Gambling Winnings

You can reduce reportable winnings from slot machine play by using the session method. See Chief Counsel Advice Memorandum 2008-011, Reporting of Wagering Gains and Losses, and IRS Notice 2015-21, Safe Harbor Method for Determining a Wagering Gain or Loss from Slot Machine Play. While both of these explicitly apply only to slot machine sessions, there are some tax practitioners who believe the principle can be extended to other forms of gambling. However, the premise is untested in Tax Court, so proceed at your own risk.

Ira Smilovitz, EA Leonia, NJ

Gambling winnings are reported on a W-2G, not a 1099-G. Form

Bob Sandler

On Monday, October 25, 2021 at 9:54:04 AM UTC-4, Bob Sandler wrote:

Yes, sorry, got my "G's" mixed up.

When I log into my casino loyalty account, they give me a "Win/Loss Statement" which I think is an estimate and unofficial. And also an option for W2-G's of which I have none.

Was 2015-21 finalized? I could only find it as a comment draft.

For those who care...

I only recently began playing video poker. (Prior to this I only played craps and blackjack, with occasional ventures to a low-stakes video poker machine to kill time.) The game I play has a 99.8% return, and I did a simulation of 100 sessions of 1 million hands and found that I had a net profit on 42 of them, so it's possible to win over a fairly long period of time. The machine has options to play for $1.25, $2.50, or $5.00 per play. The associated prize for 4 Aces (the second-highest award) is $300, $600, and $1200, and for a royal flush, $1000, $2000, and $4000. So by playing for quarters ($1.25 = 5 quarters) I run no risk of a win over $1000. However, I'd like to play for higher stakes, particularly on days the casino gives bonus "slot club" points, which based on their redemption value gives me a positive expectation. On my last trip I played about 25 hours and won $930, with 4 hands of 4 Aces but no royal flushes. A royal flush is generally ascribed a probability of about 1 in 38,000, or one pe r 100 hours. Of course your strategy will affect that. Say you are dealt K-T in the same suit and 3 other useless cards. Holding the T will increase your odds of a royal flush (about 1 in 16,200) but decrease your odds of other paying hands like jacks or better, 3 of a kind, and 4 of a kind. The difference in expectation between KT and just the K is fairly small, and if you haircut the royal flush payoff for taxes, it would probably be better to hold just the K. On the other hand if you are dealt AKT suited, it's a big difference between holding all 3 (about 132% of your original bet) and holding just the A (about 46%). You would not hold the AK in this case because you've already decreased your chances of a flush by discarding a suited card and your odds of a royal flush are now not even 1 in 16,200, but zero.

The casino, based on my player's card, can track me exactly. So it seems like I should avoid situations where I could win more than $1200 in a day. If I were +$250 and hit a royal for $1000, it might be in my interest to dump $51 back. It's trivial for me to track my results, since I know what I started the day with. I assume the casino will issue me a W2-G for each day I win over $1200 (because they have to) but not for anything less (because they don't have to, and why should they?).

While the proposed Reg in Notice 2015-21 was never finalized, it was never withdrawn either. The proposed reg was based on the decision in Schollenberger v Commissioner (which itself was based on the Chief Counsel Memorandum from 2008. The "proper" way to report income in this matter on your tax return is to report the income as other income with source "IRS Regulation 2015-X". Also attach Form 8275, Disclosure Statement, to your return explaining that you are using the Session method of tracking your gambling income.

Ira Smilovitz, EA Leonia, NJ

pe

Just because you have winnings under $1200 doesn't mean you don't have to report them and pay income tax on them.

Thanks for emphasizing that. This thread was sounding more like a tax avoidance scheme than a procedural matter.

While that's a valid point, I suspect that a very small percentage of taxpayers would report their gambling income if they made too little to receive a W2-G, especially if they thought their losses exceeded their income.

--

But they don't get to think that only net winnings are reportable if they don't itemize, do they, as losses are reportable only as other itemized deductions up to the amount of winnings. Gross winnings are reportable as other income regardless of whether losses can be reported.

Who said the tax code is fair?

If they're actually trying to make a profit (and who isn't when they gamble?) they may qualify as professional gamblers. In that case they can deduct their losses up to the amount of their winnings. They may also be able to deduct other costs related to gambling, like transportation and lodging.

Qualifying as a professional gambler is not easy and is one of the things the IRS routinely audits.

Ira Smilovitz, EA Leonia, NJ

Over and above what IRA S said (a profit motive is not enough to make you someone who is in the business of gambling), the limitation on what goes on your Schedule C is that the sum of your gambling losses plus your business expenses can not exceed your winnings.... at least to

But that's the point. It is because the tax code is widely considered unfair in the way gambling income vs. losses are treated that most people who earn under the limit for receiving a W2-G are probably not going to report their winnings.

--

I am in fact interested in tax avoidance, not tax evasion.

However, I appreciate the fact that winnings under $1200 are technically taxable. If I win $200 on Monday and lose $300 on Tuesday, I will neglect to report Monday's winnings without a shred of guilt. I guess that makes me a tax evader.

At the risk of ranting or getting political... we all know that IRS are pretty astute at knowing how the world works, and if they choose not to act on something it's generally because they choose to, not because they don't know. We also know that (a) since the advent of electronic gaming (I'm referring to slot and VP machines that run on tickets rather than coins, and player loyalty cards inserted in machines) the casinos have been able to keep really good track and (b) if they decided that when Aunt Matilda actually wins $580 on a slot machine and comes home from her bus trip beaming, they asked the casino to turn over these data and send Aunt Matilda a deficiency notice, they'd have 540 members of Congress raising holy hell. (Yeah, I'm including the delegates from DC, Puerto Rico, Guam, and whatever other territories have non-voting delegates in Congress. The Ted Cruz's of the world would scream about Big Government and the Elizabeth Warrens would scream about picking on the little guy while billionaire s and zillionaires (someone the mere term "billionaire" doesn't seem adequate to the task for people like Elon Musk and Jeff Bezos) go scott-free.

Of course tax practitioners can't actually advise clients to skirt the law. But this seems like as close to a don't ask don't tell situation as I can think of.

Meanwhile, thank you to everyone for the help. It tells me that as long as I keep my daily winnings under $1200 I should be safe. If I were to actually have net winnings for the year, I wouldn't mind reporting it. But that's not something I expect.