constitutes a session can be highly complicated. The basic premise is that gamblers are able to deduct losses from wins when both occur during a single gambling session, but the definition of what falls into this category is extremely finite. The details include a requirement that the gambling has to take place during an uninterrupted session of the same type of wagering at the same exact location.



Finally, items or monies won as a result of gambling in a charity event are still considered the result of gambling, even if the cost of the wager is going to a charitable organization. All winnings and losses are required to be reported in the same way that gambling in a casino is, and it is not permissible to deduct the cost of your wager as a charitable organization, whether you win or lose.



If you are uncertain about the tax liability of any of your gambling winnings or whether you are eligible to deduct any gambling losses, contact our tax professionals for assistance and guidance.