- Gambling Losses Tax Law
- Gambling Losses New Tax Law 2018 Tax Brackets
- Gambling Losses New Tax Plan
- 2018 Tax Changes Gambling Losses
For information on withholding on gambling winnings, refer to Publication 505, Tax Withholding and Estimated Tax. Gambling Losses. You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040 or 1040-SR) (PDF) and kept a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return. Mar 11, 2019 Gambling and the New Tax Laws. You can then claim an itemized deduction for all these betting losses throughout the tax year, against your winnings. For example, if you spend and lose $10,000 and win $9,000 during the year, you could deduct for the $1,000 difference. If you lose $10,000 and win $11,000 you would be responsible for taxes on the $1,000 difference. Previously, professionals were allowed to show a net loss if their gambling losses, plus their business expenses related to gambling, were more than their winnings. However, under the new law, pro gamblers are no longer allowed to claim a net loss for the year; winnings minus losses and expenses can only zero out. (This limitation expires after 2025, unless Congress extends it between now and then.).
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Gambling winnings are income, the same as money you make from your job or from renting out half of your two-family house. Gambling winnings are just as much income as other somewhat 'speculative' earnings you may have, such as commissions on sales (since that's not guaranteed but depends on making the sales) or a holiday bonus (which depends on whether and how much your employer wants to give you). As such, it is taxable as any other income.
Income: The IRS has made this very plain: in their online advice under 'Tax Topics: Topic 419, Gambling Income and Loses', the IRS said in no uncertain words that ' Gambling winnings are fully taxable and you must report the income on your tax return.' (The IRS also provides an interactive online 10-minute interview for gamblers; the online assistant takes you through a series of questions and provides answers in claiming winnings (and deducting losses).
It’s an age-old question that has been asked for many years, the answer of which changes more frequently than a lady getting ready for a night out. Is poker a sport or gambling. So, is a sport or a game?
Sometimes the payer (the one paying your winnings; e.g., the casino) must issue you a form (Form W-2G) with your winnings and any withholding for your taxes if your winnings reach certain levels, which vary by type of gambling. (The last instruction page of the Form W-2G lists threshold amounts of winnings requiring that the form be issued to you.) But even if you do not get a form, you do not get a free pass--you still need to legally report winnings topping over $600. As the IRS goes on to say on this subject: 'A payer is required to issue you a Form W-2G.pdf, Certain Gambling Winnings, if you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding. You must report all gambling winnings (including lotteries, raffles) on line 21, Schedule 1, Form 1040 as 'Other Income') including winnings that aren't reported on a Form W-2G.pdf. When you have gambling winnings, you may be required to pay an estimated tax on that additional income. For information on withholding on gambling winnings, refer to Publication 505, Tax Withholding and Estimated Tax.'
Can I Deduct Losses?: You can deduct your gambling losses if you itemize on a Form 1040 Schedule A. You have to track all your losses and winnings and report them comprehensively, and you can only deduct up to the amount of gambling income you report. That is, you can use your gambling losses to offset your winnings for tax purposes, but you can't do more than offset your gambling income: gambling losses cannot be deducted from or be offset against other forms of income.
Unfortunately, the 2017 Tax Cuts and Jobs Act while enhancing the standard deduction also reduces certain itemized deductions, so the net effect is to make itemizing less attractive for many people—they end up doing better without itemizing. That being the case, whether it is worthwhile to try to itemize and deduct your gambling losses is unclear--but it is clear is that you must report (and pay taxes on!) your winnings.
Professional gamblers
If you are a full-fledged, professional gambler who depends on gambling winnings as a livelihood to pay bills and put bread on the table, you report winnings (and expenses, such as meals, lodging, transportation, food) on Schedule C, Form 1040. The IRS more than likely will ask you to prove that gambling is your full-time, actual occupation, under a 1987 US Supreme Court decision establishing the professional gambler standard.
Income from cryptocurrency
Suppose you 'gamble' by trading cyptocurrency--is any profit you make taxable? Yes, but not under the gambling taxation rules discussed above. Instead, trading in cryptocurrency, where you make money (hopefully!) by buying low and selling high (so exchanging, say, dollars for Bitcoins when Bitcoins are worth X, then trading the Bitcoins for dollars later, after the value of Bitcoins has risen and they are now worth X plus) is considered the equivalent of trading in any other commodities, such as gold or oil. The income you make is taxed like the income from any other commodities trading.
Taxing rules from Fantasy sports
Not a fantasy—whether it is one day or season long, you have to track your winnings and report to Uncle Sam when they top $600 or more. If you receive over $20,000, and are paid through PayPal, you will receive a Form 1099-K.
Season-long fantasy sports is not considered gambling; any income is taxed like income from any other 'job' you have. The treatment of daily fantasy sports (DFS) varies by state in terms of whether it is legal or not, and whether it is considered gambling or not. While you should check with your own tax preparer or accountant for how to report DFS income, it is a given that the income will be taxable and you will need to report it and pay taxes on it.
Gambling Losses Tax Law
Then there are the State individual taxes
Your state may also want its share of your gambling income. There is no uniformity of how a state taxes gambling winnings (or will allow casual gamblers to deduct associated losses). Some do, some don’t. This is not surprising as states are tussling with what types of games constitute gambling and whether it is a legal activity in the first place.
If you are unsure how to report income accurately, check with your tax accountant or call your state taxing department for help. As with all state income tax issues, this is a question which must be answered state-by-state.
Taxation of gambling businesses
If you happen to be licensed by a state to provide gambling services--that is, to run a gambling business--for you, gambling is not 'gambling'. It’s your business. Income or profit from your operations will be treated like any other business income.
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Last week I noted that, in general, a taxpayer cannot simply net all gambling winnings and losses from the tax year and report the resulting amount. Instead, a taxpayer must separate gambling winning sessions and gambling losing sessions.
Takeaway #1: The Internal Revenue Code permits the deduction of gambling losses only to the extent of gambling winnings.
A taxpayer with an overall loss from gambling for the year cannot use the net loss to offset other income, create a net operating loss carryback or carryover, or be carried to a previous or future tax year to offset gambling winnings in such year.
Takeaway #2: Casual gamblers report total gambling winnings on line 21 of Form 1040 (Other Income), and report total gambling losses as an itemized deduction on Schedule A.
There are several possible tax consequences from separate reporting of winnings and losses. I will mention a few.
First, if a taxpayer’s total itemized deductions are less than the standard deduction, then the gambling losses have no tax benefit. Second, gambling winnings are included in a taxpayer’s Adjusted Gross Income (AGI), but gambling losses are not. An inflated AGI can further limit a taxpayer’s ability to take other deductions. For example, medical expenses, an itemized deduction, can be deducted only to the extent they exceed 7.5% of the taxpayer’s AGI. Third, a taxpayer’s gambling losses may trigger the Alternative Minimum Tax.
A certain type of taxpayer, however, treats gambling winnings and losses differently from above: The professional gambler.
Takeaway #3: The professional gambler reports gambling winnings and losses on Schedule C, Profit or Loss From Business.
A professional gambler is viewed under the tax code as engaged in the trade or business of gambling. The taxpayer “nets” all gambling winning and losing sessions, and reports the result (either zero or greater) as gross receipts on the Schedule C. The limitation on deducting gambling losses still applies.
Because the professional gambler is viewed as self-employed, the taxpayer may also deduct “ordinary and necessary” business expenses incurred in connection with the business. I’ll expand on business expenses for professional gamblers in next week’s post.
The professional gambler is also subject to the self-employment tax, which is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. For the 2011 tax year, the self-employment tax was 13.3% for the first $106,000 of business income, and 2.9% thereafter. A taxpayer may deduct one-half of the self-employment tax as an above the line deduction.
Takeaway #4: The professional versus amateur gambler status for tax purposes is a facts and circumstances determination.
A taxpayer cannot choose the status that produces a lesser tax bill. There is Supreme Court of the United States precedent governing this issue. In Commissioner v. Groetzinger, 480 U.S. 23 (1987), the Court established the professional gambler standard (emphasis added):
[I]f one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned.
Despite receiving other forms of income in 1978, Mr. Groetzinger was held to be a professional gambler for the year because he spent 60 to 80 hours per week at dog races gambling solely for his own account. Gambling was his full-time job and livelihood. Notably, Mr. Groetzinger had a net gambling loss in 1978. Thus, actual profit is not a requirement for professional gambler status.
Gambling Losses New Tax Law 2018 Tax Brackets
Since Groetzinger, the IRS and several state tax agencies have challenged the professional gambler status claimed by many taxpayers. There’s a common theme among losing taxpayer cases that go to trial: Substantial time was devoted to generating non-gambling income.
In addition to applying the standard established by the Supreme Court, the U.S. Tax Court and state tax courts sometimes apply the following non-exhaustive nine factor test found in the Internal Revenue Code regulations:
- Manner in which the taxpayer carries on the activity;
- The expertise of the taxpayer or his advisers;
- The time and effort expended by the taxpayer in carrying on the activity;
- Expectation that assets used in the activity may appreciate in value;
- The success of the taxpayer in carrying on other similar or dissimilar activities;
- The taxpayer’s history of income or losses with respect to the activity;
- The amount of occasional profits, if any, which are earned;
- The financial status of the taxpayer; and
- Elements of personal pleasure or recreation.
Gambling Losses New Tax Plan
The burden of proof is on the professional gambler to prove such status. Again, whether one should file as a professional gambler is a facts and circumstances determination. In most cases, it should be pretty clear where the taxpayer falls.
Author’s note: I must remind all readers that it is impossible to offer comprehensive tax advice on the internet. Information I write on this blog is not legal advice, and is not intended to address anyone’s particular tax situation. Should you seek such advice, consult with a tax professional to discuss your facts and circumstances.
2018 Tax Changes Gambling Losses
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, I inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.