If you’ve ever been to Las Vegas, you know first-hand the allure of the gambling scene. Rows of card game tables, flashing lights on the slot machines and the shouts of joy as fellow gamblers strike it big—these are the sights and sounds that entice casino patrons to place the wager on the line. If you’re fortunate to come out ahead of the game, you may not be the only one winning. Gambling winnings are subject to income tax.
The Internal Revenue Code (“Code”) defines gross income as “. . . all income from whatever source derived . . .”[1] While this Code section lists various types of income that fit into this definition, the Regulations provide that gross income “. . . is not limited to the items so enumerated.”[2]
Internal Revenue Service Publication 525 provides that gambling winnings are to be included in line 21 of the taxpayer’s Form 1040.[3]
Furthermore, the IRS requires the payer of gambling winnings to report any winnings that meet the following criteria: (1) the winnings are $1,200 or more from bingo or slot machines, (2) the winnings are $1,500 (reduced by the wager) or more from a keno game, (3) the winnings are more than $5,000 (reduced by the wager or buy-in) from a poker tournament, (4) the winnings, reduced by the wager, are $600 or more and 300 times the amount of the wager, or (5) the winnings are subject to federal income tax withholding.[4] So, if your winnings meet any of these criteria, you will receive a Form W2-G listing your winnings and any income tax withheld.
For most infrequent gambling patrons, this question is more pertinent: are gambling losses deductible? The answer: it depends. The Code provides that wagering losses are deductible to the extent of gains derived from such transactions.[5] Additionally, the Code categorizes wagering losses as miscellaneous itemized deductions subject to the two percent limitation.[6] As a result, in order to be able to deduct any portion of incurred gambling losses, the taxpayer must (a) itemize his or her deductions for the applicable tax year and (b) incur expenses categorized as miscellaneous itemized deductions in excess of two percent of the taxpayer’s adjusted gross income.[7] Any portion of miscellaneous itemized deductions that exceeds the two percent limitation may be deducted on Schedule A.
Separate rules apply to “professional gamblers,” which are beyond the scope of this brief explanation.
[1] IRC § 61(a).
[2] Treas. Reg. § 1.61(a)
[3] IRS Pub. 525.
[4] IRS Instructions for Forms W2-G and 5754.
[5] IRC § 165(d).
[6] Id. at § 67(b)(3).
[7] For further discussion on itemizing expenses, see “Can I Write That Off?”
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