I'm struggling with some tax issues right now. Last week I made a five figure profit playing blackjack at perhaps 7 different casinos. I brought in cash, and I left with cash. I never made more than 2500 at one casino in one day. I moved around from table to table a lot. I never cashed out before the day was done at a casino, and I was meticulous about my overal profit for that casino for each day. Now I've been reading about the tax requirements and they seem a little and vague and perhaps a bit unfair. What should I do at this point? Send in a check to the IRS based on my estimated earnings so far or wait until I do my taxes next year? I will be going back to the casinos this. I am not a professional. Did each adventure at a blackjack table count as a separate taxable event for profits and losses? I want to be honest, and I want to pay the government but I'm a little uncertain about what to do.
Taxes
- Thread starter doctorbean
- Start date
From google and tax forms, what I've pieced together as the "right" way:
- Treat each winning session as a "win"
- treat each losing session as a "loss"
- (the definition of a 'session' can be murky)
- Add all wins as other, non W2-G income, in your misc income session
- Deduct all losses, up to but not exceeding wins, as an itemized deduction.
- Your log would be considered supporting proof if audited (the IRS has traditionally wanted logs, so that's good).
As you can see, you can't just declare your net winnings, which is a drag.
Now, if the gambling income is going to cause you to owe much additional tax when you file in April, then a payment shortfall may trigger an extra penalty for underpayment during the year (I got hit with one of these last year after big capital gains). That's a seperate problem, but could be addressed by either making additional estimated payments this year, or increasing witholding for day job... but that gets pretty complicated. The penalty doesn't cost too much though. An underpayment of $6k in taxes was a $80 penalty.
- Treat each winning session as a "win"
- treat each losing session as a "loss"
- (the definition of a 'session' can be murky)
- Add all wins as other, non W2-G income, in your misc income session
- Deduct all losses, up to but not exceeding wins, as an itemized deduction.
- Your log would be considered supporting proof if audited (the IRS has traditionally wanted logs, so that's good).
As you can see, you can't just declare your net winnings, which is a drag.
Now, if the gambling income is going to cause you to owe much additional tax when you file in April, then a payment shortfall may trigger an extra penalty for underpayment during the year (I got hit with one of these last year after big capital gains). That's a seperate problem, but could be addressed by either making additional estimated payments this year, or increasing witholding for day job... but that gets pretty complicated. The penalty doesn't cost too much though. An underpayment of $6k in taxes was a $80 penalty.
First of all, as a fellow honest citizen, let me thank you for being honest about taxes. It makes things better for all of us. 
Okay, an overview. Your gambling winnings count as ordinary income and are taxed at the rate of any normal income, and all the normal exemptions and deductions apply. Gambling losses can be used to offset gambling income, but only up to the amount you won (you can't get a refund, so it kind of sucks if you win net $20,000 one year and lose net $20,000 the next year - you will pay taxes on $20,000 even though you averaged $0).
If you use Turbotax, it's ridiculously easy to input gambling winnings, just click through to "other income" and there's a box for gambling income. They do the rest for you.
The problem, as EasyRhino pointed out, is that if you don't have a fraction of your eventual tax paid before you file, you may be slapped with a penalty. The rules are complex - to my knowledge, you have to either have 90% of your current tax burden, or 100% of your previous year's tax burden paid when you file. Of course, withholding is the usual way people prepay, but since gambling earnings from cash games are NOT withheld (gambling winnings from tournaments with a large payout ARE withheld, you should get a W-2G if that is the case), you may want to consider filing a 1040-ES, which are quarterly payments based on what your ESTIMATED tax penalty will be.
Detailed instructions should be on the IRS site under 1040-ES. There's usually a "Who needs to file a 1040-ES?" section on the first page of the instructions.
Edit: Here you go. http://www.irs.gov/pub/irs-pdf/f1040es.pdf
I was going to cut and paste the relevant sections but Acrobat is being stupid. Seek and ye shall find.
Okay, an overview. Your gambling winnings count as ordinary income and are taxed at the rate of any normal income, and all the normal exemptions and deductions apply. Gambling losses can be used to offset gambling income, but only up to the amount you won (you can't get a refund, so it kind of sucks if you win net $20,000 one year and lose net $20,000 the next year - you will pay taxes on $20,000 even though you averaged $0).
If you use Turbotax, it's ridiculously easy to input gambling winnings, just click through to "other income" and there's a box for gambling income. They do the rest for you.
The problem, as EasyRhino pointed out, is that if you don't have a fraction of your eventual tax paid before you file, you may be slapped with a penalty. The rules are complex - to my knowledge, you have to either have 90% of your current tax burden, or 100% of your previous year's tax burden paid when you file. Of course, withholding is the usual way people prepay, but since gambling earnings from cash games are NOT withheld (gambling winnings from tournaments with a large payout ARE withheld, you should get a W-2G if that is the case), you may want to consider filing a 1040-ES, which are quarterly payments based on what your ESTIMATED tax penalty will be.
Detailed instructions should be on the IRS site under 1040-ES. There's usually a "Who needs to file a 1040-ES?" section on the first page of the instructions.
Edit: Here you go. http://www.irs.gov/pub/irs-pdf/f1040es.pdf
I was going to cut and paste the relevant sections but Acrobat is being stupid. Seek and ye shall find.
Summary
Ok, so I go into a casino. I sit down and lose $5,000 at a table. I decide I don't like this table, so I get up, go to the restroom, and come back to a new table. This time I win $10,000. I leave the table, cash my chips, and go home, never to gamble again.
Do I report $5,000 as winnings on my tax form OR
Do I report $10,000 as my winnings and itemize a deduction for $5,000 (plus other items such as medical bills)?
Ok, so I go into a casino. I sit down and lose $5,000 at a table. I decide I don't like this table, so I get up, go to the restroom, and come back to a new table. This time I win $10,000. I leave the table, cash my chips, and go home, never to gamble again.
Do I report $5,000 as winnings on my tax form OR
Do I report $10,000 as my winnings and itemize a deduction for $5,000 (plus other items such as medical bills)?
it is safe to consider a day's "trip" to a casino a "session".
You report $5,000 in winnings.
now, if you go to a casino and lose $5,000 then come back the next day and win $5,000, and then go to another casino and win another $5000 ---
3 sessions.
You report $10,000 in winnings and itemize a deduction for $5,000 in losses.
You report $5,000 in winnings.
now, if you go to a casino and lose $5,000 then come back the next day and win $5,000, and then go to another casino and win another $5000 ---
3 sessions.
You report $10,000 in winnings and itemize a deduction for $5,000 in losses.
I R S Tax Code unfairness.
A professional gambler, declaring himself as such to the I.R.S., who itemizes his travel expenses, etc. as tax deductions and properly pays his estimated quarterly taxes as a self-employed person is NOT permitted to "carry-over" losses from one year to the next. That does NOT apply to any other business and the I R S has never offered a cogent explanation for this bias.
Think about it this way. If I play all year and have a bad year and have lost $30,000 I will not have net income that is taxable. Obvious. So far so good. Now, if the following year I struggle through to show a net income of $30,000 I am taxed in full on that income, without being able to "carry over" my losses from the prior year. ANY other business is permitted to do so. In my case I will have earned nothing over two years and was taxed for the wins without any means of deducting the losses.
The tax situation re: deductions via depreciation on expenses, (e.g. a computer) that are used for your business is murky and unfairas well.
According to the I.R.S. If you win money on Dec. 31 it is fully taxable no matter how much you lose after midnight.
A professional gambler, declaring himself as such to the I.R.S., who itemizes his travel expenses, etc. as tax deductions and properly pays his estimated quarterly taxes as a self-employed person is NOT permitted to "carry-over" losses from one year to the next. That does NOT apply to any other business and the I R S has never offered a cogent explanation for this bias.
Think about it this way. If I play all year and have a bad year and have lost $30,000 I will not have net income that is taxable. Obvious. So far so good. Now, if the following year I struggle through to show a net income of $30,000 I am taxed in full on that income, without being able to "carry over" my losses from the prior year. ANY other business is permitted to do so. In my case I will have earned nothing over two years and was taxed for the wins without any means of deducting the losses.
The tax situation re: deductions via depreciation on expenses, (e.g. a computer) that are used for your business is murky and unfairas well.
According to the I.R.S. If you win money on Dec. 31 it is fully taxable no matter how much you lose after midnight.
More seriously, if you can declare yourself as a professional gambler (i.e. a small business), then you can net wins and losses and just pay tax on net win for the year.
I hear the threshold to be declared a professional gambler is very high. So most schlubs are stuck tracking wins/losses on a per-session basis.
And I have no useful info on defining a session, except that anything over 24 hours is almost definitely wrong (unless that was literally at the same table on an insane bender)
I hear the threshold to be declared a professional gambler is very high. So most schlubs are stuck tracking wins/losses on a per-session basis.
And I have no useful info on defining a session, except that anything over 24 hours is almost definitely wrong (unless that was literally at the same table on an insane bender)
The criteria for declaring yourself a professional gambler (and then able to net winnings on Schedule C and be able to easily write off gambling related expenses) is the same 9 point checklist used for any other "business".
Do you breed dogs? Sell stuff you bake? Is it a hobby or a business? There is a nine point checklist the IRS uses to determine if you have a profitable hobby of building bird houses in your garage, or if you are actually a professional and in the business of building bird houses. The same criteria and standards apply to gambling.
Are you playing Blackjack as a hobby or a business (the text below was aimed at the horse owners):
1. The manner in which the taxpayer carries on the activity ...
a. Keep separate and accurate books and records, separate checking and bank accounts.
b. Seek advice from professional trainers, breeders and others established in the industry. Keep notes.
c. Keep timely records of events, which affect current or future income (death of animals, disease, slipped foals, drought, extreme weather conditions requiring unusual expenditures).
d. Make necessary changes in operating methods, adopting new techniques or abandoning unprofitable methods, following the practices of the industry.
e. Become involved in your industry - attend seminars, meetings, subscribe to trade journals, etc.
f. Use advertising - show programs, newspapers, horsemen's magazines, word of mouth, etc.
g. Have a plan showing where profits are expected. Be able to show a profit potential. Revise and update this plan.
h. Keep detailed notes on business activities - history, date of events, location, programs, performance of horses, medical records, deviations, any and all pertinent information.
I. Consider obtaining a resale number.
j. Register your name DBA (doing business as) with the proper authorities.
2. The expertise of the taxpayer or his advisors
a. In preparation for this activity did you make a study of its accepted business, economic, and scientific practices, or consult with those who are expert in your field. Notes and documentation should be maintained.
b. Continue to engage and consult professional trainers, breeders and other specialists. Maintain formal or informal notes and documentation.
c. What organizations do you belong to; what type of books magazines do you subscribe to. Have you attended seminars or educational courses for the horse industry. Maintain accurate notes and documentation.
d. Know your potential market and bloodlines. Maintain good records.
e. Seek advice from experts on ways to increase profits and cut costs.
f. Seek professional advice for cash flow projections and review past operations.
3. The time and effort expended by the taxpayer in carrying out the activity
a. Record the number of hours spent in an average week on keeping books and records, training, feeding, grooming, mucking out stalls, maintaining facilities, travel time when horses are boarded out, etc.
b. Record frequency and duration of shows, traveling time and type of accommodations used. Notes and Documentation.
c. What kind of personal inconveniences were created or other activities given up. Notes recorded very helpful..
4. Expectation that the assets used in the activity will increase in value
a. Show how you plan to increase the value of your horse(s) and progress. What did your horse cost? What is it appraised at now? What could it be worth in the future? Point out successes in the industry. Use a qualified expert for your appraisal.
b. Any valid offers to purchase - get it in writing, name and address, amount offered, dated and signed.
c. If the activity includes property purchases for business purposes, was there an expectation that this property would appreciate in value so as to offset losses when sold in the future. Documentation.
5. The successof the taxpayer in other activities
a. Has not been considered in recent court cases.
b. May help if you have been successful in other similar or dissimilar activities.
6. History of income or losses with respect with respect to the activity
a. The courts have considered important any events, which have caused what appears to be a successful plan of operation to go awry. Notes and Documentation.
b. Two profit years out of seven does not necessarily protect the activity from being disallowed.
7. Amount of occassional profits, if any, which are earned
a. The potential for profit is the one element, which can overcome the loss years and the minimal profits, and the courts have generally recognized this fact.
8. Financial status of taxpayer
a. Lack of substantial income from other sources will be in your favor. Large income from other sources may weigh against you along with degrees of personal pleasure and substantial tax benefits.
9. Elements of personal pleasure
a. As long as the other factors indicate a profit motive, personal pleasure will not cause the activity to be classified as a hobby.
b. If you have personal riding horses as well as business horses, consider allocating a pro-rata share of cost to the personal portion and do not deduct on your return.
Do you breed dogs? Sell stuff you bake? Is it a hobby or a business? There is a nine point checklist the IRS uses to determine if you have a profitable hobby of building bird houses in your garage, or if you are actually a professional and in the business of building bird houses. The same criteria and standards apply to gambling.
Are you playing Blackjack as a hobby or a business (the text below was aimed at the horse owners):
1. The manner in which the taxpayer carries on the activity ...
a. Keep separate and accurate books and records, separate checking and bank accounts.
b. Seek advice from professional trainers, breeders and others established in the industry. Keep notes.
c. Keep timely records of events, which affect current or future income (death of animals, disease, slipped foals, drought, extreme weather conditions requiring unusual expenditures).
d. Make necessary changes in operating methods, adopting new techniques or abandoning unprofitable methods, following the practices of the industry.
e. Become involved in your industry - attend seminars, meetings, subscribe to trade journals, etc.
f. Use advertising - show programs, newspapers, horsemen's magazines, word of mouth, etc.
g. Have a plan showing where profits are expected. Be able to show a profit potential. Revise and update this plan.
h. Keep detailed notes on business activities - history, date of events, location, programs, performance of horses, medical records, deviations, any and all pertinent information.
I. Consider obtaining a resale number.
j. Register your name DBA (doing business as) with the proper authorities.
2. The expertise of the taxpayer or his advisors
a. In preparation for this activity did you make a study of its accepted business, economic, and scientific practices, or consult with those who are expert in your field. Notes and documentation should be maintained.
b. Continue to engage and consult professional trainers, breeders and other specialists. Maintain formal or informal notes and documentation.
c. What organizations do you belong to; what type of books magazines do you subscribe to. Have you attended seminars or educational courses for the horse industry. Maintain accurate notes and documentation.
d. Know your potential market and bloodlines. Maintain good records.
e. Seek advice from experts on ways to increase profits and cut costs.
f. Seek professional advice for cash flow projections and review past operations.
3. The time and effort expended by the taxpayer in carrying out the activity
a. Record the number of hours spent in an average week on keeping books and records, training, feeding, grooming, mucking out stalls, maintaining facilities, travel time when horses are boarded out, etc.
b. Record frequency and duration of shows, traveling time and type of accommodations used. Notes and Documentation.
c. What kind of personal inconveniences were created or other activities given up. Notes recorded very helpful..
4. Expectation that the assets used in the activity will increase in value
a. Show how you plan to increase the value of your horse(s) and progress. What did your horse cost? What is it appraised at now? What could it be worth in the future? Point out successes in the industry. Use a qualified expert for your appraisal.
b. Any valid offers to purchase - get it in writing, name and address, amount offered, dated and signed.
c. If the activity includes property purchases for business purposes, was there an expectation that this property would appreciate in value so as to offset losses when sold in the future. Documentation.
5. The successof the taxpayer in other activities
a. Has not been considered in recent court cases.
b. May help if you have been successful in other similar or dissimilar activities.
6. History of income or losses with respect with respect to the activity
a. The courts have considered important any events, which have caused what appears to be a successful plan of operation to go awry. Notes and Documentation.
b. Two profit years out of seven does not necessarily protect the activity from being disallowed.
7. Amount of occassional profits, if any, which are earned
a. The potential for profit is the one element, which can overcome the loss years and the minimal profits, and the courts have generally recognized this fact.
8. Financial status of taxpayer
a. Lack of substantial income from other sources will be in your favor. Large income from other sources may weigh against you along with degrees of personal pleasure and substantial tax benefits.
9. Elements of personal pleasure
a. As long as the other factors indicate a profit motive, personal pleasure will not cause the activity to be classified as a hobby.
b. If you have personal riding horses as well as business horses, consider allocating a pro-rata share of cost to the personal portion and do not deduct on your return.