Per the proposed Notice 2015-21 revenue procedure (at publication date of this text the proposed revenue procedure had not been finalized), a taxpayer determines a wagering gain or loss from electronically tracked slot machine play at the end of a single session of play as follows:

A taxpayer must use the same session of play if the taxpayer stops and then resumes electronically tracked slot machine play within a single gaming establishment during the same calendar day. If a taxpayer uses the definition of a session of play set forth in section 3.04 of the proposed revenue procedure, for any day in a calendar year at a particular gaming establishment, the taxpayer must use that definition for all electronically tracked slot machine play during the taxable year at that same gaming establishment.

(Sec 3.04 of the proposed revenue procedure) - If, after engaging in slot machine play at one gaming establishment, a taxpayer leaves that establishment and begins electronically tracked slot machine play at another gaming establishment, a separate session of play begins at the second establishment, even if played within the same calendar day as the first.

Taxpayers using the procedure would enter the income on the “other income” line of the 1040, which, on the 2021 return, would be line 8b of Schedule 1.

Generally, a taxpayer must report the full amount of their gambling winnings for the year as income on their 1040 return. A taxpayer may not reduce their gambling winnings by their gambling losses and report the difference. Instead, gambling winnings are reported in full as income and the losses (subject to limitation as discussed below) are deducted on Schedule A. Therefore, if a taxpayer does not itemize, they are unable to deduct gambling losses.

This form is issued by a casino or other payer to some winners with a copy going to the IRS. Generally, only winners of the following types of gambling activities will be issued a W-2G:

Bingo - $1,200 or more from one bingo game, without reduction for the amount wagered. All winnings received from all wagers made during one bingo game are combined. (Reg. § 1.6041-10(a))

Keno - $1,500 or more from one keno game reduced by the amount wagered on the same keno game. All winnings received from all wagers made during one keno game are combined. For example, all winnings from all “ways” on a multi-way keno ticket are combined. (Reg. § 1.6041-10(b)(1)(i)(B))

Slot Machines - $1,200 or more from one slot machine play, without reduction for the amount wagered. (Reg. § 1.6041-10(b)(1)(i)(C))

Poker Tournament - Poker tournament players winning $5,000 or more.

Other Gambling – $600 or more and at least 300 times the wager.

If federal income tax has been withheld on the winnings, a W-2G will be issued regardless of the type of gambling activity. Generally, the withholding rate is 24% of the gambling winnings but when withholding is required varies depending on the type of wagering activity. The rate could be 31.58% of the fair market value of noncash payments (e.g., a car won in a sweepstakes) if the payer pays the withholding tax. Regular gambling withholding doesn't apply to winnings from bingo, keno, or slot machines. However, if a winner in these gambling activities doesn’t provide a taxpayer identification number (TIN) when required (i.e., when the amount won exceeds the amounts shown above), the payer must backup withhold at 24%. See instructions to Form W2-G for details.

Frequently, taxpayers with winnings anticipate they only need to report those winnings included on Form W2G. However, those winnings reported on W-2G forms generally do not include all winnings for the year, and the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is generally always an issue in a gambling loss audit.

An individual not engaged in the gambling business may deduct as a miscellaneous itemized deduction (not subject to the 2% limitation) their gambling losses suffered in the tax year, but only to the extent of that year's gambling gains. (Code Sec. 165(d))

Gains - “Gains” include “comps” (complimentary goods and services the taxpayer may receive from a casino)

Losses - Losses from one kind of gambling are deductible against gains from another kind. IRS has ruled that transportation, meal and lodging expenses incurred while engaged in gambling activities are nondeductible personal expenses(1) which cannot be deducted against gambling winnings. (TAM 9808002)

(1) Court Case - Shiosaki, James, (1971) TC Memo 1971-24 - Travel expenses to Las Vegas for gambling were held to be personal and nondeductible. Taxpayer was an engineer.

The TCJA clarifies that "losses from wagering transactions" include any deduction otherwise allowable in calculating federal income tax incurred in carrying on any wagering transaction. For example, this would include the transportation costs traveling to and from a casino. But this also means that taxpayers are prohibited from separately deducting other expenses incurred while gambling. While applying to recreational gamblers and professional gamblers, this provision was aimed at the latter. Congress inserted it because some courts (see “Gambling as a Trade or Business” below) have allowed individuals in the trade or business of gambling to deduct reasonable business expenses which created a business loss that was then not subject to the limitation that gambling losses can’t exceed gambling winnings. With TCJA’s revised definition of gambling losses, separate deductions for these expenses of individuals are eliminated for 2018 through 2025. (IRC Sec 165(d) as amended by the TCJA section 11050(a)) (CCA Memo 202111012)

Gambling casinos often provide their customers with complimentary goods and services (“comps”) to encourage future patronage. IRS says that extraordinary comps, such as autos and jewelry, are taxable income. But it reserved the question of whether “normal comps,” such as food, drink, lodging and entertainment, can be excluded from income as purchase price adjustments. (Field Service Advice 1999-519, Vaughn No. 917)

The IRS Chief Counsel has stated that the amount paid by a daily fantasy sports (DFS) player to participate in a DFS contest constitutes an amount paid for a wagering transaction under Code Sec. 165(d). DFS transactions meet the definition of wager as interpreted by the Tax Court because there is (1) an uncertain event (such as the live performance of individual players), (2) winnings if the event resolves in the participant’s favor, and (3) the wager is lost if the event does not go in the participant’s favor. Further, DFS transactions are similar to poker and other wagers in which a player’s skill is a component of the game, but it does not dictate the outcome. The DFS transaction is wagering because elements of chance beyond the participant’s control ultimately determine the outcome of the transaction. (Chief Counsel Advice Memorandum 202042015)

The amount of income from a winning bet or wager is the full amount of the winnings less the cost of placing that specific winning bet or wager. Thus, the winner of a sweepstakes includes as income the amount by which the prize money exceeds the ticket price, and the winner of a horse race includes as income the amount of prize money less the cost of the winning race ticket. (Hochman v. Commissioner T.C. Memo. 1986-24) In computing the amount of income from winnings, the cost of losing tickets (or other forms of wager) is not netted against the winnings.

An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information (Rev Proc 77-29, 1977-2 CB 538):

Verifiable documentation includes wagering tickets, cancelled checks and credit records. Where possible, IRS says the documentation should be backed up by other documentation of the activity or visit to a gambling establishment, e.g., hotel bills, airline tickets, etc. Affidavits from “responsible gambling officials” (not further defined) regarding gambling activities can also be used. (Rev Proc 7729, 1977-2 CB 538)

The Cohan rule doesn't apply if the taxpayer doesn't lay the proper foundation by establishing gambling income and the relation of gambling losses to that income. Racetrack tickets alone, to support the taxpayer's testimony of gambling losses, are of little weight without supporting evidence of their purchase by the taxpayer. The tickets could be the discarded stubs of bettors who lost (Norgaard, Preben, (1989) TC Memo 1989-390) or could be winning tickets.

The Tax Court treated as unreliable and gave no weight to an unsigned letter to a taxpayer from Caesar's Palace Casino in Las Vegas that estimated the taxpayer had a net loss of $60,480 during the tax year. (Mayer, Solomon, (2000) TC Memo 2000-295)

Winnings and losses may be further supported by the following items (Rev Proc 77-29, 1977-2 CB 538):

Lotto Installment Payments - A client won the lottery in 2020 and chose to take installment payments for the rest of her life. Then in 2022 the taxpayer incurred gambling losses. Can gambling losses incurred in one year be used to offset installment payments from gambling winnings in a prior year? The answer comes from the following Court Case:

Gambling losses were allowed in full where - The taxpayer kept a pocket notebook that showed the date a bet was made, the type of bet or name of the player and the amount won or lost. (Presley, Sam Sr., (1979) TC Memo 1979-339)

Gambling losses were allowed in part where - Taxpayer's monthly diary accurately reflected the taxpayer's winnings and losses from the race tracks. (Faulkner, Leon, (1980) TC Memo 1980-90)

Gambling losses were allowed in part where - Cancelled checks issued to pay for gambling losses were offered into evidence. Checks were supported by statements of witnesses, etc. (Jacoby, Oswald, (1970) TC Memo 1970-244)

Gambling losses were disallowed in their entirety where – The taxpayer offered records indicating that he had been extended credit by a casino but offered nothing to support the assertion that the use of the proceeds resulted ultimately in losses. The Tax Court noted that it was perfectly possible that the use of the credit line resulted in net winnings or in net losses in an amount less than, but not all of, the entire line of credit.

Gambling losses were disallowed in their entirety where – Taxpayers kept no records of losses on their slot machine play. They relied on two undated letters, on a casino's letterhead, estimating the taxpayers' net winnings and losses. But the letters, besides stating they were “for marketing purposes only” and carrying other disclaimers, failed to reflect slot machine winnings and losses. The casino didn't track slot machine winnings and losses unless the patron used a player's club card and the taxpayers admitted they didn't use their cards.

Use Form 5754 if the gambling winnings belong to someone else or belong to a group of two or more people sharing the winnings, such as by sharing the same winning ticket, and provide to the payer. This enables the payer of the winnings to prepare Form W-2G, Certain Gambling Winnings, for each winner to show the winnings taxable to each.

Ordinary Income or Capital Gain? - A District Court has held that a state lottery winner realized ordinary income on the sale of his right to receive payments due in the future and not capital gain as he had contended. (Maginnis, (DC OR 5/28/2002) 89 AFTR 2d 2002-3028)

Offsetting Current Year Losses – Often, lottery winnings will be payable over a period of several years, similar to an annuity. IRS has ruled that the annual lottery payments retain their character as wagering winnings for purposes of deducting losses from other wagering activities. (TAM 9808002; Rusnak, TC Memo 1987-249)

Supreme Court Stance - The Supreme Court has declined to review the holding by the Court of Appeals for the Third Circuit that a lump-sum payment given to a married couple in exchange for the right to their future lottery payments was taxable as ordinary income and not as capital gain. (George Lattera, (CA 3 1/9/2006) denied 2/20/2007)

Transfer of Lottery Winnings a Taxable Gift – A waitress received a lottery ticket as a tip from a customer that, unbeknownst to the customer, was a big winner - $5 million (over $10 million if paid out as an annuity over 30 years). The taxpayer decided to share her good fortune with family members. Her attorney prepared incorporation papers for an S corp in which the taxpayer had a 49% interest and her family a 51% interest (17% each to her mother and two siblings), and she then signed over her interest in the winning lottery ticket to the corporation.

The Tax Court held that the transfer resulted in a taxable gift because there was no enforceable contract to share the lottery winnings with her family. Although the family members had made offhand statements through the years about taking care of one another if someone came into money, there had been no prior written agreement by the family members to share winnings, no pattern of buying lottery tickets or pooling of money, and no predetermined sharing percentages. Thus, there was no proof that there was a family partnership that owned the ticket. While the court held that there was a taxable gift, it did allow a discounted value for gift tax purposes due to a claim that had been made by a co-worker of the taxpayer that she was obligated to share the winnings with her co-workers. (Dickerson, TC Memo 2012-60)

Raffles - Amounts paid for chances to participate in raffles, lotteries, or similar drawings or to participate in puzzle or other contests for valuable prizes conducted by a charity are not gifts and therefore do not qualify as charitable contributions. (Rev. Rul. 67-246, Example 5) These activities would be treated as wagering, and thus the costs would be includible when determining the amount of gambling losses for the year.