What to Know About Gambling Winnings and Taxes
Winnings are taxable and losses can be deducted
Gambling might be an adrenaline rush, but your winnings are subject to the federal income tax and this can throw a damper on things. Gambling winnings consist of income from wagers and bets, lotteries, sweepstakes, raffles, prizes, awards, and contests. Technically, they even include the value of that bottle of beer your neighbor had to hand over to you when you made that incredible three-point shot.
The full amount of gambling income must be included on your tax return. The good news is that the cost of losing bets can be claimed as a loss.
Gambling Income and Expenses
Taxpayers who aren't professional gamblers should report gambling income as "other income" on line 21 of Schedule 1, then transfer the total from Schedule 1 to line 6 of the new Form 1040 that took effect in the 2018 tax year.
The expense of bets, wagers, lottery tickets, and similar gambling losses can be deducted as a miscellaneous itemized deduction on Schedule A. Yes, the Tax Cuts and Jobs Act (TCJA) eliminated most miscellaneous itemized deductions beginning in 2018 through at least 2025, but only those that were subject to the 2% rule—you could only deduct the portion that exceeded this percentage of your adjusted gross income (AGI). But this rule doesn't apply to gambling losses, and the TCJA left this deduction intact.
You're still faced with a limit, however. According to the IRS, "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions." In other words, you might have spent $5,000 to win $2,000 in 2018, but you can't deduct that $5,000—or even the $3,000 difference.
You're limited to a deduction equal to the $2,000 you won.
Now for the good news: You can also deduct your other expenses if you win enough to cover them, such as the cost of traveling to the casino or racetrack. You can't use excess losses and expenses to whittle away at other taxable income unless you're a gambler by profession.
"A gambler is considered to be engaged in the business of gambling if he or she gambles full time to earn a livelihood and not merely as a hobby," states J.K. Lasser's Your Income Tax. Professional gamblers report their gambling income and related expenses on Schedule C as self-employed income. Net Schedule C income is subject to the federal income tax and to the self-employment tax, plus any state income tax.
Record-Keeping for Gambling Activities
The IRS expects professional gamblers to keep records of their bets and winnings. Publication 529 states:
"You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information:
the date and type of your specific wager or wagering activity, the name and address or location of the gambling establishment, the names of other persons present with you at the gambling establishment, and the amount(s) you won or lost."
In addition to your diary, you should also have other documentation. You can generally substantiate your winnings and losses with Form W-2G: Certain Gambling Winnings, Form 5754: Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gaming establishment.
A Game-by-Game Breakdown
The IRS indicates that you should also record the following to support your winnings and losses for specific wagering transactions:
- Keno: Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check cashing records.
- Slot machines: A record of the machine number and all winnings by date and time the machine was played.
- Table games (blackjack, craps, poker, baccarat, roulette, or wheel of fortune): The number of the table at which you were playing, and casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.
- Bingo: A record of the number of games played, the cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino or parlor.
- Racing (horse, harness, or dog): A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
- Lotteries: A record of ticket purchases, dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winnings statements.
Withholding on Gambling Winnings
Gambling winnings are subject to withholding for federal income tax at a rate of 25% when you win more than $5,000 from sweepstakes, wagering pools, lotteries, or other wagering transactions, or anytime the winnings are at least 300 times the amount wagered. The gambling establishment should report the amount of the gambling winnings and any tax withheld on Form W-2G, which is issued to the winner and to the IRS.
In addition to issuing a Form W-2G when withholding is required, casinos will also issue a Form W-2G when withholding is not required for the following type of winnings:
- $1,200 or more in winnings from slot machines or bingo
- $1,500 or more in winnings from keno games
- $5,000 or more in winnings from poker tournaments.
Sharing Gambling Winnings
Fill out Form 5754 if two or more people are to share in the gambling winnings. The casino will divide the winnings among the players and will subsequently report them on separate Forms W-2G to the IRS under the names of each of the winners.