The Internal Revenue Service (IRS) has historically required that gambling winnings and gambling losses be separately accounted for. The reason for this has to do with the way gambling losses are deducted for tax purposes. Gambling losses are treated as an itemized deduction and reported on Schedule A of the individual income tax return (Form 1040). This creates a problem in the cases in which taxpayers cannot itemize (as is the case when a standard deduction is greater) or in which the taxpayer’s income exceeds a certain threshold (in which case the taxpayer loses part of their itemized deduction via a phaseout). In such cases the taxpayer does not get the full benefit of the gambling losses to offset against the gambling winnings. What the IRS is really after is the reporting and taxation of gross gambling winnings.
New Tax Rule:
According to a recent tax court case (Shollengerger, TC Memo 2009-36) taxpayers are allowed to net gambling winnings during a given day with gambling losses. This is a significant setback to the IRS. As an example, imagine if you were to win $2,000 in the morning at a casino and lose $900 later that afternoon. Prior to this court case, the IRS would require that you report the $2,000 in gambling winnings and then separately itemize the $900 in gambling losses on your tax return. The court instead ruled that the taxpayer in this case was permitted to net the gambling winnings for the day and report $1,100 as net gambling winnings instead of the $2,000 gross amount, the IRS mandated. The court went on to state that this “netting rule” only applied on a daily basis. It stated that a taxpayer could not net gambling winnings and losses for the entire year.
Irrespective of this change in reporting and taxation of gambling activities, there are specific accounting requirements for gambling activities. The IRS requires taxpayers to keep a diary or ledger of all gambling activities. This tax accounting requires the taxpayer to record the following information concerning various gambling activities:
1. Type of gambling activity
2. Location of gambling activity
3. Amounts won and amounts lost for every activity
4. Number of games played
5. Cost of Bingo cards purchased
6. Winnings for each Bingo card
7. Copies of Keno tickets validated by the gambling establishment
8. Copies of casino credit reports
9. Copies of casino check cashing records
10. Records of the number of races bet on (horse, harness, dog)
11. Amount of racing wagers
12. Amount of racing winnings and losses
13. Record of slot machine number
14. Record of slot machine winnings by date and time per machine
15. Table number played (blackjack, craps & roulette)
16. Table credit card data including where credit was issued
All of the above items can be supplemented by receipts, tickets etc.
