March Madness is upon us, and many—including players, coaches and gamblers—will soon enjoy the spoils of victory, while some will undoubtedly experience the agony of defeat. Taxpayers often run into challenges in the proper tax reporting of gambling winnings and losses. This is because gambling winnings are fully taxable, while gambling losses are not simply an offset against winnings.
Winnings must be reported as “other income.” Losses are separately reported. To measure your winnings on a particular wager, use the net gain on the wager. For example, if a $200 bet at the track turns into a $1,000 win, you have won just $800, not $1,000. If you lose $500 on a different race, however, you can't simply offset this amount against your $800 win.
It’s important to track your losses accurately. Losses are deductible, but only as itemized deductions for most, as long as your total itemized deductions exceed your standard deduction. The Tax Cuts and Jobs Act (TCJA) increased the standard deduction to $12,000 for single filers and $24,000 for taxpayers filing jointly. Thus, if you take the standard deduction, you cannot deduct your gambling losses. As the TCJA suspended miscellaneous deductions subject to the adjusted gross income 2 percent floor from 2018 through 2025, if you do itemize, the gambling losses fall into the category of “other itemized deductions.”
In addition, your gambling losses are only deductible up to the amount of your gambling winnings. That is, for tax purposes, losses can “wipe out” gambling income but you can never show a gambling tax loss. Prior to TCJA, professional gamblers—engaged full-time in the trade or business of gambling with a clear profit motive—were able to deduct gambling losses in excess of winnings. But professional gamblers have now been dealt a bad hand, as the same rule applicable to casual gamblers now applies. However, unlike casual gamblers, professional gamblers can deduct losses as business expenses (on Schedule C, for example) without having to itemize deductions.
Be sure to keep accurate, contemporaneous records of your losses during the year. A log indicating the date, place, amount and type of loss as well as the names of any people who were with you is important to maintain in the event of an IRS examination. Maintain all documentation, such as losing tickets, checks or credit slips. You should also save any related “side” documentation: For example, if you have losses on a trip to Las Vegas, save the hotel bill and plane ticket as such expenses are deductible, as well as your records on the gambling losses themselves. The IRS is keenly aware and watches for those taxpayers who pick up an unlimited amount of losing tickets at a racetrack. IRS, upon examination, will require more data and documentation to substantiate gambling loss deductions.
Good luck, March Madness gamblers. And if you win, remember to report such gambling winnings on your 2019 income tax return. For gamblers of all types, such gambling activity continues to be a red flag for the IRS. Under examination, revenue agents often do not trust the reported losses and often explore unreported winnings. Without adequate support and documentation, whether you are a casual or professional gambler, the IRS may end up as the big winner.