By Bill Bischoff
A bad economy could have some folks looking to Lady Luck for a ladder out. While most gamblers end up empty-handed, a select few win big. And when the amount of money in your pocket grows or shrinks, you know the IRS isn’t far behind. The agency has different rules for amateurs and professionals, as Tax Guy Bill Bischoff previously reported. What’s more, the IRS updated some of its recordkeeping guidelines to make them simpler and more realistic. Check out the Tax Guy’s most recent tips about how to keep your books and stay out of trouble.
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Form W-2G Helps Keep Winners Honest
For most types of gambling at a legitimate gaming facility, that facility will issue you a Form W-2G (Certain Gambling Winnings) if you win $600 or more. Of course, the IRS gets a copy too, so you better make sure the gross gambling winnings reported on page 1 of your Form 1040 (or on Schedule C if you are a professional gambler) at least equal the amounts reported on the Forms W-2G.
Recordkeeping Issues
Technically speaking, an amateur gambler must report the full amount of each and every win on the miscellaneous income line on page 1 of Form 1040. So in a profitable year, you cannot simply subtract losses from winnings and report the net amount of winnings on page 1 of Form 1040. But let’s face it: Even folks who attempt to keep good records will probably only record their daily net winnings and daily net losses. Reporting an amount of gross income equal to the sum total of the net winnings from all days you had net winnings on page 1 of Form 1040 will probably keep you out of trouble with the IRS (assuming the amount reported as income equals or exceeds the sum total of any amounts reported as income on Forms W-2G).
Whether you are an amateur or a professional gambler, you must adequately document the amount of your losses in order to claim your rightful gambling-loss deductions. According to the IRS, taxpayers must compile the following information in a log or similar record.
* The date and type of each specific wager or wagering activity.
* The name and address or location of the gambling establishment.
* The names of other persons (if any) present with the taxpayer at the gambling establishment (obviously it’s more difficult to meet this requirement at a public venue such as a casino or race track).
* The amount won or lost. Substantiation of winnings and losses from wagering on table games can done by recording the number of the table played and keeping statements showing casino credit issued to the player. See also IRS Publication 529 (Miscellaneous Deductions).
Per-Session Recordkeeping Is Apparently OK
The IRS says it’s permissible for casual slot players to simply keep a record of his net win or loss amount for each gambling session. In other words, the determination of the net win or loss amount can be made when the gambler redeems his tokens at the end of each session or determines that he lost all the tokens he started off with at the beginning of that session. If the casual slot player then reports the sum total of the net winnings from all winning sessions as gross income on page 1 of Form 1040 and keeps track of the sum total of the net losses from all losing sessions for purposes of applying the losses-cannot-exceed-winnings limitation to his Schedule A itemized deduction, the IRS will consider that close enough to the theoretically required recording of each win or loss from each spin of the slot machine. Thank you, IRS!
Presumably the IRS will also consider this concept of recording all the net wins and losses from all the taxpayer’s gambling sessions sufficient recordkeeping for other forms of casual gambling and for professional gambling as well.
In Dire Circumstances No Recordkeeping May Be Required
In a 2009 decision, the Tax Court allowed a taxpayer to use a common-sense approach to establish that his gambling losses, for which he had no records, were more than enough to offset his gambling winnings as reported on Forms W-2G. The evidence showed the taxpayer was a compulsive gambler who lost so habitually that he did not own a car and had to depend on relatives to help pay his living expenses. Therefore, the Tax Court concluded that all his reported gambling winnings (more than $70,000) had obviously been gambled away, even though he had no records to prove it.
Readers, what are your practices when it comes to keeping gambling records? What proof of losses do you keep for your tax records?
Great information! Thanks for sharing. I wrote a similar post on my blog. Your readers might be able to benefit from it. Check it out at http://blog.avoidbeingaudited.com/2011/03/16/gambling-winnings-how-to-record-them-correctly/
Avoidbeingaudited.com
Dear Readers,
I am an attorney/CPA from Oklahoma (home of 20% of the casinos in the United States and 55,000 slot machines). Taxation of gamblers is a common issue for tax professionals in Oklahoma!
I agree whole-heartedly with Mr. Bischoff’s analysis of the current law regarding Per-Session Recordkeeping (Please refer to IRS Chief Counsel Memorandum 2008-011). IRS Revenue Procedure 77-29 and several Tax Court Judges strongly recommend that taxpayer/gamblers keep a gambling diary or log to record their gambling transactions.
Because of my own frustration in not being able to find one that met the IRS reporting requirements, I wrote my own.
The Lady Luck Gambling Diary: Slot Machine Edition is available from Amazon.com as well as my own web site: http://www.LadyLuckDiary.com.
Mike – I am familiar with the “WinLoss” app. It is a very good start for a versioin 1 program. It does have some limitations as to reporting comps, tips, and state taxes withheld (like Lousiania). I am sure they will continue to improve it. You may just need to figure a way to track some of the other information in the meantime.
Barb – Yes, I can speak from experience in dealing with IRS audits. What do you want to know? Our firm just successfully settled a seven-figure assessment. Since our client did not keep a gambling diary, we had to recreate it.
NV Fisherman – It is often a fatal mistake for taxpayer/gamblers to solely rely upon the casino reports. I have an article on the web site entitled “Why Does the IRS Ignore Casino Win/Loss Statement?” I include language from 7 different casinos in NV, OK and LA which states that the information contained in the statements are not accounting records, but estimates and therefore should not be used for tax reporting purposes.
Basically, to avoid being taxed on “phantom” income, you need to keep a contemporaneous record of your gambling session – like the Lady Luck Gambling Diary.
I hope this helps. Thank-you for time and consideration.
I tried an iPhone app that helps keep track of my activity. It is called “WinLoss”. I was able to easily enter the data (casino inso, machine, amounts, who was with me, etc) then email myself a report. Very cool! I will use it for 2011, wish I had known about it sooner!
I keep little 4 x 6 index cards with the date, time, money took, money from ATM, cash outs, W2G amounts,tips,machine numbers, amount in machines, amount out of machines, including cashouts or zero,net profit or losses for the day. I then enter in a log at home. Other than the color of underwear I wore that day, what else does IRS want?. I do no play with Casino cards most of the time because i know big brother is watching me. Can anyone give some experiences from IRS audits. I spoke to a couple who were accused of not meeting the “other persons” requirement because they did not stay together every minute they were in the casino!!!!! He split between Keno and slots and she played slots only. They were accessed $60,000 and paid a tax attorney to represent them!!!!
Here in Las Vegas I have yet to see a slots player keep any kind of contemporaneous diary. The IRS is unrealistic. The reality is that most slot players rely on the print outs that the casinos maintain and those are based upon the players card that all of the casinos use.