Gambling, when done in moderation and legally, can be a fun activity for many to partake in. In the event that you strike it rich, you’ll probably wonder how you go about reporting your gambling winnings to the IRS. Some may even be asking: do you have to report gambling winnings?
All of these questions are valid and common concerns of regular taxpayers who may have hit it big in Vegas or somewhere else where organized gambling is legal. Learn more about how to minimize taxes from gambling activities and other common concerns for those who have winnings to report this tax season.
Casual Gambler vs. Professional Gambler
Though most individuals who gamble are casual and non-professional gamblers, there are some who do it enough to rise to the level of a professional trade or business venture.
The status of your gambling activities impacts how you report your earnings and how you minimize taxes owed:
● Casual Gamblers: Casual or amateur gamblers report their earnings as “other income” on line 21 of Form 1040. Gambling losses may also be reported on line 28 of Schedule A as miscellaneous itemized deductions.
● Professional Gamblers: Professional gamblers are no different from any other self-employed individual. Since the activity is a result of a trade or business, winnings, losses, and related expenses are reported on Schedule C.
The only similarity amateur gamblers and professional gamblers share is the gambler tax deduction for losses is limited to the amount of gambling winnings.You can’t deduct more than you actually lost.
In order to minimize taxes owed to the IRS for amateur/casual gamblers, you will want to do the following:
● Itemize deductions on Schedule A in order to take advantage of gambling losses. After all, most gamblers lose more often than they win.
● Nonprofessional gamblers who fail to itemize deductions lose the tax benefit of deducting their losses.
● Gambling losses are deductible only to the extent of your winnings. Keep that in mind when you report on line 21 of Form 1040.
The important thing is that you “substantiate” any losses claimed as a result of gambling activity. This would include any paperwork or receipts that demonstrate you played at a casino and lost.
According to the IRS, a professional gambler is actually classified as a trade or business. In order to prove that you are a professional gambler you must prove that there is a profit motive involved.
In determining whether an activity has a profit motive “all facts and circumstances with respect to the activity are to be taken into account”. In other words, the profit motive can include things like:
- A taxpayer conducting gambling activities in a businesslike manner such as maintaining complete books in a gambling log or diary.
- Consulting with a professional tax consultant over his or her activities related to gambling. It indicates the taxpayer has a “profit objective”.
- There was time and effort used by the individual to carry on the activity.
- Recorded history of the income and losses resulting from the activity.
- Paper trails with the profits that have been earned from the activity.
- Expectation that assets used in gambling may appreciate in value.
To be considered a professional gambler, you need to point out that you do not have substantial income from other non-gambling activities. Why? The IRS can assume that you do not rely solely on gambling profits for cost of living expenses, and therefore it can be labeled a hobby instead of a profession.
Secondly, professional gamblers must also prove that they receive no personal pleasure or recreation from gambling. Since gambling at a casino is generally understood as an amusement, a taxpayer must demonstrate there is no pleasure in the activity (i.e. not including friends or family in gambling activities).
Ultimately, the Supreme Court decided that an individual who gambles as a trade or business is legitimate, so long as he or she does it “full-time, in good faith, with regularity, and as a livelihood rather than as a hobby”.
Professional Gambler Tax Deductions
If you truly qualify as a professional gambler (and not just because you got hot on slots one night), then you can deduct ordinary and necessary business expenses related to the activity. You can also deduct wagering losses on Schedule C that do not exceed your winnings.
It is important not to report gambling losses that exceed your winnings. You also cannot carry forward gambling losses back to offset winnings in subsequent years.
Additionally, since gambling winnings are traditionally considered miscellaneous income, you are not subject to self-employment tax. However, professional gamblers may incur self-employment taxes on a gambler tax return.
Levy & Associates Supports Gamblers
In order to stay on good terms with the IRS, you need to first understand if you classify as an casual/amateur gambler or a professional gambler. Secondly, you need to know how to report winnings and deduct the proper amount of losses.
We can help you avoid common gambling tax reporting pitfalls by properly documenting gambling activities. Contact us at www.levytaxhelp.com, or call 800-TAX-LEVY to learn more.