Does the Government Subsidize Gambling Losses? 2

A while back, I had a client receive a notice from the IRS demanding why he didn’t include his over $100k in gambling winnings on his tax return.

“But I don’t gamble!” he promptly reported, figuring that the issue was a mistake and would be quickly put to rest.

The IRS responded by sending slip after slip of casino provided W-2Gs, all with his wife’s name written sloppily on the top.

You might be able to keep things from your spouse, but the IRS always knows.

Tax Evasion is never a good bet.

Tax Evasion is never a good bet.

Yes, like basically all income, gambling winnings are taxable. The IRS is actually more forceful on that, stating that “Gambling Winnings Are Always Taxable Income.” Typically, you report the winnings on “Other Income” on your 1040. And gambling establishments WILL report your income to the IRS, even if you don’t.

What about the other side of the situation, though? What about your gambling losses?

The government has decided to treat gambling losses like hobby losses. That means you can deduct your losses, but ONLY to the extent of your earnings. That means if you win $52 and lose $5,000, you (a) should probably stop gambling, and (b) can deduct only $52 of $5,000 you shelled out.

In terms of logistics, you report the gambling losses on 1040 Schedule A in the “Other Miscellaneous Deductions” area:

other misc deductions

Remember that with all deductions, but especially ones like gambling losses, the IRS expects to see thorough documentation of any amounts you take. Especially if it’s large.

My Taxes Are Paying for Gambling Losses?!

A couple months back, I read an angry tirade in a major publication about all the unfair tax deductions riddling our tax code. One of the three deductions he brought under fire was gambling losses, noting that it was unfair that our taxes were covering other people’s foolish behavior.

I’ll be honest, I don’t gamble. I don’t like gambling. I probably wouldn’t even more than bat an eye if it was made illegal (except for that whole fear of the black market, but that’s another discussion). But claiming that the IRS’s treatment of gambling losses is wrong is unfounded.

Look at it this way: the tax code allows (most) income to be reduced by related expenses. That makes total sense. If I bought a $40,000 car in Year 1, then found out it was a lemon in Year 2 and was forced to sell it for $1,000 in Year 3, no one in their right mind would say I made $1,000 on the transaction. If I started a weird Stampy store on Etsy, spending $300 on supplies to make hats but only bringing in $5, it would take a lot of mental backflips to claim I made $5 on the venture.

Likewise, if I “win” $52 gambling after sticking $5,000 in a slot machine, people would consider me an addict if I claimed to have won anything at all.

The IRS looks at the net position in your gambling winnings. If you ended up bringing in money from your gambling during the year, then you have to report it as taxable. If you lose money, then you don’t get taxed on anything.

Seems sensible to me.

If it bothers you that there’s any sort of deduction at all, take comfort that the income has to be reported by everyone on the 1040, but the deduction is only available to those with Itemized Deductions. That means the gambling loss deduction will typically only be allowed for those who are middle class and above.

For some reason, that last sentence made me feel a whole lot worse about all of this . . .

Anyway, if the IRS allowed all gambling losses above and beyond gambling winnings, then the tirade would have a point. As it is, there’s no subsidizing going on. At least with gambling losses.

  • Jason Hirst

    Is there a carry-forward on gambling losses? Or is it just straight net for the fiscal year?

    • That’s a really good question. No, the losses do not carryover.

      While I was double checking this, I found an interesting note that even professional gamblers are not allowed to carryover losses, which makes even their taxes a bit of a gamble.