GAMBLING AND TAXES
by Robert Loeb
Robert Loeb is a criminal defense and gambling attorney in Chicago. He is the co-author, with I. Nelson Rose,ofBlackjack and the Law, which is available on www.amazon.com.
It's March, and it's tax time. Ok, you'll do your taxes and you probably won't be audited. But if you are gambler, that alone can be a red flag, so there are some things you should know. Certainly many casual (and perhaps most) gamblers don't even bother to file taxes on gambling winnings. Everyone reading this may individually say, "It won't likely be me, who gets audited," however, chances are, one of these years, it will be someone who is reading this. So rather than bemoaning, "Why am I the one to get into trouble?", now might be the time to avoid that trouble.
For starters, a huge number of players lose at gambling, and because they are net losers, they think that they don't have to report gambling wins and losses when they file their federal and state income taxes. That's wrong, and arguably illegal! But let's add one more fact. Let's say that you won over $1,200 on one spin at a slot or video poker machine. You'll receive a W-2G tax form for gambling winnings from the casino staff, and the IRS will also receive a copy of the W-2G. At that point, you are at a much higher risk for an IRS audit, because you failed to report your gambling winnings, even if your had a net loss.
Income taxes for gamblers are a mess, and the government doesn't really know how to deal with many real world scenarios regarding gamblers. However, we still have the obligation to report all of our income, and that includes all of our gambling income (including worldwide and online), even if we don't have any W-2Gs or Currency Transaction Reports in our name.
What information is out there concerning your gambling? As I've already mentioned, W-2Gs are given for single wins of over $1200.00 on machine play. Currency Transaction Reports (CTRs) are generated for cash transactions of over $10,000 in a day; smaller transactions get aggregated in a single day which can put you over the $10,000 threshold and generate a CTR. And who do you think has those CTR records? That's right, the IRS.
What else is out there, you ask? If you use a Player's Card in a casino, there is a record each time you buy-in and cash-out. There is a record of how much you win or lose in each session, every time you go to the casino. Those amounts are recorded in every machine you play and are part of the tracking function of your Player's Card. If you are a table game player and use a Player's Card for rating purpose, your buy-ins, cash-outs, wins and losses are recorded by pit staff and maintained in the records of your player's card. The pit personnel may not be as accurate as the precision of the machine records of slot and video poker play, but they do show a figure for wins and losses, and it will certainly prove that you've had significant gambling activity.
In order to report gambling wins and losses, recordkeeping is essential. You should keep a log of what casinos you visit, the date, the amount you win or lose, and other information that could be important down the road, such as who was with you when you played (this person could be a witness for you). The recommended method of recordkeeping is to keep a log of each playing session. If you don't have your own records, you can obtain the records kept by the casino in relation to your Player's Card. All you have to do is request a win/loss statement from the Player's Club; these days many casinos allow you to print your win/loss record at a casino's website (you must register a password with the casino to obtain it). Note: If you get audited, it's best to show your gambling log rather than a casino's win/loss statement to prove your gambling losses.)
How do you report your taxes on a 1040 return? For recreational gamblers (and that's most gamblers), your income goes on the first page of the return, under the category "other income" or "miscellaneous income." That figure should be the total of all your wins -don't subtract your losses at that stage. Your losses can be entered on Schedule A (Itemized Deductions), under the section for miscellaneous deductions. If you don't itemize your deductions, you can't deduct your gambling losses, and you will be paying taxes on your gross winnings, not net winnings.
Why is recordkeeping so important? In general, it will provide legitimacy to your tax return if the casinos or IRS have different figures. More importantly, consider this extremely common example. Let's presume that you have received for or five W-2Gs in the past year, totaling $7,000. That is part of what you won. However, your losses are not reflected in those W-2Gs. You may have expended $6,000 or $8,000 to generate those wins that total $7,000. You need records to support your deduction. Your own personal gambling log can be very helpful; however, if you have tangible records such as betting slips, or played on a marker, or bank records showing cash which contributed to your bankroll, those records can also be extremely helpful if you need to prove your losses.
What is considered gambling income? Win, of course, is income. Cash comps definitely are income. Free play that gets converted directly to cash, without playing, is the equivalent of a cash comp; free play that is used on a machine is merely a part of your ultimate win or loss, so probably does not have to be reported. Free tournament entries may not be income, but tournament and drawing prizes should be considered income.
Professional gamblers can report their income in a different manner, by using a Schedule C for a self-employed business. The Groetzinger opinion issued by the United States Supreme Court provides the best definition of who qualifies as a professional gambler. You must have regularly conducted gambling activities and a real expectation of profit. Other factors might include education and training to achieve that expectation of profit, and a track record of profits in previous years. Groetzinger himself was a full-time gambler; the opinion in his case does not make it clear that the activity must be full-time, but the activity must be for the purpose of a profit and not be merely recreations.
When filling as a professional gambler, there are advantages and disadvantages. The major advantage is that you can deduct your losses directly from your winnings; in other words, your net profit is the taxable figure. When filing as a recreational gambler, you have to itemize deductions, and you may not get the full value of your losses because they are subject to a ceiling. The other major advantage of filing as a professional is that you will also be able to deduct expenses (i.e., transportation costs) associated with your gambling. There is even a new court ruling, allowing professional gamblers to deduct business expenses in excess of a net loss, which should be reviewed to determine under what circumstances it can be used. The major disadvantage of filing as a professional gambler, even if you qualify, is that you will have to pay the self-employment tax (the equivalent of a Social Security deduction from a paycheck).
Many other issues exist in relation to gamblers and their taxes. If you are involved in team play, you may want to standardize and compare figures with teammates so that what's reported to the IRS is not inconsistent. The most complex additional issue is that of state taxes, which totally vary from state to state. In addition, if the total of all your W-2Gs for a calendar year exceeds the amount of gambling wins you report based on your session wins and losses, this also raises a red flag with the IRS. (See the book below for details on this.)
For those who want to explore the tax law of every state, as well a more detailed consideration of all gambling/tax issues, I highly recommend the books by Jean Scott and Marissa Chien on Tax Help for Gamblers. In fact, there is a recent (2015) update of this book by Scott and Chien, and it is available as an ebook throughHuntington Press (this edition contains the latest in tax news for gamblers).
In the meantime, when you do your taxes, do them right; then you can rest easy, sleep at night, and not have to worry about a dreaded audit from the IRS. That peace of mind is worth the effort to maintain good gambling records. Don't you agree?
Disclaimer: The information in this article is for general educational purposes, but should not be relied on solely for purposes of reporting taxes. You should consult a tax expert for your particular issues.
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