Article Posted on 02/18/2020
Gambling activities are taxed differently from most other types of income. Taxpayers are often surprised that their gambling winnings are not simply netted with their gambling losses to determine the net amount taxed.
To determine your winnings, you should include only the net gain on the wager, but you cannot offset losses on other transactions. For example, if you place a $20 bet at the race track and win $100, the $80 gain is taxable. But, if you later lose $50 on a different race, you are not allowed to net the $80 gain with the $50 loss to determine your gambling winnings. The winnings and losses are tracked separately.
Gambling winnings are fully taxable on your tax return as “Other Income”. Gambling losses are deductible, but only as itemized deductions. If you do not itemize deductions and instead use the standard deduction, your gambling losses are not deductible. This fact pattern has become more prevalent with the tax law change that increased the standard deduction starting in 2018.
In addition, your gambling losses are only allowed to the extent of your gambling winnings for that tax year. For example, if your total gambling winnings for the year are $4,000 and your losses are $6,000, you report Other Income of $4,000 and $4,000 of gambling losses as an itemized deduction.
Documentation of gambling losses is critical. This deduction is heavily scrutinized by the IRS. You should maintain logs showing dates, places, and amounts. Keep copies of losing tickets, credit slips, and documentation of related travel (hotel bills, plane tickets) if applicable.