How to calculate expected gambling losses
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By Wei-Chih Chiang, CPA, DBA; Yingxu Kuang, DBA; and Xiaobo Dong, Ph.
Professional gamblers' decadelong streak of being able to deduct a net loss from gambling as a trade or business was ended this year by P.
Although a relatively minor facet of the wide- ranging tax reform package, the TCJA's amendment to Sec.
CHANGING FORTUNES While all taxpayers are required to report gambling winnings in gross income, what related deductions they can claim and in what way depends on whether their gambling rises to the level of a trade or business.
A gambler not in the trade or business of gambling a "casual gambler" can deduct how to make a mechanical slot machine losses as a deduction not subject to the 2%- of- adjusted- gross- income threshold i.
On the other hand, a gambler engaged in the trade or business of gambling "professional gambler" can net gambling winnings against losses and business expenses on Schedule C, Profit or Loss From Business.
Before amendment by the TCJA, Sec.
Consequently, professional gamblers were not allowed to generate a net operating loss NOL from gambling activities.
The Tax Court in Offutt, 16 T.
But the Tax Court did not how to show gambling losses on tax return so consistently, as discussed below.
Meanwhile, the Supreme Court in Sullivan, 356 U.
Then, in Groetzinger, 480 U.
In 2008, the IRS article source Chief Counsel Advice Memorandum AM 2008- 013 concluded that the IRS should no longer follow Offutt.
The Tax Court in Mayo, 136 T.
Therefore, professional gamblers were able to generate an NOL from gambling activities — until the TCJA amended Sec.
For more on Mayo and factors by which courts determine whether gambling is a trade or business, see "," JofA, April 2012.
TAX REFORM RESETS THE RULES The TCJA, however, put an end to professional gamblers' ability to deduct nonwagering business expenses in excess of net wagering income.
The House of Representatives described this provision in its committee report H.
The provision clarifies, for instance, an individual's otherwise deductible expenses in traveling to or from a casino are subject to the limitation under section 165 d.
Consequently, the deduction of professional gamblers' nonwagering business expenses is limited by Sec.
The following example and the chart, "Before and After the TCJA," illustrate the amendment's effects.
If G is a casual gambler, the amendment of Sec.
However, under the amended Sec.
GAINS FROM WAGERING TRANSACTIONS Amended Sec.
Courts generally have held that "gains from wagering transactions" within how to show gambling losses on tax return meaning of Sec.
Gross income does not include the return of capital Doyle v.
A gambler thus would be entitled to exclude the cost of a winning ticket from its associated gross winnings.
Nevertheless, such recovery of capital could not include the cost of tickets that did not win Hochman, T.
In the past, courts have considered various items as gains from wagering transactions.
The annual payments lottery winners receive are treated as their gambling winnings in the year the payments are received Rusnak, T.
However, an excess gambling gain in one year cannot be offset by an excess gambling loss in another year Skeeles, 118 Ct.
The Fifth Circuit in Humphrey, 162 F.
As long as the losses derive from wagering transactions, they could be used to offset gains from any such transaction.
It is not necessary for the wagering gains to be related in any way to the losses Scott-Nickels Bus Co.
For example, the taxpayer in Presley, T.
Gamblers could use gambling losses to offset the value of complimentary goods and services "comps" they receive from a casino.
Comps constitute gains from wagering transactions because the relation between the comps and the gambler's wagering is "close, direct, evident, and strong" Libutti, T.
INCOME THAT IS NOT GAINS FROM WAGERING TRANSACTIONS In addition, courts have considered the following income sources to not be gains from wagering transactions: Tokes Traditionally, casino dealers receive "tokes" from patrons who play at their tables, in the form of bets the patron places for the dealer's benefit.
Tokes are considered compensation for the recipient's services and, thus, should be treated as ordinary income rather than either wagering gains or gifts Bevers, 26 T.
Take-offs A take- off is the fee that the house charges card players to play poker at the casino.
Because take- offs serve as seat rental charges, those the house receives are not gains from wagering transactions and cannot be used to offset the house's losses from such transactions Nitzberg580 F.
Similarly, the taxpayer in Boyd, 762 F.
The contractual share of take- offs the taxpayer received was not his gains from wagering transactions and could not be offset by his losses from those transactions.
Theft income from stolen betting tickets The taxpayer in Collins, T.
He returned the entire winnings to his employer and turned himself in at the end of the day.
Further, the court held that the theft income from the stolen tickets was ordinary income and not gain from a wagering transaction.
Therefore, the taxpayer could not use his losses from wagering transactions to offset his theft income.
LOSSES FROM WAGERING TRANSACTIONS Professional gamblers can deduct business expenses against their gains from wagering transactions again, subject now to limitation under the TCJA even if how to show gambling losses on tax return gambling activities are involved.
For example, in Harbin, T.
When the losses from wagering transactions exceed the gains, the excess losses cannot be carried back to previous years Estate of Todisco, T.
Casual gamblers cannot claim a gambling loss deduction for nonwagering expenses, such as transportation, meals, and lodging Whitten, T.
Courts have considered the following items losses from wagering transactions, such that their deduction is limited to wagering gains: Unsold tickets The taxpayer in Miller, 792 F.
The Third Circuit noted that the taxpayer retained the tickets and continued to buy more tickets than he could sell, indicating that he was betting that one or more of the unsold tickets would be drawn.
Therefore, the cost of these unsold tickets should be treated as gambling how to show gambling losses on tax return rather than ordinary business expenses, the court held.
Losses by shills Typically, casinos engage persons referred to as "shills" to whom they agree to provide a certain sum of money or chips to play.
The casino will absorb any loss, but gains are split between the shill and the casino.
The Tax Court in Nitzberg, T.
However, on appeal, the Ninth Circuit Nitzberg580 F.
State tax assessment A state income tax assessment on gambling income of an individual in the trade or business of gambling is tied directly to a taxpayer's gambling activities and, hence, is subject to the limitation of Sec.
Buy-in and rake Tournament poker players are required to pay the tournament organizer a " buy- in," or entrance fee.
The casino retains a portion of this amount as an administrative fee, and the remainder goes directly into the prize fund "pot" that will be paid out to the tournament's winners.
The Tax Court in Tschetschot, T.
However, the IRS in Hom, T.
While the Tschetschot and Hom cases are inconsistent, this inconsistency is irrelevant under amended Sec.
Regardless of the nature of buy- in and rake fees, both are subject to the Sec.
Takeout In horse- race betting, "takeout" refers to the share of the entire betting pool that the event manager the track is specified to receive.
The track uses the takeout to pay its expenses, such as purse money for the horse owners, taxes, license fees, and other state- mandated amounts, and keeps any remaining amount as its profit.
As a professional gambler, the taxpayer in Lakhani, 142 T.
The Tax Court noted that the taxes, license fees, and other expenses discharged from the takeout were expenses imposed upon the track, not the bettors.
Therefore, the taxpayer was not allowed to deduct his share of the takeout.
POTENTIAL ISSUES Taxpayers should be aware of the following potential issues, some of which may require more clarification by either courts or the IRS: Treatment of 'fee to play' The courts treat the "fee to play" inconsistently, as it may be referred to as take- off, buy- in, or rake.
The Ninth Circuit in Boyd held that take- offs the casino received or awarded to a contract player were not gains from wagering transactions.
The Tax Court in Mayo implied that take- offs gamblers paid were nonwagering business how to show gambling losses on tax return />On the other hand, the Tax Court in Tschetschot considered poker players' losses of the buy- in as losses from wagering transactions, while in Hom, rake was treated as a business expense.
This inconsistency raises two issues.
First, there is no statute or theory to support the different tax treatments of the entry fees based simply on whether the taxpayer is the recipient or the payer.
Second, for professional gamblers, the inconsistency between the Tschetschot and Hom cases does not matter under Sec.
For casual gamblers, however, this inconsistency has created chaos.
Naturally, casual gamblers prefer to follow the Tschetschot case and treat their fees to play as losses from wagering transactions, as they are not allowed to deduct any gambling- related nonwagering expense.
Treatment of tokes Are tokes that dealers receive considered the giver's winnings and losses?
The courts have held that tokes are not dealers' gains from wagering transactions, as noted above.
However, there is no precedential ruling with respect to the giver's treatment of the toke.
As a toke belongs to the giver until the bet is won Bevers, 26 T.
Reportable gambling winnings How to play 5 card poker game Regs.
In bingo and slot machines, the amount of the reportable gambling winnings includes the amount wagered.
Conversely, it is reduced by the amount wagered for keno.
Taxpayers should be aware of this difference when they receive Form W- 2G, Certain Gambling Winnings.
AN END TO NOL s Before the TCJA, under the Tax How much can make playing online holding in Mayo, professional gamblers were allowed to fully deduct their to a csgo gambling site business expenses beyond wagering gains.
Although, under the TCJA, the amendment how to show gambling losses on tax return Sec.
In the meantime, professional gamblers' winning streak apparently has come to an end.
About the authors Wei-Chih Chiang, CPA, DBA; Yingxu Kuang, DBA; and Xiaobo Dong, Ph.
To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at or 919-402-4434.
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HOW TO FILE YOUR TAXES ON GAMBLING WINNINGS IN OKLAHOMA FROM REAL CPA
In other words, you can't have a net gambling loss on your tax return.. They indicate that an accurate diary or similar record that is regularly maintained by the ...
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