Do Not Take Tax Chances on Gambling

At the slots or online, remember to keep records.

The Basics of Reporting Winnings

You generally must file a tax return and include all winnings in gross income.

Gambling income includes, but is not limited to winnings from lotteries, raffles, horse races and casinos. It also covers cash winnings and the fair market value of such prizes as cars and trips.

A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have any subject to federal income tax withholding.

You may be required to pay estimated tax on your gambling winnings.

Unless you are a professional gambler, you can deduct gambling losses only if you itemize deductions. They are claimed as a miscellaneous deduction. Professional gamblers report their winnings and losses on Schedule C. In either case, the amount of losses you deduct cannot be more than the amount of gambling income you have reported on your return.

What if a group of friends pools money to buy a lottery ticket and wins? The IRS has a special form for members of a group to file to report how they split money from the same winning ticket.

Gambling at the casino or the racetrack can be entertaining for many people. If you’re one of them, you should obviously risk only what you can afford to lose from a personal financial planning perspective. But from the IRS perspective, you need to be aware of the tax consequences.

Under the tax code, you must report all gambling winnings as taxable income. You cannot claim an overall tax loss for gambling activities, but you can claim losses as an itemized deduction — up to the amount of your winnings. (Losses in excess of your winnings are not deductible.)

As you might imagine, it’s important to keep accurate records.

Best advice: Keep a diary or ledger of all your gambling activities that shows the type of gambling activity, the location and the amounts won and lost.

You can support those amounts with receipts, tickets, statements or other records that substantiate your claims.

Here is a rundown of the information you need for different types of gambling activities:

Bingo – Documentation can include the number of games played, the cost of cards purchased and the amounts collected on winning cards.

Keno – Keep copies of the tickets that were validated by the gambling establishment, the casino credit reports and the casino check cashing records.

Racing – Records from horse racing, harness racing and dog racing include the number of races and the amounts of wagers, wins and losses.

Slot Machines – Documentation can include the number of the machine played and all winnings by date and time.

Casino Tables – The number of the table where you played and casino credit card data indicating where credit was issued.

Note: The same basic rules apply to online gambling. Despite a common misconception, Internet-based gambling activities aren’t exempt from tax, even if the source originates overseas.

Eric Cohen, CPA is the President and Founder of E. Cohen and Company CPAs, a full-service CPA firm serving nonprofit organizations, government contractors, professional service companies and other industries with audit, tax and business advisory services for over 25 years. The firm was commended as a SmartCPA Reader's Choice by SmartCEO magazine and a “Best Accounting Firm to Work For” by AccountingToday magazine. For more information, visit www.ecohencpas.com or call 301-917-6200.