Since I haven’t really spoken about anything on gambling in awhile, here is Kim’s take on taxes and gambling. Regulation 1.165-10 provides that gambling losses sustained during the tax year on wagering transactions are deductible only to the extent of gains from such transactions. That means that you cannot claim losses beyond what you have wagered. With the proliferation of casinos throughout the country, people from coast-to-coast enjoy gambling at their local casinos but for tax purposes they are still considered casual gamblers (boo). Casual gamblers may not net their gains and losses from wagering transactions, reporting only the net amount for the year. For slot machine play, though, what exactly is a transaction? Do you, as a player have to calculate basis, gain, or loss each time that you move from one slot machine to the next? Even uglier than that (and to offset this thought I have added a picture of a cute, inebriated slot player) is each bet considered a taxable event?
The IRS addressed this issue in a recent Chief Counsel Memorandum. An example is given of a taxpayer who went to a casino to play the slot machines ten times during the tax year, each time purchasing $100 worth of tokens. On five occasions, the taxpayer lost the entire $100 in tokens. On the other five occasions, the taxpayer redeemed tokens for $20, $70, $150, $200, and $300. Discussing the results of various court decisions, the IRS notes that attempting to trace and recompute basis after each play would be unduly burdensome and unreasonable. The fluctuating wins and losses during the taxpayers casino stay are not accessions to wealth until the taxpayer redeems her tokens to definitively calculate the amount above or below basis (the amount of the original bet) that has been realized. Thus gain or loss may be calculated over a series of separate plays or wagers.
Applying this reasoning to the example at hand, the IRS concludes that the taxpayer has:
Three wagering gains of $50, $100, and $200 (on the days she redeemed $150, $200, and $300) Two wagering losses of $80 and $30 (on the days she redeemed $20 and $70) Five wagering losses of $100 each.
For the year, the taxpayer has total wagering gains of $350 and total wagering losses of $610. The $350 is reported as other income on line 21 of Form 1040. If the taxpayer chooses to itemize, $350 of the $610 loss is reported on Schedule A as a miscellaneous itemized deduction (not subject to the 2% floor). Because gambling losses are limited to gambling gains, the remaining $260 of the loss is not deductible and may not be carried forward. If the taxpayer does not itemize, no part of the loss is deductible.
In many casinos today, gamblers put cash directly into the slot machine. When play at that machine is finished, the taxpayer receives a voucher which may be used in the next machine or redeemed for cash. Although tokens are not involved, the principal is the same: How much did the taxpayer bring to the casino to bet and how much did the taxpayer redeem when he left the casino. For instance, a taxpayer who enters a casino with $100 and leaves with $300 has a wagering gain of $200, even though the taxpayer may have $1,000 in winning spins and $700 in losing spins. Conversely, if the taxpayer loses the entire $100 and leaves the casino with nothing, he has a wagering loss of $100 even though he may have had winning spins of $1,000 and losing spins of $1,100. The taxpayer does not have to keep track of all those spins, but must keep track of how much money he brings to bet and how much he leaves with. Remember that the losses go on Schedule A for the Federal return. When our inebriated slot playing gal sobers up and asks, please let her know what I’ve written about as well! It looks like she is standing in front of a pachislo machine instead of a regular slot machine. More about pachislo machines in another blog.
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Kim Isaac Greenblatt
Casual Gambling Definition Time
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