Gambling Tax and Gaming Losses
This first installment of our Tax and Vice series will discuss the treatment of gambling tax and gaming losses. How are gambling winnings taxed? Are there any tax deductions available for gambling losses and lost wagers? What are the tax implications if a casino, the lottery, or racetrack issues me a W2-G?
As a general disclaimer, it is not our intention to be “holier than thou” about gambling or any other activities discussed in this series. So please do not give any of us a hard time if you spot us in a casino or buying a drink. We also recognize activities such as gambling can be highly problematic for some people and encourage anyone who thinks they may have a problem to seek professional help.
As a general rule, almost anything you earn is taxable income. Gambling winnings are no exception. You are required to pay tax on all gambling winnings. Casinos and other gaming establishments are required to file a W-2G with the IRS each time someone’s winnings exceed certain thresholds.
No gambler wins every bet. The question is how gambling losses can be used to offset gambling earnings on a gamer’s tax return. Most gamblers will report gambling losses on their Schedule A. The amount of gambling losses claimed on the Schedule A cannot exceed the gambling earnings reported as income on the tax return.
Example: A Taxpayer won $5,000 at a recent trip to a casino. The same Taxpayer lost $6,000 later that weekend. This Taxpayer must report the $5,000 gambling win on his or her tax return as income. This Taxpayer can only take an itemized loss of $5,000. The taxpayer cannot claim more than $5,000.
The Tax Code puts gamblers who do not itemize at a disadvantage. Let us take two taxpayers, Mr. A. and Mr. B. Mr. A. owns his home and pays $13,000 in mortgage interest and other itemized deductions. Mr. B. does not itemize. Both taxpayers earn $100,000 in wages and file single. Both had $7,000 in gambling winnings in 2022 and both had $10,000 in gambling losses. The Chart below summarizes how the gambling losses could be treated on their tax returns.
|Mr. A (itemizes)||Mr. B (does not itemize)|
|Wages||$ 100,000.00||$ 100,000.00|
|Gambling earnings||$ 7,000.00||$ 7,000.00|
|Adjusted Gross Income||$ 107,000.00||$ 107,000.00|
|Mortgage and other itemized deductions||$ 13,000.00||$ –|
|Standard Deduction||$ –||$ 12,950.00|
|Gambling Losses||$ 10,000.00||$ –|
|Total deductions||$ 23,000.00||$ 12,950.00|
|Taxable Income||$ 84,000.00||$ 94,050.00|
|Tax||$ 14,103.00||$ 16,402.00|
Mr. A’s taxable income is $10,000 lower than Mr. B because Mr. A itemized his deductions. Mr. A was able to save over $2,000 in taxes (and he is in a lower tax bracket). The savings a gambler can achieve by itemizing deductions (or leave on the table by not itemizing deductions) can be much larger if there are larger gambling earnings and losses involved. This can be potentially problematic for frequent gamers who play regularly and win (and lose) many wagers over the course of a year.
Some gamers may wish to claim their gambling losses on a Schedule C or claim their gambling activity is a business on their tax return and claim deductions for gambling losses. While it is possible for one to claim to be a professional gambler and treat their gambling losses as business expenses on a tax return, most gamblers will not qualify as professional gamblers for tax purposes. Among other things, a gambler that qualifies as a professional gambler will generally have a good track record of reporting net gains from gambling on their tax returns, a high level of skill, and will gamble full time.
Gaming can be fun, but it can be an expensive hobby as well. Taxes are one of the hidden costs many gamers do not think about when they play their favorite games. For better or for worse, the Internal Revenue Code does not give gamblers any breaks. It is especially hard on gamers who do not have itemized deductions.
RJS LAW provides tax planning and estate planning services. Please feel free to reach out to us if you have any tax questions about gaming. Please remember to play responsibly and contact Gambler’s Anonymous or a mental health professional if you think you or someone you know may have a gambling problem.
Written by Joseph Cole, Esq., LL.M.