How To Minimize Taxes on Gambling Winnings
By: Oscar Armas Luy
Tags: Money, Taxes, Gambling, Personal Finance, Betting

How To Minimize Taxes on Gambling Winnings

Minimizing your tax burden

Photo by Drew Rae from Pexels

While most gamblers have learned that gambling winnings are taxable income in the United States, there is an important strategy you should know to minimize your tax burden.

The General Rule — Gambling Income and Taxes

The general rule is that all gambling income is subject to Federal Income Tax in the United States. In some instances, casinos will withhold a portion of large winnings and issue one or multiple forms W-2Gs to gamblers in order to report their winnings. Even if money is not withheld or you do not receive W-2Gs, it is still your responsibility to report all winnings.

Gambling winnings are considered Gross Income for tax purposes. Gambling losses, however, are merely an itemized deduction and do not offset Gross Income for recreational gamblers.

It is critical to dispel the misconception that recreational gamblers can net their wins and losses when calculating their gross income. This is not the case. Most players are considered to be recreational gamblers as opposed to professional gamblers because they gamble primarily for pleasure or entertainment and do not depend on the income. Recreational gamblers report all winnings as part of their gross income, not the winnings less the losses. This can be confusing as most casinos will issue a win/loss statement which shows a net amount — although this is not the amount of gambling income reported for tax purposes. You may have heard that gambling losses are deductible. Although you can’t net your gambling losses against your winnings, you can deduct them as an itemized deduction if you choose to itemize deductions. This distinction is important because it is less favorable to the taxpayer. Gambling winnings increase the taxpayer’s Adjusted Gross Income, or AGI, which impacts the taxpayer’s overall tax liability and eligibility for certain credits and deductions. Moreover, this treatment requires the taxpayer to pay income taxes on the full amount of gambling winnings without respect to losses should the taxpayer choose not to itemize deductions. The deduction for gambling losses is limited to the amount of winnings. In other words, taxpayers can never use gambling losses to deduct against or reduce taxable income from other sources such as investment income or wages.

Using the Gambling Per Session Method

Taxpayers that wish to minimize their gambling income can benefit from good record keeping and taking advantage of the gambling per session method of tracking winnings.

While it’s true that taxpayers cannot net their gambling winnings for the year, the IRS realizes that treating the winnings from each individual wager as income would be impractical to track and disconnected from reality. In reality, many gamblers choose to re-wager or “recycle” their gambling winnings for future bets. For example, a taxpayer that wins $10,000 from a spin of the roulette may immediately go on to bet $5,000 from that win and lose it on the next spin. As such, under the traditional method the taxpayer would have to report $10,000 in winnings even though they only left the table up by $5,000.

To account for this reality and to make record keeping more practical, the IRS acknowledged in Ann M Laplante v. Commissioner of Internal Revenue that taxpayers may net their wins and losses for an individual gambling session. Under this method in the example above the taxpayer would only need to report $5,000 as winnings assuming no other wagers were placed during the session. This is more favorable to the taxpayer.

The IRS has not issued strict or controlling guidelines as to what constitutes a gambling session. However, proposed revenue procedures and some experts suggest that a gambling session is determined as constituting play of the same game, on the same day, and at the same place. As an example, wagering on a slot machine at one particular casino for several hours on a given day would very likely count as a gambling session, however placing a wager on a slot machine and then switching to a different casino on the same day would constitute two separate sessions.

The Importance of Record Keeping

While the gambling per session rule is advantageous to the taxpayer, the burden is on him/her to keep adequate records to substantiate reported winnings and losses. As such, taxpayers should at a minimum maintain a physical or electronic diary of gambling sessions including the net win / loss for the session, the game(s), the time, the location, and the names of any friends or family accompanying the taxpayer during the session. Taxpayers that wish to be extra thorough can supplement this diary with bank statements, copies of checks, and the names of casino dealers and employees present during the gambling session.

This record keeping is particularly important. By design, the gambling per session rule will generally lead to gambling winnings which are substantially different from those reported by summing all of the W-2Gs received during the year. This can trigger a manual review or even an audit by the IRS. As such, it is a best practice to work with a professional to prepare and disclose the gambling diary proactively as a part of your return so that the IRS can review it manually if it is flagged without necessarily having to undergo a full audit. Remember than an audit is merely a request for more information and should not be feared so long as you are in compliance with the tax code.

A Side Note on Casino Comps

Comps are gifts or promotions offered to gamblers by casinos in order to entice them to visit and play. Generally these comps are determined by a set formula based on the player’s betting history or offered on a discretionary basis by the casino staff for known big players or “whales.”

There is no guidance from the IRS explicitly stating that comps constitute gambling winnings. Many experts disagree on the matter. In my view, it is generally a good idea to record major casino “comps” as taxable winnings. As established by the US Tax Court in Libutti v. Commissioner, comps such as gifts are considered to be gambling income because the casino almost certainly would not have provided them were it not for the player’s betting activity. As such, the value of comps is derived from the player’s wagering activity. It’s probably OK to exclude minor or low-cost comps such as buffet vouchers and similar promotions as they are nominal in value or hard to value and are probably given more generally to entice a broad set of customers as opposed to players with attractive betting histories.

The Bottom Line

Using the gambling per session method of reporting gambling income can lead to significant tax savings. This method is particularly beneficial for those gambling large amounts of money or who expect to come out ahead. That said, there are never tax benefits to gambling recreationally since losses cannot be used to reduce other sources of taxable income. Be smart about your taxes if you choose to gamble, but don’t think choosing to gamble when you wouldn’t have otherwise is a smart tax move.