Monday, December 14, 2009


Not too long ago I posted about a Tax Court case involving gambling winnings and losses (see my post “A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA”). The NATP year-end tax update seminar I attended in Atlantic City recently brought my attention to an IRS Chief Counsel Advice on the issue with a similar conclusion.

Chief Counsel Advice EMISC 2008-011, issued December 5, 2008, as did the Tax Court discussed in my post, addressed the question - “How does a casual gambler determine wagering gains and losses from slot machine play”.

Here are the facts in the situation that prompted the CCA –

Taxpayer, a retired woman with a fixed income, limits her slot machine play to $100 per visit to the casino. During the year in question she went to the casino on 10 separate occasions. On 5 she lost the entire $100. On 5 she cashed out (left the casino) with $20, $70, $150, $200, and $300. When she cashed out with $20 and $70 she actually had net losses of $80 and $30, after deducting her $100 initial “investment”. On the other 3 visits she had net gains of $50, $100, and $200.

According to the CCA, the taxpayer had reportable gambling winnings of $350 for the year, the total of the $50, $100 and $200 net gains. The amount she would report as taxable income on Line 21 of her Form 1040 is $350, regardless of the amount of winnings that had been reported on any W-2G forms. She would also be able to deduct $350 in gambling losses if she itemized on Schedule A.

It is very possible that she could have won $1000 in a single “pull” during one of her visits, but continued to play. In such a case she would have received a Form W-2G from the casino for $1,000. But she would still report only $350 in “gross” taxable winnings.

The Chief Counsel Advice, like the Tax Court decision, stated that a taxpayer only recognizes a wagering gain or loss at the time he or she cashes out.

The Tax Court decision has stated -

"[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. The fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized."
It is "more better" to report a smaller amount of "gross" gambling winnings on Line 21 of the Form 1040 - even if all of the losses will be wiped out by a Schedule A deduction so that the net taxable affect = "0". The amount of gross winnings reported on Line 21 will increase one's Adjusted Gross Income (AGI) and can therefore reduce a multitude of tax benefits that are phased-out or totally eliminated based on AGI.
In describing the situation that prompted the CCA, the NATP indicated that the taxpayer in question, “properly substantiates all gains and losses incurred in her wagering transactions according to (IRC Section) 6001 and Revenue Procedure 77-29”. NATP goes on to say, “That means keeping an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, which is kept with the tax return records until the close of the statute of limitations on a tax return”.

It is extremely important that a “casual” gambler (or a “professional” one for that matter) keep a detailed diary of the net gambling activity from each visit to a casino or racetrack or whatever. If you play the slots at a casino you should join that casino’s “rewards” club and use the club card to document your activity as an additional back up. This should not take the place of an actual diary.

I do not know if the print-out provided by using the club card will indicate net activity for each visit. Do any of you regular gamblers out there know if it does?

As I suggest in my earlier post –

Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casino, and the net activity from that casino for the day. For example:

November 19, 2009 – Bally’s Wild West - $115.00; Ceasar’s Palace – ($25.00)

November 20, 2009 – Bally’s Wild West – ($50.00)

You may have won $1,000 in one slot pull while at Bally’s on November 19th, but you put $885.00 back into the machines before leaving the casino. So instead of reporting $1,000 you would report only $115.00. The additional $75.00 in losses could be deducted as a Miscellaneous itemized deduction not subject to the 2% of AGI exclusion

When giving your tax professional Form W-2Gs you have received for the year also be sure to give him your gambling diary. He will need to attach to your Form 1040 a statement to reconcile the amounts reported on the W-2G forms to the amount reported on Line 21. If such a statement of reconciliation is not included with the return you will no doubt get a CP 2000 notice and bill from the IRS.


1 comment:

JOHN said...

Even IF such a statement of reconciliation IS included with the return you will no doubt get a CP 2000 notice and bill from the IRS.


An excellent post, as always.