Gambling Taxes (U.S. income tax)

“Michael Bluejay's page is a good source on how taxes are supposed to be done.” — Wizard of Odds

Last update: April 2023

Disclaimer: I'm confident about the accuracy of this article, and I cite my expert sources very well, but I'm not a CPA.  I did study accounting at the university level (with an A in Financial Accounting) and got the highest possible score on the SAT Test of Standard Written English (so I should be expected to be able to interpret tax instructions well), but ultimately I'm not an accountant by trade.

This article covers U.S. income tax, not taxes for individual states or other countries. It also applies only to recreational gamblers, not professional gamblers.

Quick example of how to report

Your data:

1. Wins:  $50,000 (total of winning sessions from your journal)
2. Losses: $60,000 (total of losing sessions from your journal)
3. W-2G total:  $15,000

The proper way to report it is:

1. $50,000 win on Schedule 1.
2. $50,000 loss on Schedule A.  (Not $60,000, because you can't claim more losses than wins.)
3. Ignore the W-2G.  W-2G's are irrelevant, all but useless, and ought to be abolished. (sources)

However, if you received any W-2Gs, then reporting as above can possibly result in higher taxes.  So, if you received any W-2Gs, then see my detailed instructions for how to handle them.

Summary

1. You're supposed to report anything you win as income.  If you win a prize rather than cash, you're supposed to report the cash value of the prize.  Just because you don't get a W-2G form doesn't mean the win isn't taxable.
2. You don't subtract losses from wins and report the net.  Instead, you report your income as the total of all winning sessions.  (For 2021 returns, it goes on Schedule 1, Line 8b.)  Separately, you report your loss as the total of all losing sessions (on Schedule A, if you itemize; see the sidebar below), but the losses you claim can't be more than the amount you won.
3. If you received any W-2G forms, you'll need to choose whether to report the W-2G figures -OR- your session figures.  I'll cover that in great detail below.
4. You're supposed to keep a journal to document your gambling sessions.  From this journal, the total of your winning sessions becomes your gambling income, and the total of your losing sessions becomes your losses.  You can deduct the losses on Schedule A if you're itemizing.  You can also deduct "expenses incurred in connection with the conduct of the gambling activity, such as travel to and from a casino" (Pub. 529).  Finally, you can't deduct more than you won.
5. None of this is fair.  There's a whole host of reasons why U.S. gambling taxes aren't fair, and why lots of other countries don't tax gambling wins.  The main reason it's unfair is that gambling wins aren't really income.  (The total result of all Americans' gambling activity each year is a net loss, so there is truly no actual income to tax.)  See more on the unfairness of gambling taxes.
6. The tax requirement applies to permanent residents as well.  Visitors to the U.S. are taxed on slot machine winnings but not on winnings on most kinds of table games. (Forbes, in the comments, and USC § 871(j))
7. Comps are sometimes taxable, sometimes not.  This is a gray area, since the IRS hasn't defined it clearly, but tax professionals advise that if the casino gives the comp as a gift, it's not taxable (e.g., free room offer you got in the mail, where the casino hopes you'll play, but doesn't require you to), while if you earned it through your play, it is taxable (e.g., cashback or a buffet that you got from accumulating points through slot play). (CPA Marissa Chien, paraphrase of that book, tax attorney Brad Polizzano)  However, taxable comps can be offset by gambling losses. (tax attorney Brad Polizzano) 
8. This article covers federal income tax only, not state income tax.  Tax laws vary from state to state and there's no way I can be knowledgeable about all of them.  Significantly, I've heard that some states don't allow session accounting for wins & losses, and that some states don't allow any gambling losses to be deducted.  (No, I don't have a list of such states.)  However, I can tell you that if you travel to a different state and win money, you generally owe tax in your state of residence, not the state where you gambled.

Some losses are deductible

You can deduct your gambling losses, but there are some catches:

1. You can deduct only as much as you won, not more.  That means you can never show a net loss for gambling.  For example, if you lose $1000 playing slots, and the next day win $400, and that's the only gambling you do for the year, you can deduct only $400 of your slot loss.  You'll report a $400 win and a $400 loss.
2. Starting in 2018, you can deduct related expenses, like travel to and from the casino (Pub. 529), but again, your losses can't exceed your winnings.
3. You can deduct only if you're itemizing your deductions.  See the sidebar at right for an explanation of what itemizing means.
4. You can't carry over losses from one year to the next.  You report wins and losses for the current year only.
5. Nonresident aliens can't deduct their losses, even though they're taxed on winnings. (Forbes)

Separating wins from losses

You're supposed to report wins and losses separately.  You do not report the net win for the year.  If you win $1000 and lose $750 in one year, you don't report a $250 win.  You report a $1000 win and a $750 loss. (IRS Pub. 529, Nolo)  Wins go on 1040 Schedule 1, and losses go on Schedule A.  I can't stress this strongly enough:  do not report the net win.  Report wins and losses separately.

Note that if you never had a winning session then there's no duty to report.  There's nothing to deduct anyway, because you can deduct losses only to the extent of your winnings.

But all this raises the question:  How do you keep track of wins and losses?  The answer is that the IRS says to keep a diary of your session net result. (source)  For example:

See below for more info on the diary format.

At the end of the year you add up all your session wins and count that as your winnings, and you total up all your daily losses and count that as your losses.  In the above example, we'd report $450 in winnings (on Schedule 1), and $450 in losses (on Schedule A). (sources)  Note that we can't deduct the entire loss, because we can't claim more losses than winnings; our losses our limited to our wins.  So we report a $450 loss and not a $500 loss.

Some online casinos will provide you with a report detailing your wins and losses.  They track every single bet, and count every winning bet as a win, and every losing one as a loss.  If you have such a report, you can use it, but most online casinos don't provide such a report, and land casinos never do.  Note that the yearly win/loss statements that land casinos give out can't be used as primary evidence, since they don't track all bets, they generally carry a disclaimer that they're not to be used for tax purposes, and the IRS generally won't accept them as main evidence.

Format for the diary

What's a “session”?

The IRS doesn't explicitly define what a "session" is, so just use a reasonable definition.  When you take a break for a meal or some other kind of entertainment, or when you cash in your chips, consider your session over.  It's not clear whether you have to consider your session over if you simply switch games (e.g., slots to blackjack), or if you walk 30 seconds from one casino to the next (like in downtown Vegas where they're close together), but it couldn't hurt.  You can have multiple sessions in one day.  I don't think it would be reasonable for a session to span more than a day, unless you played constantly without stopping to eat or sleep.

Some forum members opined that they think they can treat the entire year as one long session, but I'm confident that the IRS would never accept that.  In fact, I think they've explicitly rejected that argument before, but I can't find the case now.  Certainly in IRS Notice 2015-21 they propose that a session should never span more than a calendar day.  That proposal was never officially finalized, but since we know the IRS thinking on this matter, that's how you can expect them to treat it if you have a dispute.

What needs to be included in the diary?

The IRS says your diary should include, at a minimum:

1. Date and type of specific wager or wagering activity
2. Name & address or location of the gambling establishment
3. Name(s) of other person(s) (if any) present with you at the gambling establishment
4. Amount won or lost  (source)

Revenue Procedure 77-29 says you could also record things like the table number for table games, and slot machine number for slots.  It couldn't hurt. (source)

Diary must be contemporaneous

The diary must be contemporaneous, meaning recorded as it happens.  You can't wait until the end of the year and then try to piece it all together.

It's unclear whether you have the burden of proof to prove that your diary was contemporaneous, or if the IRS has the burden of proof to prove that it wasn't.  For example, if you record everything in the notepad app on your phone, there's no automatic timestamp for each entry, and usually not even a creation date listed for the note file.  On the other hand, for years the IRS accepted hand-written diary entries which have no machine-generated timestamp, so if they'd accept that, then why wouldn't they accept a phone notepad?

I don't have good answers to these questions.  I've never heard of the IRS rejecting a diary because it didn't look contemporaneous, but there might be cases I don't know about.  So, here's my feeling about how to handle things:

1. Personally, I just use the notepad app on my phone.  But these days I generally have no more than $1000 in wins or losses.  If I won considerably more, I might consider using machine-generated timestamps.
2. If you want a machine-generated timestamp for a phone-based notepad, email the contents of the note to yourself each day.
3. If the IRS rejects your contemporaneous diary as not being contemporaneous, fight it.  You have the right to appeal any IRS decision.  This is really a "you've got nothing to lose" scenario:  Worst case is that you don't get any relief, so you're no worse off than before you appealed.  Best case is they rule in your favor, which happens frequently.

Consequences of not keeping a diary at all

If you don't keep a diary, you could wind up owing lots more in taxes.  Bill Remos won $50k in a blackjack session, and had at least $50k in losses for the year, so he shouldn't have owed any taxes, but he couldn't substantiate his losses, so the IRS made him pay the taxes on his $50k win without letting him deduct any losses to offset his winnings.  Ouch. (Nolo)

In addition to the diary, you can also use supplementary documents like hotel and airfare receipts. (source)  You can use win/loss statements that casinos provide at the end of the year as backup evidence to supplement your diary, but not as your main evidence.  As one tax attorney says, "The IRS has consistently and regularly rejected the use and reliance upon such information. The primary reason for the IRS belligerence is simply because the casinos explicitly state in their reports that the reports are inherently inaccurate and should not be used for accounting purposes." (Reece B. Morrel Jr., CPA JD)  The IRS also likes other supplementary evidence that you were at the casino, such as airline tickets or receipts from casino restaurants and gift shops.

What to do with W-2G forms

The casino will issue you a W-2G form when you hit certain jackpots (such as $1200 on a slot or other machine).

It's widely believed, quite wrongly, that you're supposed to enter the total of your W-2G's as your gambling income.  Many accountants get that wrong, as well as TurboTax and other tax software.  (source for the fact that they get it wrong: Reese Morrel Jr., CPA, and my own experience)  The proper way to report your wins is to total your winning sessions.  For proof that you don't simply transcribe the W-2G amounts, see the sources at the end of this article.

Here's the summary of the two methods:

The method that results in higher AGI (Adjusted Gross Income) could: 

1. Reduce the amount you can deduct for 19 different deductions. (source)
2. Increase your Medicare premiums. (source)
3. Make you owe lots more in state taxes.

Since the IRS will generally accept either method, many gamblers choose the one which gives them lower tax liability.  So here's how many gamblers choose to handle it:

1. Prepare draft returns (federal + state) listing your session wins as income on Schedule 1, and your session losses as a deduction on Schedule A.
2. Prepare another set of draft returns listing your W-2G total as income on Schedule 1.  For your losses on Schedule A, if you had a net loss for the year, use the same figure as your W-2G win.  If you had a net win for the year, then for your Schedule A losses, use whatever number will result in your W-2G win minus Schedule A loss equaling your session wins minus session losses.  (Example 1:  Your session wins were $2000, your session losses were $1600, and your W-2G is $1200.  Session wins - losses is $2000 - $1600 = $400.  Your reported losses will be $1200 - $400 = $800.)
3. If there are no downsides from the W-2G method (didn't reduce your deductions, increase your Medicare premiums, or increase your state taxes), then use the W-2G method.  That avoids a problem where your return is reviewed by an IRS clerk who's unfamiliar with session accounting and they send you a letter saying you didn't report properly.  (Note, the W-2G method is technically incorrect, but ironically you're less likely to get pushback from the IRS by using that method.  If you choose to go this route, that's your decision, I'm certainly not advising you to report using the incorrect way.)
4. If the session method results in less tax liability than the W-2G method, then use the session method.  Include Form 8275 (disclosure statement) with your return as follows:
• Part I, (a):  "Chief Counsel Memorandum 2008-011 and Shollenberger v. Commissioner"
• Part I, (c):  "Session method of gambling winnings/losses"
• Part I, (d):  "1040 Schedule 1"
• Part I, (e):  "8b" [or whatever line it is on that year's form]
• Part I, (f):  [the amount on that line]
• Part II:  "My reported gambling winnings don't match the W-2G total because I used session accounting to arrive at the total for winnings, as per Chief Counsel Memorandum 2008-011 and Shollenberger v Commissioner, which established that wins and losses should be tracked by session, and that 'The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000.'  For more, see Easy.Vegas/gambling/taxes#sources"

Once I received a fistful of W-2Gs for many thousands of dollars, but never had a winning session, so I had no wins to report, so I didn't.  Despite the fact that my W-2Gs were sky high and I reported no gambling income, I never heard a peep from the IRS.

However, some taxpayers said that they got warnings from the IRS saying that their reported winnings don't match the W-2G.  This just goes to show that even many rank-and-file IRS clerks (or some versions of the IRS computer software) aren't familiar with how gambling taxes are supposed to be reported.  That's why in the explanation above, I note that many gamblers use the W-2G figures if they result in the same tax liability as session accounting.

On a popular gambling forum, some members made the wild suggestion to report the W-2G amounts as income, even if it results in more tax than the session method, to avoid any trouble with the IRS.  They conjure up images of having to hire lawyers and go through time-consuming court cases.  But that almost certainly will not happen.  Using Form 8275 as I suggested above will likely head off almost all problems with the IRS, and if you do get a notice from them, simply replying with a letter with an explanation should resolve the situation in almost all cases.  Whenever the IRS has sent me a notice about something they mistakenly think I calculated wrong, I simply replied with a letter explaining how I properly calculated the amounts, and then I never heard from the IRS again about that.  Here's also a post by one gambler who didn't report W-2G amounts, got a letter from the IRS, responded with his own letter, and the IRS was satisfied.  (He also revised his return to separate wins from losses as I advise in this article, rather than reporting the net as income.  His revisions didn't result in any extra tax.)

How to account for Bitcoin

The preferred way to deposit into online casinos and to withdraw winnings is with Bitcoin.  This adds another layer of hassle for tax reporting.  Here's how that works.

The IRS treats virtual currency as property. (source)  So, you report Bitcoin gains and losses on Form 8949, same as you would for stocks or other investments.  Note, your Bitcoin gains and losses are not the same as your gambling wins and losses.

Let's work through a deposit example:

1. You buy $1000 of Bitcoin at Bitstamp, receiving 0.0909 BTC (the currency abbreviation for Bitcoin).
2. You deposit the 0.0909 BTC into an online casino and receive $1000 credit for it.  This counts as a "sale" of your BTC.

So you bought some property for $1000, and sold it for $1000, and thus have no gain on the sale.  I've been unable to find out whether you have to report a sale that has no gain or loss, but it certainly couldn't hurt.  (If you have a credible source [link] that answers that question, then please let me know.)

However, it's unlikely that you'll get exactly $1000 for your BTC deposit.  If you receive slightly more, you have capital gains income, and if you receive less, you have a capital gains loss.  These go on Schedule D.

Now let's walk through a withdrawal example:

1. Your balance when you withdraw is $900.
2. You request a withdrawal and the casino sends you 0.856 BTC.

This is not a taxable event.  It's not taxable until you sell your BTC.  At whatever point you sell your BTC, you record the sale as being "purchased" for $900, and sold for whatever you get for it.

Yes, it's not fair

There are a number of aspects of the gambling tax that are decidedly unfair.  Let's tally them.

1. Gambling wins aren't really income.  The total of all Americans' gambling activity each year is a loss for the players.  That means there is no income to tax.  That's starkly different from the sum of all Americans' wages, which is clearly income.  Lots of countries don't tax gambling wins, because they recognize that it's not really income.
2. Net wins are taxable, but you can't deduct net losses.  As we saw above, you can't deduct more than you win.  If you win $1500 and lose $500, you pay tax on $1000 of winnings.  But if you win $500 and lose $1500, you don't get to claim a $1000 loss.  The easiest solution to this problem is to simply not tax gambling winnings at all.  The overall result from all Americans' gambling in a year is a net loss, so there's no real income to tax anyway.
   
3. You can deduct your losses only if you itemize. (For an explanation of "itemizing", see the sidebar above.)  If you have $2000 in wins and $2000 in losses, you'll have to itemize on Schedule A in order to deduct your losses.  Of course, if your standard deduction is more than your itemized deductions, you'll want to go with the standard deduction.  But that means you don't get to deduct your losses, specifically.  You're gonna pay taxes on $2000 in winnings with no way to offset it.
   
   Those who would claim that you are deducting your losses as part of your standard deduction are missing this point:  If you didn't gamble at all, you'd still get to take the full standard deduction.  But by gambling and having wins that equal losses, you still use that same standard deduction, and thus have to pay more taxes compared to not gambling at all—even though you didn't have a net win.
4. Gambling losses can't be carried over from year to year.  Let's say you lose $1000 a year for three years by playing slots, then in Year 4 you have a net win of $2000.  So over four years you lost $1000.  However, in year 4 you'll pay taxes on the $2000 win, and never get any credit for your $3000 in losses for the previous three years.  Too bad.
   
5. Reporting wins separately from losses increases your AGI, reducing your ability to make other deductions.  A $5000 yearly win and a $5000 yearly loss means you pay no taxes, but because you report wins separately from losses, your AGI (Adjusted Gross Income) goes up by $5000.  That might be great if you're trying to get a loan and the bank uses your AGI as your income, but the downsides are:
1. Your state taxes might go up substantially.
2. You might lose the ability to deduct medical expenses, mortgage interest, and charitable contributions, among other things (source).  (Here's a detailed article on limitations on itemized deductions.)
3. You might face higher Medicare Part B and D premiums. 
6. To get around this, some taxpayers might (questionably) choose to report their winnings as their W-2G amounts rather than their session wins. (more on that)

Additional Sources

• IRS Tax Topic 419:  Gambling Income and Losses
• IRS Publication 529:  Miscellaneous deductions

• Ron Wilburn, CPA.  Reports on IRS case Shollenberger v Commissioner, which established that wins and losses should be tracked by session, and that "The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000."
• IRS Notice 2015-21.  "Gross income from a slot machine wagering transaction is determined on a session basis."
• Randall Brody, IRS Enrolled Agent. "You add up all your winning sessions during the year to determine your winnings that are to be reported on Line 21 of the Form 1040 and then do the same by adding up your losing sessions to determine your annual losses."
• Forbes.  "In 2008, the IRS ruled that U.S. citizens could measure their gains on a per-session basis. In effect, you don't have to compute each wager separately to determine if you won or lost and by how much. Just tally your total at the end of your gambling session. The Tax Court reached the same conclusion in Shollenberger v. Commissioner."
• IRS Memo No. AM2008-011, Dec. 2008, PDF.  Confirms the use of session-based wins and losses.
• Note that IRS Publication 525 (2017) is unclear!  Many people think it's saying to consider your W-2G winnings to be your gambling income, which is not what it says.  The actual wording is, "Include the amount from box 1 [of your W-2G] on Schedule 1."  Notice the word "include" and not "enter".  In IRS parlance, "enter" means "copy this number exactly from one place to another".  But "include" means that "whatever number you're entering, make sure this other number is a part of it."  So yes, it's worded poorly, and they failed to include any clarification, but in any event, it absolutely does not say that W-2G = what you report for gambling winnings.  Even if it did, remember that (1) case law trumps instructions, and (2) we have the IRS memo above that clarifies that wins and losses are based on sessions (which may or may not match the W-2G amounts).
• Reece B. Morrel, Jr., CPA and Attorney.  “The IRS and judges get suspicious if the amount of gambling income reported by a taxpayer exactly matches the total amount of gambling income reported on Form W-2Gs....Several recent private telephone calls with IRS employees by the author and others confirm the current acceptance of this [session accounting] concept....For example, if a gambler starts the day with $10,000 in cash, and ends the day with $15,000 in cash but generates $100,000 of W-2Gs in the process, the taxpayer's gambling winnings for the gambling session are $5,000—not the $100,000 of W-2Gs.” (April 2013)

• Gives the requirements for how to record the diary.
• States that "An accurate diary...supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses."
• Also states, "Where possible, the diary...should be further supported by other documentation [such as] hotel bills, airline tickets, gasoline credit cards, canceled checks, credit records, bank deposits, and bank withdrawals."
• Link to the actual text