Deducting Gambling Losses

The IRS Threshold

On a federal return, gambling losses are capped at the amount reported as winnings. Gamblers cannot report only the net. The IRS does not allow gamblers to simply offset losses against winnings when they file a return. Gambling winnings are taxable income, and losses can only be deducted if reported on an itemized return.

What the IRS Requires

The IRS requires contemporaneous records in order for gambling losses to be considered legitimate itemized deductions. That means that gamblers need to keep records of their gambling activities in real time, and show a complete picture of both winnings and losses. Simply maintaining a bank account statement is not enough, the IRS says - the Internal Revenue Service requires gamblers to track their losses separately from wins.

"Your records should show winnings separately from losses. You may use a diary, log, or similar record. It should include:

• The amount of both your winnings and losses
• The date and type of gambling activity
• The name and address or location of the gambling establishment. "
• IRS Topic No. 419, Gambling Income and Losses

The IRS suggests that gamblers maintain an accurate diary or other similar record in order to support a loss deduction, with the caveat that the IRS definition of a "contemporaneous record" is not well-explored in IRS language. In fact, an unbiased look at what the IRS actually says about gambling losses, as stated in Publication 529, reveals no insistence on session-to-session tracking. Publication 529 does state that taxpayers should keep "an accurate diary or similar records of your winnings and losses." But that's it.

If the publication were absolutely adamant about recording winnings and losses by gaming session, wouldn't it say something like: "Place your winnings and losses in a diary - a similar record will not suffice"? Or perhaps: "Maintain one entry per each gaming session." Or even: "Log wins and losses separately, no exceptions!" But there's no such language in Publication 529. There is, however, a note that weekly or monthly summaries are OK:

"And, keep a summary that provides totals for:

• The number of winnings transactions
• The number of losses transactions
• The gross winnings"

It's clear, from a straight reading of Publication 529, that the IRS expects some accuracy in loss tracking, and expects to see these records supported by receipts or logs that are similar to a diary. But Publication 529 just doesn't dictate that one must maintain separate logs of each individual session. An "accurate diary," just by its ordinary meaning, already sounds like something you'd rather keep online than on paper, and "similar records" could refer to receipts, bank statements, or other documents that provide a snapshot of what a diary might have.

Published in December 2020 PUBLICATION 529 (CAT. NO. 15066U) MISCELLANEOUS DEDUCTIONS https://www.irs.gov/pub/irs-pdf/p529.pdf

What Counts as a Loss

The IRS defines losses as gambling expenditures plus the actual cost of wagers. Travel costs and related expenses may also count as gambling losses. "Gambling losses include the actual cost of wagers plus expenses incurred in connection with the conduct of the gambling activity, such as: transportation costs for trips to and from a gambling venue."

• IRS Publication 529, Miscellaneous Deductions