William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Taxing Gaming Wins and Losses

Posted by William Byrnes on March 12, 2011

How does the average gambler determine wagering gains and losses for tax purposes?

Mrs. X is a casual gambler.   She uses the cash receipts and disbursements method of accounting and files her returns on a calendar year basis.  Mrs. X’s gaming practice is to commit only $100 to slot machine play on any visit to a casino.  She wagers until she loses the original $100 committed to gambling or until she stops gambling and “cashes out.”

Upon cashing out, there are three possibilities, that she have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain).   She went to a casino to play the slot machines on ten separate occasions throughout the year.  On each visit to the casino, she exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble.  On five occasions, the she lost her entire $100 in tokens before terminating play.  On the other five occasions, the she redeemed her remaining tokens for the following amounts of cash:  $20, $70, $150, $200 and $300.

Under the Internal Revenue Code, gross income means all income from whatever source derived, which has been determined to include wagering gains. [1]

The Code further allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. [2] In the case of losses from wagering transactions, losses are allowed only to the extent of gains from such transactions. [3]

In ordinary practice, a wagering “gain” means the amount won in excess of the amount bet (basis). [4] That is, the wagering gain is the total winnings less the amount of the wager.  The term wagering “loss” means the amount of the wager (basis) lost.

Generally, gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. [5] Nor may casual gamblers net their gains and losses from play throughout the year and report only the net amount for the year. [6]

It is accepted that fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. [7]

Under the facts presented above, Mrs. X purchased and subsequently lost $100 worth of tokens on five separate occasions.  As a result, the taxpayer sustained $500 of wagering losses.  She also sustained losses on two other occasions, when she redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased.

Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss.  On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss.  On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased.  The amount redeemed less the $100 basis of the wager constitutes a wagering gain. [8] On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain.  On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain.  And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain.

For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions).  Mrs. X’s wagering losses exceeded her wagering gains for the taxable year by $260 ($610 – $350).  She must report the $350 of wagering gains as gross income under IRC § 61. However, under IRC §165(d), she may deduct only $350 of the $610 wagering losses.  In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction.   Generally, a casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses. [9]

[1] IRC Section 61; Rev. Rul. 54-339; Umstead v. Commissioner, T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).


[2] IRC Section 165(a).

[3] IRC Section 165(d); Treasury Regulations Section 1.165-10.

[4] See Rev. Rul. 83-103.

[5] Skeeles v.  United States, 118 Ct. Cl. 362 (1951), cert. denied, 341 U.S. 948 (1951).

[6] See United States v. Scholl, 166 F.3d 964 (9thCir. 1999).

[7] See Commissioner v. Glenshaw Glass  Co., 348 U.S. 426 (1955).

[8] See Rev. Rul. 83-130.

[9] See Rev. Rul. 54-339.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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