Code Section 61 defines gross income, “except as otherwise provided,…gross income means all income from whatever source derived,” Regulation 1.61-1 further states that Gains from wagering transactions are included in gross income.
I suspect that most households participate in one way or another in the gambling industry. We purchase lottery tickets, enjoy an afternoon at the casino, a day at the race track, a night out for beano or maybe a little fantasy football. When we have a lucky day, how should the winnings be reported on a tax return?
Like much of the Code, gambling income and loss deductions are generally misunderstood. Gambling gain is defined as winnings less the cost of the winning bet. Gain transactions are included on line 21 on the front page of the 1040 and add to adjusted gross income. Substantiated gambling losses however, are allowed only to the extent of gambling gain transactions and must be reported on Schedule A. If you do not itemized deductions there is no benefit realized from the loss deduction.
What does the term gain “transactions” mean? I know, you all think that you learned the term in grade school; one bet is one transaction, right? Fortunately, that is not always the case. When it comes to a horse race or the lottery, a transaction is a single bet. It is not so clear when it comes to one hand of a poker game or one pull of a slot machine lever. Rather than define a transaction as a single pull of the lever, the definition is broadened to include all pulls until the winnings or tokens are cashed out for the “session”. Major relief, you can net gains and losses during a session, but what the heck is a session?
Notice 2015-21 helps gamblers better understand. The Notice takes no less than eight pages and seven examples to define a “session” of play. The abridged version is this: A session of play begins with the first wager of the day and ends with the last wager on the same type of game but not later than the end of the calendar day. Winning sessions are reported as gross income while losing sessions are deducted on schedule A.
A weekend of winning $20,000 on Saturday followed by losses of $20,000 on Sunday (two separate sessions), lead to increased gross income of the entire $20,000 with a deduction of $20,000 on Schedule A. Who cares? Well you might if you collect Social Security, receive advanced premium credits or take other deductions which might be limited when adjusted gross income exceeds certain thresholds.
Who would ever imagine that a breakeven weekend at the casino could cost thousands of dollars in income tax? Quit while you’re ahead. All the best gamblers do.
Jamie Boulette, CPA has 30 years of tax experience and is managing director of One River CPAs with offices in Bath and Oakland. He can be reached at firstname.lastname@example.org