Gambling is a very strange thing. The thrill of winning is so enticing that your brain stops functioning in a rational manner. Have you ever played a scratch-off lottery ticket just to end up winning another scratch-off lottery ticket? From a logical standpoint, this should be pretty disappointing. I mean, it’s essentially a do-over. Who gets excited about do-overs? But if you’ve ever won a free scratch-off ticket then you know that for some reason it feels like you just won back-to-back NBA championships.

But it’s not just the thrill of winning that causes us to act irrationally; it’s also the fear of not winning. Have you ever worked in an office that pools money together to buy lottery tickets every week? These places are awful. It’s basically a form a blackmail. On one hand, you know that you won’t win anything. Your odds are about one in a billion. But on the other hand, you know that if you don’t put your money in then that’s the week they’ll win, and you’ll be the only sucker who’s not rich. So you’re stuck forking over your hard-earned cash each week for a losing cause.

But apparently, some people are winning when they gamble. After all, over 42 million tourists visited Las Vegas in 2016. You have to figure some of these people are winning. But before you head off to make your millions, you should understand the tax implications of winning. The more prepared you are, the more you can reduce your tax bill.

Gambling Guidelines

Rule 1: You know the saying “What happens in Vegas, stays in Vegas”? It’s not exactly true. What happens in Vegas may be reported to the IRS.

For example, if you win $2,000 from a slot machine, the casino must report your winnings on Form W-2G and send a copy to you and the government. This form tells the government how much you won, and if you don’t report the gambling income on your tax return you should expect to hear from them.

Rule 2: Keep records of your losses. You can offset your gambling winnings with your gambling losses provided you have proof of those losses. The IRS and courts expect you to maintain a “contemporaneous gambling diary.”

There are specific rules for a gambling diary, depending on the type of gambling. For example, with slot machines, the IRS advises that you record the machine number, date, and time played to support your winnings. Often, you can find the machine number clearly displayed on the machine. If not, simply ask the casino operator for the machine number.

Rule 3: You cannot claim net losses. If your gambling losses exceed your winnings, you get no deductions for your net loss. And you can’t carry forward the net loss either.

For example, let’s say you won $5,000 at the casino, but over the course of the year you lost $10,000. You can report $5,000 of those losses (up to the amount of your winnings). But you lose out on any benefit related to the remaining $5,000 of losses.

By Daniel Magence, CPA, Esq.

 Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal-income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.