How to keep your records straight for the taxman
By Henry Tamburin
I bet you didn’t know that you’ve got a silent partner when you play video poker. His name is Uncle Sam. When you hit a jackpot that is $1,200 or more on a video poker machine (usually this means a royal flush), your dear ol’ Uncle Sam will be notified of your good fortune. You will be given “Form W-2G Certain Gambling Winnings” from the casino, and they send a copy to the IRS.
Like it or not, Uncle Sam knows when you hit it big, and he expects you to report your gambling wins when you file your taxes so he can get his cut.
Unfortunately, most folks who play video poker are misinformed as to what they are supposed to report come tax time. For example, take a gander at the following three emails I recently received regarding gambling and taxes.
“I hit a few royals this year but my losses are greater than my winnings. Since the two cancel out, do I have to go through the trouble of reporting anything when I file my taxes?”
“I get the annual Win/ Loss statement from the casinos. Is there a threshold amount of winnings that triggers reporting your wins to the IRS?”
“I had a few W-2Gs last year after hitting royal flushes. Can I deduct my losses against the W-2G’s wins?”
Let me begin with a disclaimer. I’m not an accountant, so if you have any questions or concerns about reporting your winnings, you should consult a tax accountant who has experience in this area. This is a serious topic, and the reason I’m writing about it is to make you aware of what the IRS requirements are for reporting gambling wins. (Being audited by the IRS is something you definitely want to avoid during your lifetime.)
IRS Publication 529 clearly states that if you are a U.S. citizen, you must declare as income all gambling wins, from anywhere (this includes brick-and-mortar as well as cyberspace casinos). This means not only wins when you received a W-2G, but all gambling wins during all sessions. However, the IRS further states that you can deduct your gambling losses up to the amount of your gambling winnings in a calendar year. You report your winnings on your Federal 1040 tax form on the Other Income line, and you can deduct your losses (up to your winnings) on Schedule A under Other Miscellaneous Deductions (for recreational gamblers).
In addition, the IRS regulations state you must have proof of when and where the gambling wins and losses actually occurred, by keeping a “diary of gambling wins and losses.” (In other words, it’s the player’s responsibility to keep a gambling record or log.)
The IRS defines a gambling win as the net win that a person achieves after a “gambling activity,” which most players interpret as a “gambling session.” The gray area is the definition of exactly what constitutes a “session.” For example, suppose you play two hours of video poker in the morning, break for lunch, and then play another two hours in the afternoon. Did you play one session or two sessions? Most tax experts agree that it’s up to the player to define what a session is and to be consistent when they keep a record of their session wins and losses in their logbook.
By way of an example, here is how I define a session in my gambling logbook. It’s my net win (or loss) after playing in the same casino over a maximum of a 24-hour period. For example, if I play a two-hour session in Casino A in the morning, another two hours in the afternoon, and maybe three more hours in the evening, I log my net win (or loss) for the day as one session. If instead, I played three hours at Casino A, took a break, then went to Casino B in the afternoon, and played another three hours, my net win/loss at Casino A would be one session, and my net win/loss at Casino B would be a second session.
There are other ways to define a session. The key is for you to define it and then be consistent in recording your net wins/losses per session throughout the year in a logbook.
Now let’s get to the meat and potatoes of staying out of trouble with the IRS–namely, record keeping. The key is to maintain a gambling log. IRS publications and regulations state that your gambling log should contain, at the minimum, the following information:
- Date and the type of game you are playing.
- Name of the casino, and its location.
- Name of the person doing the gambling, and names of people who were with you when you gambled.
- Amount you won or lost.
Here’s how I do my record keeping. I bring a small monthly planner with me when I play video poker (my real-time gambling log). I jot down the date of my session, name of the casino, name of anyone else who might be with me when I play (usually my wife or a friend), time I start playing and quit playing, type of video poker game that I played and denomination, and my net win or loss. I also include any royal flushes that I hit, the number of points I earned, and other information about the casino and its player’s club that I want to keep for my own records, not necessarily for the IRS.
When I get home, I transcribe the above information into a hardcover composition book (like the one you used in grammar school), which is my official gambling log.
By keeping an accurate gambling log, it’s easy for me to add up my session gambling wins for the year (which I report as Other Income on my 1040), and my total session losses (which I report in Schedule A).
Some of my gambling friends put their session wins/losses on a spreadsheet on their computer. If you have an iPhone, there’s a handy app called the “WinLoss-Slot Player’s Diary” (by Sandcroft) that you can use for your record keeping. (It’s available in the ITunes store.)
I know many video poker players who don’t keep a gambling log and instead rely solely on the annual casino win/loss statements that casinos will give to players at the end of the year, if they are requested. Many of the tax experts I’ve spoken to have this to say about that practice: Many tax-court decisions have upheld the IRS position that casino win/loss statements do not substitute for a gambling log.
Therefore, what I do (and what you should, too) is maintain a gambling log and only use the Casino Win/Loss statements for supporting documentation (as to when and where you played) in the event you are audited by the IRS. When I once received a paper audit from my State of primary residence, I sent the auditor a copy of my Gambling Log, not the Casino Win/Loss statement).
There are other consequences of tax regulations that I simply don’t have the space to cover (such as how to file as a professional gambler, hitting a jackpot in one state and filing for a refund of the withholding tax in your resident state, what to do if your gambling wins are less than the total of your W-2G’s, and more). My advice is to get a copy of Jean Scott’s and Marissa Chien’s excellent book, “Tax Help For Gamblers,” which contains all the information you need to keep you in compliance with reporting gambling wins when you file your Federal and State tax returns (and keep you out of trouble if you get audited).
(Note: The second edition of their book will be published in March 2012 and will be available at http://www.shoplva.com/ both in hard copy and as an instantly down-loadable ebook. Although the basic information in the first edition of their book is nearly all still correct, there have been some changes, including updates in the state tax information. Also added to the second edition are some interesting tax court cases that show some movement toward a more reasonable stance on gambling by the IRS, both for the recreational and professional gambler. If you play poker (especially online), you’ll see that the regulations have seen many changes in the last few years, and these are noted and discussed in the second edition of their book.
Henry Tamburin is a blackjack and video poker expert. He hosts the smartgaming.com website and is the editor of the Blackjack Insider newsletter (for a free three-month subscription, visit www.bjinsider.com/free). For a free copy of his Casino Gambling Catalog, which contains books, strategy cards, and software for video poker players, call toll free 1-888-353-3234, or visit the web store on smartgaming.com.