New Gambling Tax Rule: Why Breaking Even May Still Create Taxable Income
Taxpayers who gamble should be aware of an important federal tax change that may affect how gambling winnings and losses are reported on their income tax returns.
This can apply to many types of gambling activity, including:
- Casino gambling
- Slot machines
- Sports betting
- Poker
- Lotteries
- Raffles
- Online wagering
- Other betting or wagering activities
Gambling Winnings Are Taxable
Gambling winnings are generally taxable income. This means that if a taxpayer wins money from gambling, those winnings may need to be reported on the tax return.
A common mistake is assuming that gambling income only needs to be reported if a tax form is received. That is not always correct. Even if no tax form is received, gambling winnings may still be taxable.
Gambling Losses Are Now More Limited
Under 26 U.S.C. §165(d), wagering losses are deductible only under specific limits.
The U.S. Code now provides that losses from wagering transactions are deductible at 90% of the amount of such losses, and only to the extent of gains from wagering transactions during the taxable year.
This means gambling losses may no longer fully offset gambling winnings.
Simple Example
Assume a taxpayer has the following gambling activity during the year:
- Gambling winnings: $10,000
- Gambling losses: $10,000
Economically, the taxpayer may feel like they broke even.
However, for tax purposes:
- Total gambling losses: $10,000
- Deductible portion at 90%: $9,000
- Taxable gambling income: $1,000
So even though the taxpayer did not actually make a net profit from gambling, there may still be taxable income.
Why This Matters
This rule can create unexpected tax results for taxpayers who gamble frequently.
For example, a taxpayer may think:
“I won $10,000 and lost $10,000, so I should not owe tax.”
But under the 90% limitation, the taxpayer may still have taxable gambling income because only 90% of the losses may be deductible.
Reporting Threshold Under Code Section 6041
There is also an important reporting rule under 26 U.S.C. §6041.
Section 6041 generally requires information reporting when a person engaged in a trade or business makes certain payments of $2,000 or more in any calendar year.
The U.S. Code also provides that for calendar years after 2026, this $2,000 amount is adjusted for inflation and rounded to the nearest $100.
Important: Reporting and Taxability Are Not the Same
Taxpayers should understand that information reporting rules and income tax rules are not the same thing.
A tax form may help the IRS track income, but the absence of a tax form does not automatically mean the income is not taxable.
In other words:
- Gambling winnings may still be taxable even if no form is received.
- Gambling losses must be properly documented.
- Losses may be limited even when the taxpayer broke even overall.
Recordkeeping Is Very Important
Taxpayers who gamble should keep detailed records throughout the year.
Good records may include:
- Dates of gambling activity
- Location of gambling activity
- Type of gambling activity
- Amounts won
- Amounts lost
- Casino win/loss statements
- Player card records
- Betting account statements
- Bank records
- Copies of any tax forms received
Without proper documentation, it may be difficult to support gambling losses if the IRS questions the deduction.
Tax Implications
The new wagering loss limitation may affect taxpayers in several ways:
- A taxpayer may owe tax even if they broke even from gambling.
- Gambling losses may not fully offset gambling winnings.
- Only 90% of wagering losses may be deductible.
- The deduction is limited to wagering gains.
- Taxpayers should keep detailed records of winnings and losses.
- No tax form does not necessarily mean no taxable income.
- Frequent gamblers should review their gambling activity before filing their tax return.
Bottom Line
The new gambling loss limitation can create a surprising result: a taxpayer may have taxable income even when total gambling winnings and losses are equal.
Taxpayers with gambling activity should maintain accurate records and speak with a tax professional before filing their return.
Special Warning for Taxpayers Who Do Not Itemize
Taxpayers who take the standard deduction need to be especially careful.
Gambling winnings and gambling losses are not reported in the same place on the tax return.
- Gambling winnings are reported as taxable income.
- Gambling losses are generally deducted only if the taxpayer itemizes deductions on Schedule A.
This means that if a taxpayer does not itemize, the gambling losses may not provide a tax benefit.
Example
A taxpayer has:
- $10,000 of gambling winnings
- $10,000 of gambling losses
Even though the taxpayer broke even, the tax result may not be zero.
If the taxpayer takes the standard deduction:
- The full $10,000 of gambling winnings may still be taxable.
- The $10,000 of gambling losses may not be deductible.
- The taxpayer may owe tax even though there was no real profit.
This can be a surprising result for many taxpayers. Breaking even from gambling does not always mean there is no tax impact.
For this reason, taxpayers should keep accurate records and speak with a tax professional before filing their return.
Sources
This article is based on the following official U.S. Code provisions:
Internal Revenue Code §165(d) — Wagering Losses
This section explains the limitation on deducting losses from wagering transactions.
Official source:
https://uscode.house.gov/view.xhtml?edition=prelim&num=0&req=granuleid%3AUSC-prelim-title26-section165
Internal Revenue Code §6041 — Information Reporting Requirements
This section explains certain information reporting requirements and reporting thresholds.
Official source:
https://uscode.house.gov/view.xhtml?edition=prelim&num=0&req=granuleid%3AUSC-prelim-title26-section6041
