For many of us, gambling means buying the occasional lottery ticket on the way home from work, but the Internal Revenue Service says that casual gambling also includes raffles, casino games, poker, sports betting—and, yes, even fantasy football. When you win, your winnings are taxable income, subject to its own tax rules.
• You must report all gambling winnings—including the fair market value of noncash prizes you win—as “other income” on your tax return.
• You can’t subtract the cost of a wager from the winnings it returns. However, you can claim your gambling losses as a tax deduction if you itemize your deductions.
• Your deductions for gambling losses can’t exceed the gambling income you claimed. You can’t use gambling losses to reduce your other taxable income.
• Depending on the amount you win and the kind of wager you place, you may receive a Form W-2G reporting your winnings. You must report your winnings even if you don't receive a Form W-2G.
You must report your winnings
The first rule is that you must report all winnings, whether the place that you gambled reports them to the government or not. For example, if you hit the trifecta on Derby Day, you must report the winnings as income.
The second rule is that you can’t subtract the cost of gambling from your winnings. For example, if you win $620 from a horse race but it cost you $20 to bet, your taxable winnings are $620, not $600 after subtracting your $20 wager.
Cash is not the only kind of winnings you need to report. If you win a brand new laptop in a raffle, this counts as income, too. You must claim the item’s fair market value at the time you won it, which would generally be the amount you would have to pay for the item if you bought it.
Both cash and the value of prizes are considered “other income” on your Form 1040. If you score big, you might even receive a Form W-2G reporting your winnings. The tax code requires institutions that offer gambling to issue Forms W-2G if you win:
- $600 or more on a horse race (if the win pays at least 300 times the wager amount);
- $1,200 or more at bingo or on a slot machine;
- $1,500 or more at keno;
- $5,000 or more in a poker tournament.
Table games in a casino, such as blackjack, roulette, baccarat, or craps are exempt from the W-2G rule.
This doesn’t mean you don’t have to claim the income and pay taxes on it if your winnings aren’t enough to warrant the tax form. It just means that the institution won’t send a Form W-2G.
TurboTax Tip: If you’re a professional gambler, you can file Schedule C as a self-employed individual. This allows you to deduct costs associated with your gambling activity, including meals and travel expenses. However, it also means you’ll have to pay self-employment tax on your winnings.
You can deduct your losses…to an extent
You can’t deduct the cost of your wager from your winnings when determining how much you won, but you can deduct your gambling losses subject to certain rules.
- You must itemize your deductions to claim your gambling losses as a tax deduction.
- This means you can’t take the standard deduction for your filing status, which often amounts to more than a taxpayer’s itemized deductions.
You’re allowed to deduct losses only up to the amount of the gambling income you claimed. So if you won $2000 but lost $5,000, your itemized deduction is limited to $2,000. You can’t use the remaining $3,000 to reduce your other taxable income. You have to claim $2,000 in income on your Form 1040 and then separately claim $2,000 as an itemized deduction.
If you’re a professional gambler
Does the tax picture change if you don’t just dabble in gambling, but actually make your living at it? Yes and no. Deductions from losses that exceed your winnings still are not allowed. The U.S. Supreme Court ruled in 1987 in the case of Commissioner vs. Groetzinger that deductions for losses cannot exceed the income from winnings.
If you regularly pursue gambling with the intention of making a profit, then it’s effectively your day-to-day job. Rather than claiming your winnings as “other income” on your Form 1040, you can file Schedule C as a self-employed individual.
This is an important distinction, because you can deduct your other costs of doing business on Schedule C, ultimately reducing your taxable income. For example, you can deduct the costs of:
- Magazines, periodicals, and other data that relate to your gambling profession
- A portion of your Internet costs, if you wager online
- Meals and travel expenses if you attend tournaments
The downside of going pro is that you’ll have to pay self-employment tax (Social Security and Medicare) on your winnings.
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