Reporting Gains and Losses From Recreational Gambling

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.