“Oh no, I never lose money on the roulette tables” said my friend, Jack, in response to what must have been an incredulous look on my face. He had been telling me about his recent visit to Las Vegas, and how he had set aside a couple of thousand dollars for playing roulette at his favorite casino.
“When I first started, I used to lose money, but then I figured out the right way to play. And now I always win. I almost feel sorry for those poor saps at the table who lose money because they don’t know how to play the game properly,” he chuckled.
I resisted the urge to express my doubts or ask any further questions. I was also tempted to explain the rules relating to the deduction of gambling losses from taxable income, but I think a discussion of that type would have been perceived as an insult by Jack because he only plays roulette, and he “never” loses. Thus, instead of explaining the rules to Jack, I’ll explain them to you, just in case your gambling activities are not as financially successful as Jack’s.
There are two main points that we must bear in mind in this discussion:
- The winnings you make from you gambling activities are fully taxable, and you must report them on your tax return,
and
- The losses you incur from your gambling activities may be deductible, but the total amount of your deduction cannot exceed the amount of gambling income you reported on your return.
To help us understand the above points, we must begin by looking at what we mean by the word “gambling”.
What is Reportable Income from Gambling?
According to the IRS, gambling income includes winnings from activities such as lotteries, raffles, slot machines, horse races, and games of chance at casinos, among other wager-based activities. Gambling income includes cash winnings and the fair market value of any prizes you may have received, such as cars and trips.
How Can I Deduct My Losses?
The first condition that must be met for you to deduct your gambling losses is that you must qualify to itemize your deductions on Form 1040,
Schedule A. To be able to file Schedule A, you must first calculate the total of your expenses in the following categories:
- Eligible medical and dental expenses
- State, local, real estate, and personal property taxes you paid (subject to limitations)
- Qualified home mortgage and investment interest you paid
- Gifts to charity
- Casualty and theft losses
If the total of your expenses in these areas together with your deductible gambling losses exceeds a certain threshold amount based on your filing status ($27,700 for a married couple filing jointly for 2023), you are eligible to use Schedule A to itemize your deductions. In fact, spouses filing a joint return can combine their gambling losses to the extent of their combined gambling gains.
As we have seen, you can only deduct your losses up to the amount of your winnings. For example, let’s say your only gambling activity last year was to pay $1,000 for a ticket in a raffle. When the prizes were drawn, you won a fancy new lawnmower with a fair market value of $600. You must report the $600 value of the lawnmower as gambling, but you can only deduct $600 as a gambling loss on Schedule A. The remaining $400 that you paid for your raffle ticket is lost.
What Else Do I Need to Know?
As is the case with so many of the available deductions from taxable income that the tax code allows, the keeping of full and accurate records is vital to the acceptance by the IRS of your claim for a gambling loss deduction. In case the IRS questions your deduction, the following types of records would serve to substantiate your claim.
A diary of winnings and losses that contains at least:
- The date and type of your specific wagers or wagering activity.
- The name and address or location of the establishment where the gambling took place.
- The names of other persons who were present with you at the gambling establishment.
- The amount(s) you won or lost.
Documentary proof of your winnings and losses, such as:
- Form W-2G, Certain Gambling Winnings.
- Form 5754, Statement by Person(s) Receiving Gambling Winnings.
- Betting tickets; canceled checks; credit card receipts; bank withdrawal slips; and statements of actual winnings or payment slips that were provided to you by the gambling establishment. For example, if you were playing slot machines, you should keep a record of the machine number(s) and all winnings by the date and time the machine(s) were played.
To return to our original question, we have now seen that gambling losses may indeed be deducted from taxable income – even if my friend Jack doesn’t believe he’ll ever need to know about it!