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The Muddy Water of Determining Gambling Losses

What happens in Vegas stays in Vegas, except reporting the gaming winnings and losses. Most folks just report the winnings from the W-2Gs and simply report the same amount as losses on Schedule A.

Technically, that is not the correct method per the IRS.

Part of the problem with gambling losses is the way they are reported. Thankyou Congress! They set the recreational gambler up with a bad deal. (Oh, the pun!) Because Congress defines gaming winnings in the same category as hobby income, it is reported “above the line” (before deductions), which grosses up Adjusted Gross Income AGI (and Modified Adjusted Gross Income) which is used to calculate many other things, such as taxability of Social Security Income, etc. Then the losses are reported (to the extent of winnings) as part of actual Itemized Deductions.

If a person likes to gamble and “wins” $20,000 in a year, their AGI increases by that amount. If they normally only have $5,000 in other itemized deductions, then they add the gaming losses of $20,000 to the $5,000 of other itemized deductions, resulting in actual itemized deductions of $25,000. But, since our recreational gambler is married, they get a Standard Deduction of $27,900. So, in essence, they don’t get any benefit of deducting gaming losses at all! Their AGI went up $20,000, but they are taking the same Standard Deduction they were without gaming income… ouch!

But it gets worse. The IRS and the Tax Courts have created a mess when it comes to trying to figure out what is reportable gaming income. There is a concept called “net session” income or loss. If a person opens up a “session” (which cannot be longer than 24 hours) and they win some, they lose more, so they net lose, technically, they don’t have any gaming income to report. But wait! The IRS has put rules on casinos called W-2G reporting. Any “win” over $1,200 must be reported on a W-2G. Even if their “session” resulted in a net loss. Thus, the IRS rules contradict themselves. (By the Way, Nevada Casinos are pressing Congress to raise the level of W-2G reporting to an inflation adjusted $5,000.)

But here is where the IRS becomes downright unfair. If the recreational gambler doesn’t have specific records to substantiate their losses, the IRS has been known to disallow ALL gaming losses if the taxpayer just “claims” they lost at least as much as they won. It is very hard to show that money was used to gamble with. Starting to see the unfairness of all this. A taxpayer must overwhelmingly demonstrate their habit/pattern of regularly gambling, including providing witnesses of others who observed the gambling. Maybe you should ask for the names of strangers sitting next to you at a casino?

That comes back to using player’s club services of casinos. If you are a recreational gambler, try to ALWAYS do your gambling using a player’s card. Without that independent verification of “gaming losses”, upon an IRS audit, you might find your gaming losses totally disallowed.

Have you heard? Ecclesiastes 9:11b says, “but time and chance happen to them all.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at Also on Facebook.

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