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How to Claim Gambling Losses On Your Income Taxes

How to Claim Gambling Losses On Your Income Taxes

An overview

Before claiming gambling losses in income taxes, you must declare gambling winnings as income. Here's all you need to know in a nutshell: You can deduct gambling losses based on three criteria.

  • You are not a professional gambler.

  • You itemize your deductions in schedule A

  • Your losses don't exceed your reported winnings

According to the IRS, gambling winnings are fully taxable. Therefore, you must report any winnings as income, and this is not limited to cash prizes alone. Other prizes like exotic vacations and vehicles are taxable based on their market evaluation.

However, it's not always rosy with gambling. The IRS also allows you to claim the loss in your returns when you lose money. You must itemize your deductions on Form 1040 as "other itemized deductions." If you would instead claim the standard deduction, you can't claim gambling losses. 

However, you must have kept a record of your losses and winnings, and your losses can't be more significant than your winnings. As part of your records, you should have the record of the dates of your winnings and losses, the type of gambling (lotteries, raffles, horse races, dog races, casino games, sports betting, etc.); the name of the gambling agency, the kind of people you bet with, and of course the amount won or lost. 

One needs to report your winnings and your losses. You can't deduct losses from winnings and simply report the difference. So, what if you don't win at all? The IRS doesn't also allow you just to declare losses. You are not qualified for deductions just because you lost money at a sports betting shop. You must report winnings before the IRS considers you for any claims. The IRS believes allowing people to qualify for deductions simply because they lost money in gambling would be equal to subsidizing gambling for taxpayers.

Since your tax winnings are declared as income, tax losses may be claimed. However, as noted earlier, you can only claim losses, not more than winnings in gambling. Here's what that means. If you declare winnings of $3,500 and losses totaling $6,000, your returns are capped at no more than $3,500, which is the value of your winnings. 

Also, the balance of $2,500 can't be claimed or carried over into another year. So, your winnings, which the IRS sees as income, determine how much you can reasonably claim as deductions and not your losses.

So, rather than compensating it by subsidizing gambling losses, the IRS reduces or cancels taxes on your winnings. So, you won't pay any tax on your winnings if you lose just as much or more than the value you won. If you lose more than you win, you are only eligible for deductions equal to your winnings and not losses.


Additional information about gambling and taxes

Every gambling win is tax-deductible. The government sees it as an income. So you should report every win, no matter how little it is. Non-cash prizes won should also be reported for their fair market value. Also, if your payout is at least 300 times the amount of your bet and is at least $5,001, the payer is required to withhold a portion of your winnings (24%) as income tax. This amount is reflected when you file your 1040 for the next tax season.  

Remember, you won't get any deductions to compensate for your losses if you do not itemize them.

However, if you are a professional gambler or practice gambling full-time, you are under different rules. As a professional gambler, you have additional restrictions, and it is even believed that you're treated better by the IRS. That's because, unlike casual gamblers, they may not declare each win as an income.


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