March 7, 2012 Leave a comment
Reporting Gains and Losses From Recreational Gambling
Here’s a common scenario: Gavin spends a weekend in Las Vegas. His overall position from gambling is negative, but he made a couple of lucky bets. He receives Form W-2G showing $3,000 in winnings. If he does not report the $3000 on his Form 1040, the IRS computers will be likely to catch the discrepancy between their records and Gavin’s tax return, and Gavin will receive a notice that he owes additional taxes.
If Gavin already has itemized deductions that total to more than his standard deduction, he can deduct up to $3000 of gambling losses on Schedule A (itemized deductions) to offset the winnings.
Here’s how it works:
Scenario 1 – Overall Positive Outcome From Gambling
Gavin’s W2-G says $3,000, but this does not include losses of $2,500 from slot machines. Gavin also spent $645 on transportation and lodging.
Gavin can take the following deductions on Schedule A:
Gambling losses $2,500
Travel Expenses $ 500
Taxable Gain $ -0-
Scenario 2 – Overall Negative Outcome From Gambling
Gavin’s W2-G says $3,000, but this does not include losses of $2,500 from slot machines and $1,000 from other bets.
Gavin can take the following deduction on Schedule A:
Gambling losses $3,000
Taxable Gain $ -0-
In other words, you can offset gambling winnings with gambling losses and expenses, but only up to the amount shown on Form W-2G. A recreational gambler cannot use gambling losses or expenses to reduce his pre-gambling taxable income.
But what if Gavin’s itemized deductions total less than the standard deduction? In this case, Gavin will have to report his $3000 of winnings from Schedule W-2G. Period. He will not be able to offset any of the gambling winnings with gambling losses or other expenses, even though he had an overall loss from his gambling activities.