Image courtesy of FreeDigitalPhotos.netRecreational gamblers must report their gambling winnings on line 21- Other Income on page 1 of Form 1040 U.S. Individual Income Tax Return.  The deduction for gambling losses is limited to the amount of winnings from wagering transactions I.R.C. § 165(d).  The gambling losses are reported as a miscellaneous itemized deduction on Schedule A.  Note, a taxpayer cannot take the standard deduction and still deduct his gambling losses.

The statute I.R.C. § 165(d) refers to gains and losses in terms of wagering transactions.  In order to calculate the gain or loss from wagering, the gambler would have to track each wager as a separate transaction and calculate the gain or loss per wager.  The Courts considered that interpretation as too burdensome and unreasonable according to IRS chief counsel advice memorandum A.M. 2008-011  December 5, 2008.  IRS chief counsel believes that the better view is that a casual gambler recognizes a wagering gain or loss at the time she redeems her tokens or cashes out of the slot machine. Wins that are left in the slot machine and used to continue wagering are not counted as income or winnings until the gambler cashes out and stops playing.

Shollenberger v Commissioner, T.C Memo 2009-306 determined that the Shollenbergers were recreational gamblers that should keep records of gambling wins and losses by sessions.  No court cases have defined the requirements of what constitutes a session, and the IRS has no clear ruling on the matter.  According to the Shollenberger case, on the day in question, they withdrew $500 from their joint bank account to take with them to the casino.  Mr. Shollenberger won $2,000 playing a dollar slot machine, and they each took $200 from his winnings to continue playing the slots.  They ended the day with $1,600, which they took to the bank and deposited the next day.  The IRS contended that the Shollenbergers should have reported the $2,000 jackpot as gambling income.  The court concluded that they net their winnings against the amounts wagered for that particular session of gambling.  The $2000 jackpot minus the original $500 minus the additional $400 wagered, resulted in a net taxable gambling gain of $1,100 for the session.  They should report $1,100 as gambling income on line21 Other Income of the Form 1040.  The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000.

The IRS matches up the earnings reported on your tax return against the amounts reported to them from the Casino’s on Form W-2G.  If they do not match, you will most likely receive an IRS notice stating that you under reported your taxable income.  You should keep a log book of your wagering activity similar to a travel or mileage log book.

To help determine the beginning and ending of a session, consider the time, place, and activity.  Remember, when the chips are cashed in, that signals the end of the session.

Examples are as follows:

Time – When a gambler plays slot machines at the same casino for 2 days in a row, there are 2 separate sessions based on time.

Place – Playing the game on the same day at two different casinos is considered two separate sessions.

Activity – Changing from playing the slot machines to black jack would be considered changing activities and would be two different sessions.

Following is an example of a wagering log book and how the wagering gains and losses would be reported on your tax return.

Date

Location

Others present

Won

Beginning Cash

Winnings Wagered

Net Gain or (Loss) from Session

03/31/2014

River Spirit Casino

Joe Bob

$1500

$100

$600

$800

06/30/2014

Hard Rock Casino

Jim Bob

$2500

$200

$2000

$300

09/30/2014

Million Dollar Elm Casino

Jim Meister

$3500

$300

$3500

($300)

12/31/2014

River Wind Casino

Jimbo Rama

$4500

$400

$4500

($400)

2014 TOTALS

$12000

(Amount per

 W-2G)

$1000

$10600

$400

In the example log book above, the taxpayer should report gambling gains of $1100 on line 21 for Form 1040, and gambling losses on Schedule A Itemized Deductions of $700.  The net amount is $400 gain, but notice that the income amount on line 21 would have been $12000 of gross income if the taxpayer had reported the gross amount per the Form W-2G.  A taxpayer’s Adjusted Gross Income or AGI would be substantially higher if this session method were not used.  Because the AGI is used in numerous phaseout of deduction calculations, the taxpayer can be penalized by not having kept a good wagering session log book.

If you want to make sure you are legally optimizing how you report your gambling income on your tax return, please call (918) 212-9950.  We will prepare your return and make sure you don’t pay Uncle Sam more than his legal share of your gambling winnings!

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