Gambling return once you factor in taxes

As most of us know, the way to report your gambling wins/losses for (U.S. federal income tax is):

(1) Report the total of your session wins as income.

(2) If you're itemizing deductions, report the total of your session losses as a deduction (but not more than the total of your session wins).

(3) Ignore W-2Gs, since IRS wants you to use the session method.

(source for the above)

That got me thinking: Only about 14% of taxpayers itemize deductions. The other 86% don't, presumably because they get a bigger tax break by using the standard deduction. This is unfair for gamblers who don't itemize, because they have to report their winnings as income, but don't get to offset those wins with losses. (We can't consider that they're getting the offset as part of the standard deduction, because they'd get the exact same standard deduction if they weren't gambling. Once they start gambling, they have losses, but they can't claim any extra deductions.)

So, I was wondering, what does the return look like on gambling once you factor in taxes? This is what it looks like, unless I've made an error. Let's assume Craps, with a 49.3% chance of winning and a 50.7% chance of losing, and a 24% tax bracket.

	Wager	Probability	Return Calculation	Return
Win	$100	49.3%	$100 x 49.3% * (1-24%) =	$37.47
Lose	$100	50.7%	-$100 x 50.7% =	($50.70)
				$13.23

So, that's like a 13.2% house edge. Ouch.

Let's take the case in which you *do* have enough deductions to itemize. Let's say your total wins are $1000 and total losses are $1300. You report $1000 in income, and a $1000 deduction on Schedule A. (You can't claim more losses than wins.) So, you have no net wins, and so by itemizing the house edge on your game isn't affected by taxes like it was if you didn't itemize.

Whether you itemize or not, by reporting your wins as income, you increase your AGI, which could reduce your ability to claim other deductions, such as medical expenses, mortgage interest, and charitable contributions. There are more details about this in my article about gambling taxes.

The thought of paying taxes on my gambling winnings makes me sad, very glad the system here in the UK runs differently.

Quote: blackjacklad

The thought of paying taxes on my gambling winnings makes me sad, very glad the system here in the UK runs differently.

The thought of somebody paying taxes on their gambling winnings makes me happy, very glad the system here in the US runs differently.

Most gamblers use roads to get to their destination. Somebody needs to pay for the roads :-)

Gambling should not be taxed because there is no real income. The overall gambling activity by all Americans in any year is a net LOSS. There is no net income to tax. Instead, the U.S. system taxes "winnings" that aren't really winnings, and losses aren't fully deductible.

If you win $100 on one day and lose $100 the next day, you have no actual winnings, but most Americans are taxed on the $100 "win", and can't offset it with their loss. That's just blatantly unfair.

Quote: MichaelBluejay

Gambling should not be taxed because there is no real income.

???????????
How do professional gamblers survive?
Doyle Brunson hated it when people found out he was a professional gambler and assumed he had a gambling problem and was not making money
Doyle did quite well and should pay taxes because he was making money

You can easily prove your losses. Save your receipts such as sports betting or horse betting.

If you are playing a game where you cant prove losses then dont play that game or figure in taxes as an additional house edge and maybe that will dissuade you from playing

Quote: terapined

The thought of somebody paying taxes on their gambling winnings makes me happy, very glad the system here in the US runs differently.

Most gamblers use roads to get to their destination. Somebody needs to pay for the roads :-)

Taxing the gambling providers rather than the customers is more effective and much easier to enforce.

Obviously I'm talking about recreational gamblers, which are 99.999% of all gamblers.

Quote: terapined

You can easily prove your losses. Save your receipts such as sports betting or horse betting.

You seem to be missing the point. The ovewhelming majority of Americans can NOT offset their gambling wins with losses, even if they can prove those losses. You win $100 and lose $100, you're taxed on the $100 with no offset for the loss (unless you can itemize, and the overwhelming majority of Americans don't).

Quote: MichaelBluejay

Obviously I'm talking about recreational gamblers, which are 99.999% of all gamblers.

Quote: terapined

You can easily prove your losses. Save your receipts such as sports betting or horse betting.

You seem to be missing the point. The ovewhelming majority of Americans can NOT offset their gambling wins with losses, even if they can prove those losses. You win $100 and lose $100, you're taxed on the $100 with no offset for the loss (unless you can itemize, and the overwhelming majority of Americans don't).

People that are too lazy to itemize should have to pay taxes.
I dont give a crap about the 99.9%
You got money to waste on gambling, you should be taxed at a higher rate.
By taxing the winnings, those in society that can afford to pay higher taxes are paying higher taxes.
Its perfect
Offsets all the bogus tax breaks these rich gamblers take advantage of.

Quote: terapined

Quote: MichaelBluejay

Obviously I'm talking about recreational gamblers, which are 99.999% of all gamblers.

Quote: terapined

You can easily prove your losses. Save your receipts such as sports betting or horse betting.

You seem to be missing the point. The ovewhelming majority of Americans can NOT offset their gambling wins with losses, even if they can prove those losses. You win $100 and lose $100, you're taxed on the $100 with no offset for the loss (unless you can itemize, and the overwhelming majority of Americans don't).

People that are too lazy to itemize should have to pay taxes.
I dont give a crap about the 99.9%
You got money to waste on gambling, you should be taxed at a higher rate.
By taxing the winnings, those in society that can afford to pay higher taxes are paying higher taxes.
Its perfect
Offsets all the bogus tax breaks these rich gamblers take advantage of.

It’s not laziness. It’s that the standard deduction exceeds most people’s itemized deductions.

Quote: terapined

People that are too lazy to itemize should have to pay taxes.

Okay, clearly you don't understand how itemizing works.

You can either itemize or take the standard deduction, which is $12,000 for singles and $24,0000 for married couples. The overwhelming majority of Americans don't have enough deductions to make itemizing worthwhile, so they take the standard deduction. It's not laziness, it's just that if they itemized they'd pay MORE taxes.

So, take your typical American who's taking the standard deduction. She has a $100 winning session and a $100 losing session. She has to pay taxes on the $100 "win" and CAN NOT deduct the $100 loss. This gambler had NO net win, no net profit, but is taxed as though she did. This is completely unfair.

Quote: terapined

By taxing the winnings...

Okay, then how do you define "winnings"? If I win $100 at blackjack and then lose $100 on slots, I consider that I had no net winnings. That's what any reasonable person would conclude. What does terapined conclude?

Quote: MichaelBluejay

Okay, clearly you don't understand how itemizing works.

You can either itemize or take the standard deduction, which is $12,000 for singles and $24,0000 for married couples. The overwhelming majority of Americans don't have enough deductions to make itemizing worthwhile, so they take the standard deduction. It's not laziness, it's just that if they itemized they'd pay MORE taxes.

So, take your typical American who's taking the standard deduction. She has a $100 winning session and a $100 losing session. She has to pay taxes on the $100 "win" and CAN NOT deduct the $100 loss. This gambler had NO net win, no net profit, but is taxed as though she did. This is completely unfair.

Okay, then how do you define "winnings"? If I win $100 at blackjack and then lose $100 on slots, I consider that I had no net winnings. That's what any reasonable person would conclude. What does terapined conclude?

No tax
Nobody knows
But
You make a big killing and casino reports it to IRS
Pay the tax regardless of losses unless you itemize and can prove losses.
I just feel that high rollers should pay more taxes and this is the perfect way to accomplish this.

Quote: terapined

I just feel that high rollers should pay more taxes and this is the perfect way to accomplish this.

No, it's quite imperfect, because it hits everyone, not just high rollers. If a lower class American buys five $1 lotto tickets (-$5) and one of them wins $5, she hasn't really won anything, but she pays taxes on the $5 "win". That is the opposite of a "perfect" way to have the rich pay more taxes.

Quote: MichaelBluejay

No, it's quite imperfect, because it hits everyone, not just high rollers. If a lower class American five $1 lotto tickets (-$5) and one of them wins $5, she hasn't really won anything, but she pays taxes on the $5 "win". That is the opposite of a "perfect" way to have the rich pay more taxes.

????????????
Does the 5 she won get reported to IRS
No
Its perfect in how imperfect it is
Penalize people that waste money on gambling
If they hit big. Tax it.
They can easily afford the tax :-) They just hit big
Dont want to pay the tax, dont gamble. I don't

Quote: terapined

Does the 5 she won get reported to IRS[?] No

It's a legal requirement to report it. You seem to be suggesting that people should be committing felony tax fraud.

Quote: terapined

Dont want to pay the tax, dont gamble.

That's an odd way to address the inherent unfairness of the tax law.

Somebody around here is playing $3 million of video poker coin-in and still losing 0.15%, so they've lost more than $3 million.

Quote: MichaelBluejay

No, it's quite imperfect, because it hits everyone, not just high rollers. If a lower class American five $1 lotto tickets (-$5) and one of them wins $5, she hasn't really won anything, but she pays taxes on the $5 "win". That is the opposite of a "perfect" way to have the rich pay more taxes.

Definitely imperfect. I would guess that 99.9% of the gamblers that win $100 aren't reporting it anyway.

Quote: ChumpChange

Somebody around here is playing $3 million of video poker coin-in and still losing 0.15%, so they've lost more than $3 million.

I don't follow, if they are betting $3 million how are they losing $3 million?

Quote: ChumpChange

Somebody around here is playing $3 million of video poker coin-in and still losing 0.15%, so they've lost more than $3 million.

Easy
Tax the 2.55 million he won
So he has 2 million now after taxes
Sounds like this guy has plenty of money to gamble with
Fair is just a word in the dictionary :-)
We have a deficit
No skin off me so tax it

If that player has a $50K bankroll, and just keeps running it through for $3 million of coin-in, and ends the year with a $45.5K bankroll, they've lost $3,004,500. They've lost more than they won and the $4.5K actually lost doesn't even count as a loss.

Quote: ChumpChange

If that player has a $50K bankroll, and just keeps running it through for $3 million of coin-in, and ends the year with a $45.5K bankroll, they've lost $3,004,500. They've lost more than they won and the $4.5K actually lost doesn't even count as a loss.

By that method he would have wins of nearly $3 million dollars.

Play a $5 five coin VP machine and any payout of 240 coins or more generates a W-2G. Just saw a photo where a Jacks or Better machine has a Straight Flush payout crimped at 239 coins instead of 250 coins, but it was a $1 machine.

Say I have 50 gambling sessions:
15x win $10,000
15x lose $2,000
10x break even
5x win $5,000
5x lose $1,000

$175,000 wins
$35,000 losses
$140,000 taxable winnings

Quote: ChumpChange

Say I have 50 gambling sessions:
15x win $10,000
15x lose $2,000
10x break even
5x win $5,000
5x lose $1,000

$175,000 wins
$35,000 losses
$140,000 taxable winnings

I would be very happy to pay taxes on a $140k win

Quote: DRich

I don't follow, if they are betting $3 million how are they losing $3 million?

Chump Change math of course. I'm sure he presents this math on the corona virus thread. With his math we all died several months ago.

I don't know how you pay estimated taxes based on your previous year's winnings.

Quote:

The IRS doesn't explicitly define what a "session" is, so just use a reasonable definition.

For tax purposes, the most reasonable definition is for it to start on January 1 and end on December 31, for amateur level players. Professional level players would do it quarterly, like other businesses do.

That is what I would argue to the IRS or a judge. And if they disagreed, how would they be able to come up with a better accounting of my wins and losses by using a different definition of "session"?

Quote: TomG

For tax purposes, the most reasonable definition is for it to start on January 1 and end on December 31....That is what I would argue to the IRS or a judge. And if they disagreed, how would they be able to come up with a better accounting of my wins and losses by using a different definition of "session"?

Good luck with that.

https://www.journalofaccountancy.com/news/2009/dec/20092454.html

I won't name any names but some people embarrassed themselves in this thread, perhaps they don't know it, ignorance is bliss they say

I don't sympathize with cheaters in anything else, but when it comes to paying taxes on gambling winnings that are not really winnings, let's just say if I became a judge in tax court and this came up very often, I would soon be quietly removed.

I think it is an appalling glimpse of the human heart to see how absolutely everybody 'wants a piece' of the gambler, winner or loser. He is posed as an unavoidably immoral derelict unworthy of any consideration, a sucker who should not be given an even break, and anybody who can benefit from cheating him in some way, wants to, including the IRS. Look at that proposal they recently made, wanting to make W2Gs mandatory at $600

Quote: odiousgambit

I think it is an appalling glimpse of the human heart to see how absolutely everybody 'wants a piece' of the gambler, winner or loser. He is posed as an unavoidably immoral derelict unworthy of any consideration, a sucker who should not be given an even break, and anybody who can benefit from cheating him in some way, wants to, including the IRS.

I agree with this sentiment. I also want to thank Michael for useful advice in this thread. That said, I have been filing Schedule C for my gambling wins for over 20 years. This has save me a lot of money since the TCJA went into effect. It would get me steaming to have to itemize and cannibalize my own standard deduction.

Since 2017, I switched to making all of my charity donations every four years. I made large donations in 2017 before the new tax law went into effect and prepaid 2018 local property taxes. I will make large charity donations in 2021. I will also pay some 2022 local property taxes early. I will still barely get much benefit from itemizing in 2021.

Quote:

Look at that proposal they recently made, wanting to make W2Gs mandatory at $600

This proposal would have reduced the total dollar value of the W2-Gs that I could expect to receive in a typical year by around 50%. I am annoyed that many high-roller gamblers, including GWAE, did not understand this proposal and lobbied against it. The $600 limit was based on a daily netting of losses with wins on any given property. I recently had a session with over $32k of W2-Gs that resulted in a large net loss. Under the IRS's proposal, I would have received no W2-G because my net win was less than $600. Instead, I have a pile of paper that I have to track. I would have loved this new rule. In order to net, though, I would need to have my player card in the machine. If I won and my wife lost on the same day and property, these would not be netted against each other, as I understand it.

Looking for tax deductions?
Online gaming & Casino gambling is fast... exciting... profitable... challenging... and tax deductible!
https://professionalgamblerstatus.com/

Why use Professional Gambler Status for tax return purposes?:
For IRS tax purposes there are non-professional or casual / recreational gamblers and then there are professional gamblers (US Supreme Court Commissioner v Groetzinger 1987). The casual gambler generally benefits by contemporaneously tracking his "daily gambling sessions" and then reporting the daily net gain for each wager type "above the line" rather than reporting only the gross winnings "above the line," as reported on the Form W-2G. The differences can be devastating to the unwary. Illustration by example: Let's assume a casual gambler (regular or sessions) has winnings where he received form W-2G's and 1099's for "comps" and cashback & free-play totaling $400,000 for the year. Let's further assume that at other times during the year he lost $420,000. Bottom line is he is down $20,000 + his travel and other out-of-pocket expenses for the year.

To keep this somewhat realistic, let's say the taxpayer has some interest & dividend income, is collecting Social Security and has a little part-time job earning $10,000 of which $4,500 is put into a Roth IRA.

Then oversimplifying this a bit for clarity in this example:
Filing as a regular casual / recreational gambler the $400,000 is reported on form 1040, line 21 "other income" and then $400,000* is deducted on Schedule A, line 16 "gambling losses" (line 28, before 2018)
* That's not a typo, only $400,000 is deductible, not the full $420,000 in losses.

If using contemporaneously maintained sessions the regular casual / recreational gambler the $400,000 (less his same sessions wagers and losses)* with the resulting net amount being reported on form 1040, line 21 "other income" and then the same amount is deducted on Schedule A, line 16 "gambling losses." (line 28, before 2018)
* That's not a typo, the Schedule A, line 16 deduction is limited to the amount of gambling income reported on Line 21. (line 28, before 2018)

Filing as a professional gambler the $400,000 is reported on Schedule C, line 1 "gross receipts" and then $400,000 is deducted on Schedule C, line 39 as "other costs" or line 48 as "other expenses."

The professional gambler's Schedule C therefore shows a net of zero with zero coming forward to Form 1040, line 12. Basically it is a wash with no negative tax repercussions. (operating expenses may have resulted in a negative amount coming forward to Form 1040, line 12 for years before 2018).

But the casual / recreational gambler has numerous changes starting with a higher Adjusted Gross Income (AGI) and higher itemized deductions, all of which cost him money:

His social security rather than being non-taxable is now 85% taxable because his AGI is over the threshold. This adds $18,000 to his taxable income.
His $12,000 standard deduction is wiped out and replaced with the itemized deduction, this in effect increases his taxable income by $12,000.
Various tax credits, earned income credit, child credits, education credits, and so on are eliminated because his AGI is over the thresholds.
His ability to have a deductible IRA, Roth IRA, or Roth conversion is prohibited because his AGI is over the thresholds.
For tax years before 2018, his $3,650 for each exemption / dependent listed on the tax return is eliminated because his AGI is over the thresholds.
The active gambler who files his taxes as a non-professional gets a raw deal. But if qualified to file as a professional gambler the income tax burden can be reduced by thousands of dollars.

Even better: if the professional gambler is modestly profitable for the year, while this means he is subject to an extra 15.3% self-employment tax (SECA) on top of his regular income taxes - it also opens the door to the earned income credit (EIC) which occasionally can actually exceed the SECA tax, and thereby offsetting it completely.

Having some self-employment income also can allow the professional gambler to deduct health insurance in full without itemizing and without the 7.5% AGI limitation. Also up to a $7,000 IRA contribution can be made or up to a $25,000 self-employed 401(k) plan contribution can be deducted.

Optionally, the forming a separately filing entity (such as a partnership, LLC or s-corporation) can help lock in professional gambler status and further protect all of these tax benefits.

Quote: link provided by ChumpChange

His social security rather than being non-taxable is now 85% taxable because his AGI is over the threshold. This adds $18,000 to his taxable income.

whoa!

Professional Gamblers need to be aware of their responsibilities under the law to maintain adequate books and records and document their activities.
https://professionalgamblerstatus.com/responsibilities.htm

The danger here is that when it comes to an Individual's Professional Gambler Status and Professional Gambler Status Entities, the lack of credible substantiation can lead to a revocation of Professional Gambler Status in its entirety and thus reverting the taxpayer to Casual Gambler Status.

Nobody gets receipts when they cash-out at the cage unless there's other paperwork involved. Even an ATM will spit out a receipt for money paid out. That makes most cage transactions unreportable as a gambler because there's no paper trail. You don't even get a buy-in receipt at the table unless you take a marker.

Quote: MichaelBluejay

Quote: TomG

For tax purposes, the most reasonable definition is for it to start on January 1 and end on December 31, for amateur level players. Professional level players would do it quarterly, like other businesses do.

That is what I would argue to the IRS or a judge. And if they disagreed, how would they be able to come up with a better accounting of my wins and losses by using a different definition of "session"?

Good luck with that.

https://www.journalofaccountancy.com/news/2009/dec/20092454.html

This is really great stuff. These were people who gambled throughout the year, which means it is likely they had multiple winning "sessions". Yet even in Tax Court, the IRS only cared about one, easily tracked winning "session". And despite the court ruling in 2008 about 2005 winnings, it looks like they let all of 06 and 07 slide. With no fines or jail time.

Based on this, if someone only claims winnings that are directly reported to the IRS, they're probably ok. And if it is like I do, where I claim an amount higher than what gets directly reported to the IRS, they would likely accept my accounting. And if they didn't accept it, how would they come up with something different?

Quote: terapined

The thought of somebody paying taxes on their gambling winnings makes me happy, very glad the system here in the US runs differently.

Most gamblers use roads to get to their destination. Somebody needs to pay for the roads :-)

Isn't that why there are registration fees and gasoline taxes? It cost me nearly a thousand dollars to register two cars in my first year in Arizona, plus a fee for a lien release and a change of title. A hefty chunk of the cost of a gallon of gas is supposed to go towards the roads.

Quote: billryan

Isn't that why there are registration fees and gasoline taxes? It cost me nearly a thousand dollars to register two cars in my first year in Arizona, plus a fee for a lien release and a change of title. A hefty chunk of the cost of a gallon of gas is supposed to go towards the roads.

I did say roads
But
What I was referring to is the whole infrastructure and govt agencies in this country supported by tax dollars that we all use.
We have a massive deficit
This country needs all the tax dollars it can get

If I keep winning at craps and losing at blackjack, I'll have to loosen my session definitions to cage cash-outs instead of table numbers. I probably won't need any of this information until I start triggering CTR's on the regular though. The best receipts are casino cashier checks, but some here say casinos aren't even good for that!

Quote: terapined

I did say roads
But
What I was referring to is the whole infrastructure and govt agencies in this country supported by tax dollars that we all use.
We have a massive deficit
This country needs all the tax dollars it can get

When we have alleged billionaires working the system so they pay a few hundred dollars in taxes, it seems obvious to me that the whole tax system is broken. Chasing lower-middle-class gamblers for extra taxes isn't going to get us out of the hole we are in.

The casinos in my area actually pay taxes, and maybe that's why they were built.