Winnings From Gambling

Gambling winnings must be reported. If you win a lot, then the gambling issues you a 1099-MISC or something like that. If you win a little you report the winnings on Line 21 Other Income, and you report your gambling losses on Schedule A line 28. However if you wont $20, you can only report $20 or less on line 28.

It's kind of like reporting just $10 net income (in your example of $20 in winnings $10 in bets) but not quite. If you take the standard deduction then you essentially get no deduction for your loss, and your gambling winnings increase your AGI which then reduces your medical expense deduction, increases AMT phaseout, etc.

As a practical matter I don't know if anyone actually reports small amounts.

Also, it's possible that the driving to Oklahoma is deductible. I've never heard of anyone doing this, but just an idea to look into.

All income is taxable unless exempt by law. However, gambling income is gross winnings while losses are miscellaneous deductions, if you itemize.

The United States income tax is based on voluntary reporting.

J Wiedwald

Gambling winnings are like any other type of income. You don't need to receive an information return such as a Form 1099 or W2-G to report them on your tax return. The gambling winnings are not "voluntarily" reported but are required to be reported on your tax return just like any other taxable income, whether you receive an information return or other notification, or not.

$20 in winnings $10 in bets) but not quite. If you take the standard deduction then you essentially get no deduction for your loss, and your gambling winnings increase your AGI which then reduces your medical expense deduction, increases AMT phaseout, etc. [...]

Only $10 of wagering gain exists in this case. The $10 bet is is the taxpayer's basis in his wager, as such it is excluded from gross income, just like the basis of a capital asset is excluded from gross income from its sale.

In other words, suppose he bets $10 and wins $20. His wagering gain is $10 (gross winnings less basis). Now suppose some other day he bets $20, and loses, with these two bets comprising his total gambling activity for the year. The wagering loss on the 2nd transaction is $20, of which he can deduct on Schedule A up to $10, after reporting $10 gain on Form 1040 line 21.

Economically, he has a $10 loss. Tax-wise, he has at best zero gain/loss (with indirect affects due to AGI, as previously noted), at worst he has $10 gain if he doesn't benefit from itemizing.

I learned this from a recent article in the NAEA publication "EA Journal" by Reece B. Morrel, Jr., CPA.

"Rev. Rul. 83-103, 1983-2 C.B. 148, provides that the ?basis? of a wager is excluded from the amount of a ?wagering gain.? For example, if a taxpayer purchased a $20 lottery ticket that ultimately won $1 million, then his wagering gain is $999,980 and not $1 million. This step is frequently overlooked or mistakenly included as part of the calculation for wagering losses."

To answer the OP, reporting gambling income is required by law, whether or not a W2-G is issued by the casino or other gambling sponsor.

Just to clarify (search IRS website for "frivolous"):

"The Law: The word ?voluntary,? as used [...] in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset."

which is completely contrary to all other definitions of "voluntary". I call B.S. on the IRS here.

The more correct term is "voluntary compliance". Same as traffic laws - effective administration relies on taxpayers and drivers voluntarily complying with regulations, with adverse consequences for those who do not.

That is a distinction without a difference. There is nothing voluntary about "voluntarily" complying so you don't go to prison or face other serious consequences.

I do not voluntarily comply with the tax laws. I comply due to coercion and threat.

But I wonder if many small-time gamblers do that. I mean, there appears to be no easy way that the IRS can check this. I wonder how much tax revenue is lost...

It's hard to say. Suppose 10 million win an average of $500, that's $5B in income. Let's say $1B in Schedule A deductions which is only those people who actually itemize. At 25% federal marginal tax rate (seems to be the average) and 5% for state, that $1.5B in taxes -- federal and state. But that also means $1.5B less that people spend on other stuff, and thus less income (and thus income taxes) for other companies.

You could say the same about any law.

like any other type of income.  You don't

remove ps's Dewey Decimal System computations notwithstanding, tax revenue losses are probably insignificant. Most "small-time gamblers" are net losers.

that is true. Voluntary compliance would mean you don't need to make a law about a subject.

Most laws don't claim to involve "voluntary compliance".

Seth

I wondered how the IRS got stuck with the term "voluntary compliance" in the first place; apparently it is in the regs § 601.602

I think "voluntary" is a sub-optimal choice of word to describe the difference between our income tax collection system, and the tax systems in some other countries, or even our own payroll tax, which is not "voluntary" for employees.

A better choice of terms might be "self-reported" and "self-assessed".

Many if not most laws involve prohibiting something, so there is nothing the individual needs to do or report on a regular basis in order to comply with the law.

However, the laws that require something instead of prohibiting it, such as paying tax, can either be preemptively enforced by the authorities, or self-enforced by the citizens.

The closest thing I could think of is laws that require vehicle registration, insurance, seat belt usage, child car seats, and smog checks. Drivers "voluntarily" comply with these laws, but if they don't take the required action, they might get caught and penalized, or they might get away with it, just as with income tax.

Interestingly, just this morning I read a news item how in CA the state is now setting up more random roadside "smog" checkpoints, where a cop waves some drivers over to run through a 10-15 minute vehicle inspection and to take smog readings. What struck me is that even though such a check is considered "voluntary" and is not supposed to result in any citations or vehicle seizures, the comments from various drivers was that it sure didn't seem "voluntary" to them.

If you only lose money then no income/deduction, so most small-time gamblers report nothing. But those who win have to report. It is a small amount, because if you win a lot then a W-2G is issued.