Claim your gambling losses up to the amount of winnings, as "Other Itemized Deductions. If you're a nonresident alien of the United States for income tax purposes and you have to file a tax return for U. Nonresident Alien Income Tax Return.
Refer to Publication , U. Tax Guide for Aliens and Publication , U. Tax Treaties for more information. Generally, nonresident aliens of the United States who aren't residents of Canada can't deduct gambling losses. For additional information on withholding on gambling winnings, refer to Publication , Withholding of Tax on Nonresident Aliens and Foreign Entities.
To deduct your losses, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses. Refer to Publication , Miscellaneous Deductions for more information. More In Help. Gambling Winnings A payer is required to issue you a Form W-2G, Certain Gambling Winnings if you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding.
Taxpayer-gamblers are sometimes shocked by the numbers presented in the report in relation to their memories of actual amounts wagered. The process of establishing gross winnings requires the taxpayer to prove the amount originally wagered, as well as the funds remaining at the end of a gambling session. The IRS lists bank records as one means of corroborating amounts gambled; thus, taxpayers can accomplish this by making automated teller machine ATM withdrawals at the casino and retaining these records.
In Mack, the taxpayer admitted he won other wagers during the tax year, but testified he sustained corresponding offsetting losses that were not included in the amount deducted as a loss. The court noted that the taxpayer had the burden of showing that the funds used for making wagers were either on hand at the beginning of the year, or were acquired during the year from nonwagering sources.
It concluded that he failed to make this showing. Failure to recognize winnings means that if those winnings are re-bet and lost, the taxpayer has no basis in those losses, and, thus, nothing to deduct. In Kikalos, 34 the court stated that taxpayers must maintain accounting records of gambling activities that enable them to file accurate returns.
In Rodriguez, 35 the taxpayer argued that accurate records of gambling losses and winnings are difficult to maintain. Implicitly, according to the court,. All taxpayers, it held, are required to substantiate their deductions under Sec.
Stein followed the practice of recording at the end of each day an amount purported to represent his net gain or loss for the day from gambling transactions. He kept these various slips of paper in his pocket until he returned home where he placed them in a drawer and retained them until the end of the year. He afterwards destroyed the various pieces of paper. Cohan 40 is often cited by the courts in the context of gambling losses. In Zielonka, 41 in which a court disallowed the deduction of gambling losses, it stated that, if the trial record provides evidence that a taxpayer actually incurred a deductible expense, but the evidence is inadequate to substantiate the amount of the deduction to which the taxpayer is entitled, the court may estimate the expense and allow that amount as deductible the allowance of an estimate is known as the Cohan doctrine.
In such cases, the court can only estimate the deduction if provided with some basis to make the estimate. In Drews, 42 the court applied the Cohan doctrine and found the taxpayer sustained net gambling losses. Gambling losses were allowed, but in an amount less than claimed by the taxpayer. So many courts have refused to apply the Cohan doctrine to gambling losses that taxpayers and their advisers should not feel comfortable relying on a court to make such estimates.
Corroborating evidence is essential in establishing basis for gambling losses. The Service and the courts look at lifestyle, large cash purchases, levels and use of debt, credibility of testimony and bank and credit card records. In using this documentation, the taxpayer must also track the amount used for gambling original cash supplied, not current winnings and the amount cashed out of slot machines and retained.
Many recreational gamblers establish a loss limit before an excursion to the casino; when that money is gone, they stop gambling. If this is the case, the use of in-out reports to establish the basis of losses and gross winnings is made easier. Because these gamblers keep wagering until their pre-established loss limit is met, only the beginning cash balance for each casino visit must be demonstrated.
The result is a credible third-party record of gross winnings or losses. A tax adviser is faced with educating clients as to the requirement to report winnings separately from losses and to report gross winnings which include house money won and subsequently lost. Clients must also be informed that they have the burden of proving that the funds used for making wagers were either on hand at the start of the year or their acquisition during the year was from nonwagering sources. Maintaining clear, contemporaneous records of both winnings and losses is the only trustworthy defense a taxpayer even a recreational gambler can produce that will prove effective against a Service challenge to gambling loss deductions.
For more information, contact Dr. Morris at Dmorr2 uis. Schooler, 68 TC ; and Clifford F. Tax Court Rule a ; Welch v. Helvering, US The Service may have been able to reconstruct the amount based on large asset purchases mentioned in the case. Louis, August However, in the process of losing, it is unlikely that there were no winning transactions. Roemer Jr. That a taxpayer chooses to bet the winnings rather than cash them out is not determinative of their taxability.
In the case of a husband and wife making a joint return for the taxable year, the combined losses of the spouses from wagering transactions shall be allowed to the extent of the combined gains of the spouses from wagering transactions. To date, however, there is no authority for this position in court cases or IRS rulings. In Est. If a gambler constantly plows winnings back into gambling, producing losses and more winnings, the cumulative winnings cannot be used as a measure of wealth.
The winnings may be great, but the losses may be and often are equal in proportion. This is why it is important to look at issues of lifestyle and asset acquisition which the court did. Items based on AGI, such as the taxability of Social Security which was otherwise nontaxable to Erbs , the medical expense deduction, IRA deductions, itemized deductions, personal exemptions and various credits, would all be correspondingly affected.
Finally, 11 of the states that impose an individual income tax do not allow a deduction for gambling losses. In Remos, TC Summ. The net would be the same, but AGI would decrease. Parschutz, Sr. Skirscak, TC Memo COVID upended tax season.
Read the results of our annual tax software survey. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID Toggle search Toggle navigation. Each pull of a lever or push of a button on a slot machine, hand of blackjack or spin of a roulette wheel is an individual wager that may result in gambling winnings. To prove gambling losses and taxable income, taxpayers are subject to rules of proof, recordkeeping, estimating and credibility.
The fatal step is that the taxpayer dutifully reports the W-2G winnings, but fails to report any other winnings, however small. The IRS, on examination, questions the gambler about the possibility of any other winnings during the period. The Tax Court has accepted this position when the taxpayer failed to report gambling income in excess of W-2G winnings.
The taxpayer must establish that claimed gambling losses exceed unreported gambling income, to be entitled to a deduction. The diary must contain the following information: 1. Date and type of specific wager or wagering activity; 2. Name and address or location of gambling establishment; 3.
Name s of other person s if any present with the taxpayer at the gambling establishment; and 4. Amounts won or lost. For slot machines, the Service further requires that a taxpayer record all winnings by date, time and slot machine number see Exhibit 1. But because few taxpayers especially recreational gamblers maintain convincing records of their gambling activities, they can be left paying tax on their gross W-2G winnings, without any offset for gambling losses.
Unreported W-2G winnings can also result in the imposition of penalties and interest. The court rejected the additional-income argument and allowed the loss deduction.
Footnote 12 As a result, a bright-line test was devised. In general, a gambling session is comprised of three unique components—time, place, and activity. By way of example, a taxpayer who gambles at two different casinos on the same day would have at least two gambling sessions different places.
A taxpayer who played slot machines and black jack on the same day at the same casino would have at least two gambling sessions different activities. A taxpayer who played slot machines over three days would have at least three gambling sessions different times.
But by comparison, a taxpayer involved in a three-day poker tournament would have only one gambling session since any accession to wealth cannot be determined until the tournament is finished and the final payouts to the participants are calculated and made. Several recent private telephone calls with IRS employees by the author and others confirm the current acceptance of this concept.
In addition, the Tax Court indicated its approval of gambling- session calculations in Shollenberger v. Commissioner of Internal Revenue. Tax Ct. As guidance, Chief Counsel Advice Memorandum provides ten gambling- session examples. In essence, a gambler who recycles his winnings is no different than a day trader who repeatedly buys and sells stocks or a real estate developer who flips houses.
Such an overstatement can easily penalize a taxpayer since AGI is used to calculate the phaseout levels for some deductions and as a multiplier for others. To exacerbate the issue, several popular tax-preparation programs reviewed by the author ignore the gambling-session methodology as well; they merely total the W-2Gs. If the taxpayer elects to take the standard deduction, the amount of wagering losses are ignored and not used. IRS computers do a thorough job of matching amounts from documents submitted by third parties to the amounts reported on income tax returns.
Therefore, the tax preparer should consider completing a Form Disclosure Statement , notifying the IRS that the gambling-session calculations were prepared in accordance with Chief Counsel Memorandum and Shollenberger v. Furthermore, a detailed analysis of each gambling session and a copy of any available gambling diaries should be included. An often forgotten step is the treatment of gambling winnings and losses at the state level. While the number of state-level audits triggered due to gambling issues is almost nonexistent, a few basic issue-spotting pointers can help identify the major concerns in preparation of income tax returns for the various states.
But what about amounts won by nonresidents in states that have an income tax? Initially, some states made it a point to aggressively pursue nonresident winners. Then, these states decided to automatically withhold state taxes from any winnings. It is also important to remember that Native American gambling establishments are exempt from state withholding requirements. This in turn may require the taxpayer to file nonresident returns in order to receive the appropriate refunds. But then there is Mississippi.
Mississippi automatically withholds three percent from everybody, and it is considered a nonrefundable income tax. Fortunately, it is not necessary to file a nonresident Mississippi income tax return since the documents provided by the casinos are considered to be the income tax return and proof that the tax was paid to Mississippi. For the most part, the majority of states follow the federal example of allowing gambling losses to be deducted.
However, some states base their income taxes on the federal AGI. The nonrecognition of itemized deductions, such as gambling losses, makes the gambling-session concept even more important to understand and implement. As a word of warning, do not assume anything, and frequently research the status of the state laws.
For example, many of the general principles discussed previously regarding state taxes are riddled with exceptions if the winnings are from various sources such as lotteries. Furthermore, the political winds can change quickly. As a case in point, in July the state of Hawaii eliminated the deduction for gambling losses.
But on April 16, , legislation was enacted to repeal the prohibition and make it retroactive to When in doubt, check it out. It is very likely that gambling and casino entertainment will continue to grow. Now more than ever it is important for tax professionals to become better prepared and equipped to assist their clients in the evolving area of the tax law. Working together, taxpayers, tax professionals, and the IRS can help improve the accuracy, compliance, and understanding of the taxation of recreational gamblers.
IRC Sec. IRS Pub. The recordkeeping suggestions listed in this publication merely restate Sec. However, tax treaties provide the exception to this general rule. For example, the United States has a tax treaty with the Federal Republic of Germany that allows the exclusion of gambling income for German citizens.
As such, German nonresident aliens are not subject to U. This fact was demonstrated in when Pius Heinz, a year old professional poker player from Cologne, Germany, won the World Series of Poker. Reportedly, he refused to take a check or wire transfer and insisted that his winnings be paid in cash.
Commissioner of Internal Revenue v. Glenshaw Glass Co. Commissioner of Internal Revenue , 25 T. Commissioner of Internal Revenue ,T. Groetzinger , U. Bauman v. Commissioner of Internal Revenue , T. Tax Court This mistake also resulted in penalties for negligence, failure to file, and failure to pay estimated taxes. In , the only other income Mr. Carmack et ux. Commissioner of Internal Revenue , F. United States v. Simply prepare and e-File with eFile. From there, the proper gambling forms will be filed along with your Tax Return.
Remember that, even if you do not get a Form W-2G, you must report all gambling winnings on your return. That is, the payer of said winnings may need to be provided with a social security number to avoid withholding. Not sure how much to pay? If you win a non-cash prize, such as a car or a trip, you will be responsible for paying taxes on the fair market value of each prize. Depending upon the amount of your winnings and the type of gambling, the establishment or payer may be required to withhold income taxes.
If tax is withheld from your gambling winnings, you will be sent a W2-G form from the payer. You may deduct gambling losses if you itemize your deductions. You can deduct your losses only up to the amount of your total gambling winnings. You must generally report your winnings and losses separately, rather than reporting a net amount. When you prepare and e-File your return on eFile. The IRS requires you to keep detailed records of your gambling winnings and losses as well as any related documents, including receipts, tickets, payment slips, statements, and Form W-2G.
You must be able to prove both your winnings and losses if you wish to deduct your losses. The IRS suggests that you keep a gambling log. If you e-File your tax return, you do not have to send any W-2Gs or other documents to the IRS but you must keep them for your records in case of audit.
The rules described on this page are for the majority of people with gambling income—those who are not professional gamblers. If gambling is your actual profession, then your gambling income is generally considered regular earned income and is taxed at your normal effective income tax rate.
As a self-employed individual, you will need to report your income and expenses on Schedule C, which the eFile app will automatically generate and add to your Tax Return based on the information you enter. You can deduct gambling losses as job expenses using Schedule C, not Schedule A. Nonresidents can usually report income that is "effectively connected" with a U. Gambling winnings, however, are considered to be "not effectively connected" and must generally be reported on Form NR.
Nonresident aliens often cannot deduct gambling losses. However, there is a tax treaty between the United States and Canada that generally allows Canadian citizens to deduct their gambling losses, up to the amount of their gambling winnings. If you have gambling winnings or losses, they must be reported on your tax return.
We will prepare all the forms needed to report this on your return so you don't have to worry about which form you need. Get Your Tax Refund Date.
If you win a non-cash prize, such as a car or a trip, you will be responsible for paying taxes on the fair market value of each prize. Depending upon the amount of your winnings and the type of gambling, the establishment or payer may be required to withhold income taxes. If tax is withheld from your gambling winnings, you will be sent a W2-G form from the payer.
You may deduct gambling losses if you itemize your deductions. You can deduct your losses only up to the amount of your total gambling winnings. You must generally report your winnings and losses separately, rather than reporting a net amount. When you prepare and e-File your return on eFile. The IRS requires you to keep detailed records of your gambling winnings and losses as well as any related documents, including receipts, tickets, payment slips, statements, and Form W-2G.
You must be able to prove both your winnings and losses if you wish to deduct your losses. The IRS suggests that you keep a gambling log. If you e-File your tax return, you do not have to send any W-2Gs or other documents to the IRS but you must keep them for your records in case of audit. The rules described on this page are for the majority of people with gambling income—those who are not professional gamblers.
If gambling is your actual profession, then your gambling income is generally considered regular earned income and is taxed at your normal effective income tax rate. As a self-employed individual, you will need to report your income and expenses on Schedule C, which the eFile app will automatically generate and add to your Tax Return based on the information you enter.
You can deduct gambling losses as job expenses using Schedule C, not Schedule A. Nonresidents can usually report income that is "effectively connected" with a U. Gambling winnings, however, are considered to be "not effectively connected" and must generally be reported on Form NR. Nonresident aliens often cannot deduct gambling losses. However, there is a tax treaty between the United States and Canada that generally allows Canadian citizens to deduct their gambling losses, up to the amount of their gambling winnings.
If you have gambling winnings or losses, they must be reported on your tax return. We will prepare all the forms needed to report this on your return so you don't have to worry about which form you need. Get Your Tax Refund Date. What is DocuClix? Security About eFile. Where Is My Refund? How to Check Refund Status efile. Sign In Start Now. All wagers in horse racing, dog racing, or jai alai placed in a single parimutuel pool and represented on a single ticket are aggregated and treated as a single wager for purposes of determining the amount of the wager for withholding and reporting requirements.
These types of wagers are not necessarily identical wagers. For example, two bets in a single show pool, one for Player X to show and the other for Player Y to show, are not identical wagers because winning on the two bets isn't contingent on the occurrence of the same event.
However, if both bets are represented on a single ticket, then they must be aggregated to determine the amount of the wager. Enter the date of the winning event. This isn't the date the money was paid if it was paid after the date of the race or game.
Enter the type of wager if other than a regular race bet, for example, Daily Double or Big Triple. Enter any federal income tax withheld, whether regular gambling withholding or backup withholding. This is required information. Enter the TIN of the person receiving the winnings.
If the winner fails to give you a TIN, backup withholding applies. See Withholding , earlier. As verification of the name, address, and TIN of the person receiving the winnings, enter the identification numbers from two forms of identification. Acceptable forms of identification include a driver's license, passport, social security card, military identification card, tribal member identification card issued by a federally recognized Indian tribe, voter registration card, or completed and unmodified Form W Enter the number and the state or jurisdiction.
In some instances, the number may be the same number as in box 9. One of the two forms of identification that the recipient presents must include the recipient's photograph. Gaming establishments owned or licensed by a tribal government may waive the photo ID requirement for payees who are members of that federally recognized Indian tribe and present a tribal member identification card issued by the same tribal government.
These boxes are provided for your convenience only and need not be completed for the IRS. Enter the abbreviated name of the state and your state identification number. The wager must be subtracted from the total winnings to determine whether withholding is required and, at the option of the payer, to determine whether reporting is required.
The wager must be subtracted at the time of the first payment. The requirements in this section apply to church raffles, charity drawings, etc. When a third party makes the payments, for example, an insurance company handling the winnings as an annuity, that third party must withhold. A payment of winnings is considered made when it is paid, either actually or constructively, to the winner. Winnings are constructively paid when they are credited to or set apart for that person without any substantial limitation or restriction on the time, manner, or condition of payment.
However, if not later than 60 days after the winner becomes entitled to the prize, the winner chooses the option of a lump sum or an annuity payable over at least 10 years, the payment of winnings is considered made when actually paid.
If the winner chooses an annuity, file Form W-2G each year to report the annuity paid during that year. Winnings from "identical wagers" are added together for purposes of the reporting and withholding requirements.
Enter the date of the winning transaction, such as the date of the drawing of the winning number. This might not be the date the winnings are paid. Except for winnings from state lotteries, as verification of the name, address, and TIN of the person receiving the winnings, enter the identification numbers from two forms of identification.
If the winnings aren't paid in cash, the FMV of the item won is considered the amount of the winnings. Total all winnings from all wagers made during a single bingo or keno game to determine whether the winnings are reportable. Regular gambling withholding doesn't apply to winnings from bingo, keno, or slot machines.
However, if the recipient of reportable gambling winnings from bingo, keno, or slot machines doesn't provide a TIN, you must backup withhold. You may use the optional aggregate reporting method to report these payments. On December 31st, all open information reporting periods must close at p. On January 1st, all information reporting periods must begin at a.
For more details and recordkeeping requirements, see Regulations section 1. Enter the ticket number, card number and color, if applicable , machine serial number, or any other information that will help identify the winning transaction. Enter zero as the amount, unless the winning person hasn't provided a TIN. If the winning person hasn't provided a TIN, enter the backup withholding amount.
See Withholding and backup withholding , earlier. Acceptable forms of identification include a driver's license, social security card, or voter registration. Use Form , Statement by Person s Receiving Gambling Winnings, to prepare Form W-2G only when the person receiving gambling winnings subject to reporting or withholding isn't the actual winner or is a member of a group of two or more people sharing the winnings, such as by sharing the proceeds of the same winning ticket.
The payer is required to file Forms W-2G based on Form The person receiving the winnings must furnish all the information required by Form However, a recipient of winnings from a state-conducted lottery need not provide identification other than his or her taxpayer identification number TIN. Part I lists the identification of the person to whom the winnings are paid, and Part II lists the actual winners, their respective shares of the winnings, and any additional winnings from identical wagers.
In Part II, the person receiving the winnings must provide the name, address, TIN, respective share of the winnings, and additional winnings from identical wagers for each of the winners. In addition, if regular gambling withholding is required, the form must be signed, under penalties of perjury, and dated by the person receiving the winnings.
The form must be returned to the payer for preparation of Form W-2G for each of the persons listed as winners. Forms W-2G may be issued immediately or by January 31 following the year of the payment. If more than one person shares in the winnings from a single wager, the total amount of the winnings minus the amount wagered will determine the amount of the proceeds for purposes of reporting and withholding.
Do not allocate winnings to each winner before determining whether the withholding or reporting thresholds were reached. Backup withholding rate. Payee identification rules. Box Poker Tournaments Withholding and backup withholding. Backup withholding. Electronic reporting requirements. When and where to file. Taxpayer identification numbers.
Statements to recipients. Corrected and void returns. Other general topics. Regular withholding rate. Regular Gambling Withholding for Certain Games. Sweepstakes; Wagering pools; Lotteries; Wagering transactions in a parimutuel pool with respect to horse races, dog races, or jai alai, if the winnings are at least times the amount wagered; or Other wagering transactions, if the winnings are at least times the amount wagered. Noncash payments. Backup Withholding. Foreign Persons.
State Tax Information. Local Tax Information. Identical Wagers. Box 1. Box 2. Box 3. Box 4. Box 5. Box 6.