Clients who are casual gamblers can deduct losses from gambling on their personal tax return, up to the amount of gambling winnings.
However, as shown in a case, Bon Viso, TC Memo 2017-154, resolved earlier this month you can’t deduct any losses if you don’t itemize deductions and keep the records required to back up your claims.
The basic rules are as follows: If you incur gambling losses during the year, you can use those losses to offset any winnings earned in the same year.
For instance, if you win $5,000 playing blackjack at a casino and then lose $3,000 at the track, you’re taxed on only $2,000 of income. This applies to all gambling activities — even playing the lottery or bingo at the local house of worship.
This deduction is claimed separately from other miscellaneous expenses on Schedule A.
In other words, you don’t have to contend with the usual floor of 2% of adjusted gross income (AGI). But you must keep detailed records to show the IRS that you actually suffered losses.
In a pinch, you might fall back on the “Cohan rule” allowing an estimate if you can convince the court you incurred deductible losses.
Here’s what happened in the new case: During 2013, the taxpayer engaged in several casual gambling activities, including betting on college and professional sports, playing slot machines and buying lottery tickets. He won $5,060 on slot machines at three different casinos, but also sustained $6,983 in gambling losses.
On his 2013 return, the taxpayer claimed a standard deduction of $12,200. He did not report any gambling winnings or losses for 2013. Based on three Forms W-2G reporting total winnings of $5,060, the IRS issued a notice of deficiency.
The taxpayer had no quarrel with the reported gambling winnings. But he argued that the amounts should be reduced by the amounts of bets placed to produce the $5,060 winnings. He also contended that he should be able to use his gambling losses to offset his gambling winnings.
However, the Tax Court sided with the IRS. It said that he had to report all of the income from his gambling activities on his tax return. In addition, because he wasn’t a professional gambler, he could only deduct losses up to the amount of winnings by itemizing deductions, instead of taking the standard deduction.
Furthermore, although the taxpayer introduced evidence of gambling at the casinos, he didn’t provide any specifics regarding the amounts of the bets that produced the winnings reflected on the Forms W-2G.
Although the court can make estimates under the Cohan rule, even if the taxpayer failed to keep detailed records, it can only do so if the taxpayer presents sufficient evidence to establish a rational basis for an estimate.
Finally, the taxpayer would have to forego the standard deduction to claim any gambling loss deduction. This would leave him in a worse tax position overall.
Note that the rules differ for professional gamblers who legitimately rely on income from gambling activities as a way to make a living. For these individuals, losses may be deductible even if they exceed winnings. Consider the particular circumstances of each client.