Tax Consequences of Playing Video Poker

Under U.S. federal tax law gambling winnings are taxable. Under the law, you must report as income (on the "Other Income" line of your tax return) your gross gambling winnings. While casinos are required by federal law to report certain winnings on a form W2-G (a copy goes to you and another goes to the IRS), whether or not you received a W2-G is immaterial as to your reporting requirement. If you had a win, it is required to be reported.

Gambling losses may be deductible, as well -- but that depends on whether you itemize your deductions on Schedule A of your form 1040. Gamblers who don't itemize are not allowed any deduction for their losses. This really seems unfair to many people; if you make money selling a stock, you are allowed to deduct the cost of the stock against the sale price to determine your taxable gain. If you lose money on a stock, you are allowed to deduct the loss (with some limitations). Gambling losses do not work like this. Of course, if you lose enough money, it may make itemizing a viable option for you even though you don't normally itemize your deductions. Gambling losses are deducted as "Other Miscellaneous Deductions" on Schedule A (Itemized Deductions) of form 1040. Reported gambling losses can never exceed the amount of your winnings reported for a tax year.

Like so many areas of taxation, there are obscure complicating factors that can be problematic. The fact that wins and losses are reported differently creates a problem of determining just what comprises a win or loss: is it the total of all wins and losses for the year? For a single day? Or perhaps for a single hand of video poker? This matters because it can result in different tax liabilities depending on the period chosen for measuring wins or losses.

If one followed the letter of the tax law, he would be require to report as a "Win" each transaction on each machine he played. Those hands on which he won money would report as a "net win" the amount won, for example, you bet $1.25 on a quarter machine and win $5.00, your net win for that transaction would be $3.75. On the next hand, you may bet $1.25 and lose, which is another transactions reported as separately as a loss. Of course, a video poker player may have thousands or tens of thousands of such transactions over the course of a year, which creates quite a conundrum at tax time.

For video poker machine winnings, the IRS has issued Revenue Procedure 77-29 which details the reporting requirements. The ideal proof of your winnings and losses is a statement from the casino which provides "a record of all winnings by date and time that the machine was played". This is a more detailed analysis than is normally provided by casino's year-end win/loss statement. Certainly, few video poker or slot players break their gambling activities down in this way. Typically, they will report year-end totals for wins and losses. Some may even keep diaries of each casino visit; however, the date/time/machine breakdown wouldn't be considered feasible by most players.

While the IRS in its 1977 Revenue Procedure stated its position, the Tax Court, in a 2009 Memo decision, looked at this issue in depth. In that case, IRS agreed that tracking individual "transactions was unrealistic when placing many bets at slot machines during a long session of plays." TC Memo 2009-226 (Ann L. Laplante v. Commissioner of Internal Revenue). IRS wanted to treat each "cash out" of tokens (this was prior to the use of "tickets" for slot machines) as giving rise to a reportable net win or loss, but then claimed the gambler's losses should be disallowed on the basis that she kept inadequate records to substantiate the amount of the deduction. Tax Court Memo decisions do not have the force of law, so it is possible IRS would attack the problem differently in another case.

It is important to recognize that no casino can track your winnings or losses unless you play with your player's card. A player who is playing "winning" games (i.e., those that return more than 100%) may be tempted to play without the card. After all, you're going to win, right? This is a mistake. Your wins will be reported on a form W2-G, but you will have a difficult time documenting losses. Always use your player's card. Aside from the obvious benefits like comps and cash back, casino records provide critical evidence of your losses that will be difficult or impossible to prove if the IRS calls on you to do so.

The point of all this is convey that it is a far more complex issue than is apparent. Probably the best advice is to maintain a log, at least daily, of casino visits and wins and losses for the day. If you visit multiple casinos, there should be a separate log entry for each casino on a given day. This will allow you to reasonably substantiate your winnings and deductible losses. While the win/loss statement provided by the casino at year end is helpful, it doesn't meet the technical requirements set out by the IRS. So, maintaining additional records is the safest route to take. If these amounts are significant, it makes sense to engage a tax professional who is familiar with these issues.

Professional Gamblers

We will not address the rules for professional gamblers in detail, but instead provide a brief overview. If one can substantiate the claim of being a "professional gambler", it opens the possibility of deducting not only losses, but various other expenses such as travel and lodging. Before getting ready to take advantage of this treatment, one must be aware that IRS can be aggressive against the claim one is a professional gambler. The most important decision to date on this issue was the 1986 Supreme Court decision in Commissioner vs. Groetzinger, 480 US 23 (1987). The Court, in this instance, found that "if one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for livelihood, and is not a mere hobby" it is a "trade or business" (i.e., it is a "profession"). If one is a professional gambler, all income, expenses and losses are reportable on Schedule C of form 1040.

The requirements are not easily met, as it must bear a strong resemblence to a business and not merely a hobby or entertainment activity. Gambling must be pursued as a business with an anticipation of profits for the Groetzinger ruling to be applicable. Subsequent to this decision, the Minnesota Supreme Court has held that the "anticipation of profits" need not even be rational (e.g., playing video poker games that are losing games), however, there is no indication this rationale would be upheld in the US Supreme Court. If you are purporting to be a professional gambler, it would be good a idea to be able to show that you play only games having returns in excess of 100%. Anyone claiming to be professional gambler should probably have the assistance of a CPA who is familiar with these requirements.

Forms W2-G

The casino is required to provide a form W2-G whenever you receive winnings of $1,200 or more from a video poker machine. Various state tax law may have different requirements.

State Taxes

The various states have their own requirements for taxation of gambling winnings. If winnings are taxable in a state, the casino may be required to withhold some of your winnings to pay that state income tax. In some states, this may necessitate the filing of a state income tax return, even if to merely claim a refund of the taxes paid. Some states now require withholding and consider the withheld amount to be nonrefundable and as a flat payment of the taxes on the winnings. When playing in a state in which you are not familiar with the taxation of winnings, you should be prepared to deal with any winnings in that state at tax time. If you gamble in multiple states it is possible you will have to file tax returns in multiple states, applying the different rules for each state. Obviously, this can substantially complicate your tax filing requirement and you should take this into account. © 2012 | All Rights Reserved | ProSystems, Inc.