Gambling Losses Tax Deductible Australia
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Gross gambling income is reported on page one of Form 1040, while gambling losses are a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income (AGI) limit). Taxpayers often believe their winnings are immune from reporting unless they receive a Form W-2G. Your business of gambling will be considered separate to any other income you earn, effectively the gambling losses will be carried forward to be offset against future winnings. You can’t claim gambling losses as a tax deduction against any your normal income. As Tax Agents and accountants we get asked this quite often. Some countries are taxed on their gambling winnings. Australia is the lucky country and the income derived from these activities is not taxable for three main reasons:- 1) It’s generally not considered a profession. You must itemize deductions on Schedule A in order to take advantage of gambling losses. Nonprofessional gamblers that do not itemize deductions lose the tax benefit of deducting their losses. Gambling losses are deductible only to the extent of gambling winnings reported on line 21 of Form 1040. You must be able to substantiate any losses claimed. When the progressive jackpot is won, the jackpot Are Gambling Losses Tax Deductible In Australia for the next play is reset to a predetermined value, then resumes increasing with each play. Some games even feature a progressive jackpot network that’s linked across multiple games and Canadian jurisdictions. This means that every bet Are Gambling Losses Tax Deductible In Australia.By Donald Morris, Ph.D., MS, CPA
Executive Summary
*
Most taxpayers believe gambling proceeds are immune from tax, unless they receive a Form W-2G.
*
Each pull of a lever or push of a button on a slot machine, hand of blackjack or spin of a roulette wheel is an individual wager that may result in gambling winnings.
*
To prove gambling losses and taxable income, taxpayers are subject to rules of proof, recordkeeping, estimating and credibility.
Taxpayer-gamblers are not generally aware of the ease with which the IRS successfully counters attempts to offset gambling winnings with gambling losses. Often, gamblers are not concerned about the exact amount of gambling winnings they report, because they believe they have sufficient gambling losses to offset their winnings. The central issue raised by the Service on audit is not always the right to a deduction for gambling losses—allowed by Sec. 165(d)—but taxpayers’ inability to prove the amount of their gambling losses and, in particular, their basis in the losses claimed. The Problem of Gambling Losses
A common scenario involves a taxpayer, as in Norgaard,1 who reports gambling winnings because a Form W-2G, Certain Gambling Winnings, was issued. The fatal step is that the taxpayer dutifully reports the W-2G winnings, but fails to report any other winnings, however small. The IRS, on examination, questions the gambler about the possibility of any other winnings during the period. When the taxpayer admits to other winnings, the Service asserts that whatever the amount of the taxpayer’s losses, they were already used to offset the unreported winnings and, thus, are not available to offset the W-2G winnings. The Tax Court has accepted this position when the taxpayer failed to report gambling income in excess of W-2G winnings. The taxpayer must establish that claimed gambling losses exceed unreported gambling income, to be entitled to a deduction.2Gambling Losses Tax Deductible Australia 2020
When the IRS determines that a taxpayer’s income is incorrectly computed, he or she bears the burden of proving that the Service’s position is erroneous.3 In Mack,4 the Service successfully denied gambling losses, arguing that the taxpayer’s losses were already offset by winnings other than those reported on his return. In Lutz,5 the IRS conceded unproven gambling losses of $43,818.75 to the taxpayers, then asserted they were not entitled to a deduction, because those losses were less than the unreported gross gambling winnings omitted from the notice of deficiency. The court responded that, to establish their entitlement to deduct gambling losses from gross gambling income, the taxpayers had to show that their gambling losses exceeded the $50,995 of unreported gross gambling income not reflected in the notice of deficiency. This approach may save the Service from having to reconstruct a taxpayer’s unreported winnings, which can be daunting.6
A taxpayer’s logical response to the IRS should be to produce his or her books and records regarding the year’s gambling activities, as required by Rev. Proc. 77-29.7 This procedure requires taxpayer-gamblers to maintain an accurate diary or similar record, supplemented by verifiable documentation of wagering winnings and losses. The diary must contain the following information:
1. Date and type of specific wager or wagering activity;
2. Name and address or location of gambling establishment;
3. Name(s) of other person(s) (if any) present with the taxpayer at the gambling establishment; and
4. Amounts won or lost.
For slot machines, the Service further requires that a taxpayer record all winnings by date, time and slot machine number (see Exhibit 1). But because few taxpayers (especially recreational gamblers) maintain convincing records of their gambling activities, they can be left paying tax on their gross W-2G winnings, without any offset for gambling losses. Unreported W-2G winnings can also result in the imposition of penalties and interest.
In Kalisch,8 the taxpayer reported $41,979 in gambling income and claimed offsetting gambling losses in the same amount on his 1981 return. In its notice of deficiency, the IRS accepted the taxpayer’s income figure, but disallowed the deduction for gambling losses, because the taxpayer failed to substantiate them and because he had additional unreported winnings that exceeded his losses for the year. The court rejected the additional-income argument and allowed the loss deduction. Fortunately for taxpayers, the courts do not always agree with the Service’s reasoning. A Growing Problem
What is the potential magnitude of this problem? Should practitioners and their clients be concerned? Part of the answer lies in the growing number of people participating in gambling. In 2000, the U.S. General Accounting Office reported that legalized gambling had spread to every state, except Utah and Hawaii.9 Legalized gambling in the U.S. has seen a steady increase since the advent of Indian tribal casinos and the subsequent legalization of casino gambling by states other than Nevada. Gaming revenue for 2002 totaled $68 billion (up from $30 billion in 1992, or 127%), while in 2003, it totaled $73 billion, rising 7.4% from the previous year.10 Of this total, $40 billion stems from casino revenue.11 In addition, for 2004 (the most recent data available), 1.7 million taxpayers reported gambling winnings to the IRS totaling $23.3 billion. This is up from the 1.5 million taxpayers in 2003 who reported winnings of $19 billion.12 An estimated 86% of Americans have participated in gambling in some form, and 63% reported gambling at least once in the past year.13 The number of individuals visiting casinos in 2003 was 53 million—more than one quarter of the U.S. adult population.14 Tax advisers should assume the same percentages apply to their clients, as gambling cuts across demographic and regional boundaries. As one tax observer recently noted, “Gambling is increasingly looked upon as a legitimate entertainment option akin to sporting events, the theater, and amusement parks.”15 What are the practical consequences of the spread of gambling?
As with other areas requiring recordkeeping (such as automobile mileage and entertainment), clients must be informed of the legal requirements for reporting gambling winnings, even if they erroneously believe they have no reportable winnings or they have sufficient gambling losses to offset them. It is crucial to determine gross gambling winnings and to separately establish the amount and basis for deducting gambling losses. As noted, the IRS wields a powerful argument in its arsenal; taxpayers and their advisers need to be educated.Educating Clients
Education covers two fronts. First, which types or amounts of gambling winnings must be reported? The requirement to report gambling winnings (legal or illegal) at gross, even if the year’s net result is a loss, is not frequently recognized by taxpayers, including recreational gamblers. Gross gambling income is reported on page one of Form 1040, while gambling losses are a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income (AGI) limit).
Taxpayers often believe their winnings are immune from reporting unless they receive a Form W-2G. In Hamilton,16 taxpayers failed to include $134,041 in lottery winnings in income on the grounds that they were neither professional nor part-time gamblers. The court disagreed, asserting that “an accession to wealth on account of gambling winnings is includable in an individual taxpayer’s gross income whether he or she is a professional gambler, a part-time gambler, or simply a onetime gambler.”
Taxpayers must also segregate winnings from losses to allow proper reporting. In Clemons,17 the taxpayer argued that his $44,833 in gambling winnings need not be included in gross income, because he had sufficient gambling losses to offset them. According to the court, the taxpayer “steadfastly rejects or ignores certain basic principles of the Federal income tax laws.” The taxpayer insisted on netting his winnings and losses and reporting only net winnings on his return.18
Once the need to report gambling, like any other form of income, is established and the corresponding requirement to segregate (as opposed to netting) winnings and losses is acknowledged, the next step is establishing a basis for gambling losses.Tax Adviser’s Responsibility
Tax advisers need to recognize the pitfalls involved in determining the amount of gambling losses available to offset winnings. As most taxpayers do not keep sophisticated books and records of their gambling activity, the tax preparer is in a potentially perilous position when advising a client on documentation requirements for establishing gambling losses. If the taxpayer is reporting Form W-2G winnings (and no other gambling income), a preparer should not take a taxpayer’s word for the fact that he or she suffered sufficient offsetting losses without at least discussing the issue of documentation and the Service’s expectations in Rev. Proc. 77-29. The IRS and the courts, for example, view the documentation required for gambling no differently from that for employee business expenses, charitable donations, casualty losses and medical expenses. In Schooler,19 the court stated that there is no reason to treat taxpayers who claim deductions for wagering losses more favorably than other taxpayers by allowing a deduction for wagering losses when the evidence is inadequate. Calculating Gambling Income
Sec. 165(d) allows a deduction for losses from wagering transactions only to the extent of gains therefrom.20 Gambling winnings are defined in Sec. 3402(q)(4)(A) as proceeds from a wager that is determined by reducing the amount received by the amount of the wager. Literally construed, this means that each pull of the lever or push of the button on a slot machine, hand of blackjack or spin of a roulette wheel is an individual wager that may result in gambling winnings.
The Service’s position is: “a gambling gain is the difference between wagering proceeds received and the amount wagered on a gambling transaction. I.R.C. section 1001(a) defines gain as [the] difference between amount realized and [the] adjusted basis.”21 However, the IRS also admits a problem with the position that the cost of a winning wager should be excluded from gross income. In determining what constitutes a winning wager, it concedes, ’[t]here is a definitional problem of one gambling transaction.” (Emphasis added.) The Service’s guidance continues, “[a]lthough the purchase of a lottery ticket or a bet on a horse race seems to be an individual transaction, one hand of a poker game or one pull of the lever of a slot machine may not be one gambling transaction. This seems to be a factual issue which varies in accordance with the nature of the wager.” In Letter Ruling 8123015,22 the Service stated that a wagering transaction for purposes of withholding taxes is one in which all wagers are identical because bets are placed on the same animal (or team) to win the contest. If the wagers are not identical, there is more than one wagering transaction.
Further, according to the Service, each bet on a different possible winning combination is a separate wagering transaction for purposes of determining taxable income. It is apparent from this that, because each bet on a slot machine is a bet on a different set of contingencies programmed for the machine, each push of the button is a different gambling transaction. While it is clear that there may be a “definitional problem” in determining what constitutes one gambling transaction, it is not obvious that a practical distinction can be established between an individual bet on a horserace and an individual hand of poker, or between an individual lottery ticket purchase and a single push of the button on a slot machine. The key to resolving this issue may reside in application of the constructive-receipt doctrine.Constructive Receipt
Because individuals usually report their income on a cash basis, the constructive-receipt doctrine applies to their gambling transactions, as well as to other accessions to wealth. Constructive receipt means that income occurs when the taxpayer has the opportunity, whether exercised or not, to draw on the cash freely.23 The crux of constructive receipt is essentially unfettered taxpayer control over the time funds are actually received; control is not subject to any substantial limit or restriction. In this respect, gambling is analogous to earning interest on a savings account, but not actually retrieving it.24 The interest (or the gambling transaction winning) is taxable when available for withdrawal; whether one chooses to remove the cash at that point or leave it on account (in the slot machine or on the blackjack table) is irrelevant to its taxability.
Based on this reasoning, each winning or losing wager should constitute a gambling transaction, because a gambler could stop betting after any given wager. Thus, winnings (and losses) should be tracked for each individual bet, not, as many (most) gamblers (anecdotally) assume, on the basis of the day’s (or year’s) final tally. Reporting the outcome of each wager results in reporting gambling winnings at gross—as the law requires—and in an objectively determinable manner (although cumbersome, because of the recordkeeping). Without this interpretation of a gambling transaction, reporting losses separately from winnings becomes subjective and places the taxation of gambling gains effectively at the taxpayer’s discretion.Slot Machine (In-Out) Reports
Exhibit 2 is a sample report issued by casinos to slot machine players who register for the casino’s “Players’ Club” and use the card to record their slot machine play. The Players’ Club cards are magnetic-strip cards inserted by the gambler into the casino’s slot machines, which electronically track the player’s wins and losses.25 Taxpayer-gamblers who frequent casinos will often have this report available in their tax records.26
The win/loss amount is net; its accuracy hinges on several factors. The first is the consistency of the taxpayer’s use of the card when playing slot machines. (If he or she played at more than one casino, was a card used at each? Was the card employed at each machine? Did anyone else use the card?) The second is the taxpayer’s record of cash available before playing the slots, as well as after playing them; the “dollars in” figure includes amounts bet plus amounts placed in the machine’s currency accepter, but does not break them out. If the slot player cashes out the same amount he or she originally placed in the machine (i.e., breaks even), the amounts wagered and won are reliable indicators of gross winnings and wagers (given the above limits). If this is not the case, the win/loss amount must be adjusted by the change in cash position from the beginning of play to the end.27
The columns are calculated as described in Exhibit 3, which includes comparing amounts wagered to winnings and cash at the outset with cash at the end.
Taxpayer-gamblers are sometimes shocked by the numbers presented in the report in relation to their memories of actual amounts wagered. This results in part because “dollars in” represents not only the amount originally placed in the slot machine, but also the cumulative wagers—although the amounts wagered were likely never available to the gambler at any one time.28
Example 1: A gambler placed $2,000 of his own funds into slot machines over the course of a year. These wagers, together with credits from winning bets, generated cumulative wagers of $10,375.75, of which $8,729.50 was derived from winnings ($2,000 was cashed out). The result is a $1,646 net loss; see Exhibit 4.
The “dollars out” column includes winnings plus funds cashed out, if any (not including jackpots, which are paid by hand and reported separately). In this example, the amounts originally deposited in the slot machine plus the amounts wagered exceed the amounts won plus dollars cashed out. When the hand-paid jackpot of $1,200 is subtracted, the loss is reduced to $446.25, as indicated in the report in Exhibit 2.Reporting Losses
The fact that a taxpayer incurred a net loss for a year does not relieve him or her of the obligation to report winnings. In Exhibit 2, the Form W-2G received for the $1,200 jackpot will likely encourage the taxpayer to report such winnings on his return. The Exhibit 2 report states that there was a net loss for the year; this may lead the taxpayer to conclude that a $1,200 deduction in offsetting losses is warranted on Form 1040, Schedule A. This is how the problem of demonstrating a basis for losses arises, because the losses on the report are linked to income that may be unreported.
It is up to the taxpayer to establish the out-of-pocket amount ($2,000 in Example 1). The process of establishing gross winnings requires the taxpayer to prove the amount originally wagered, as well as the funds remaining at the end of a gambling session. The IRS lists bank records as one means of corroborating amounts gambled; thus, taxpayers can accomplish this by making automated teller machine (ATM) withdrawals at the casino and retaining these records. After the amount of the taxpayer’s own funds provided and retained is determined, he or she can establish gross winnings and losses from the in-out report. While it
https://diarynote-jp.indered.space
Gross gambling income is reported on page one of Form 1040, while gambling losses are a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income (AGI) limit). Taxpayers often believe their winnings are immune from reporting unless they receive a Form W-2G. Your business of gambling will be considered separate to any other income you earn, effectively the gambling losses will be carried forward to be offset against future winnings. You can’t claim gambling losses as a tax deduction against any your normal income. As Tax Agents and accountants we get asked this quite often. Some countries are taxed on their gambling winnings. Australia is the lucky country and the income derived from these activities is not taxable for three main reasons:- 1) It’s generally not considered a profession. You must itemize deductions on Schedule A in order to take advantage of gambling losses. Nonprofessional gamblers that do not itemize deductions lose the tax benefit of deducting their losses. Gambling losses are deductible only to the extent of gambling winnings reported on line 21 of Form 1040. You must be able to substantiate any losses claimed. When the progressive jackpot is won, the jackpot Are Gambling Losses Tax Deductible In Australia for the next play is reset to a predetermined value, then resumes increasing with each play. Some games even feature a progressive jackpot network that’s linked across multiple games and Canadian jurisdictions. This means that every bet Are Gambling Losses Tax Deductible In Australia.By Donald Morris, Ph.D., MS, CPA
Executive Summary
*
Most taxpayers believe gambling proceeds are immune from tax, unless they receive a Form W-2G.
*
Each pull of a lever or push of a button on a slot machine, hand of blackjack or spin of a roulette wheel is an individual wager that may result in gambling winnings.
*
To prove gambling losses and taxable income, taxpayers are subject to rules of proof, recordkeeping, estimating and credibility.
Taxpayer-gamblers are not generally aware of the ease with which the IRS successfully counters attempts to offset gambling winnings with gambling losses. Often, gamblers are not concerned about the exact amount of gambling winnings they report, because they believe they have sufficient gambling losses to offset their winnings. The central issue raised by the Service on audit is not always the right to a deduction for gambling losses—allowed by Sec. 165(d)—but taxpayers’ inability to prove the amount of their gambling losses and, in particular, their basis in the losses claimed. The Problem of Gambling Losses
A common scenario involves a taxpayer, as in Norgaard,1 who reports gambling winnings because a Form W-2G, Certain Gambling Winnings, was issued. The fatal step is that the taxpayer dutifully reports the W-2G winnings, but fails to report any other winnings, however small. The IRS, on examination, questions the gambler about the possibility of any other winnings during the period. When the taxpayer admits to other winnings, the Service asserts that whatever the amount of the taxpayer’s losses, they were already used to offset the unreported winnings and, thus, are not available to offset the W-2G winnings. The Tax Court has accepted this position when the taxpayer failed to report gambling income in excess of W-2G winnings. The taxpayer must establish that claimed gambling losses exceed unreported gambling income, to be entitled to a deduction.2Gambling Losses Tax Deductible Australia 2020
When the IRS determines that a taxpayer’s income is incorrectly computed, he or she bears the burden of proving that the Service’s position is erroneous.3 In Mack,4 the Service successfully denied gambling losses, arguing that the taxpayer’s losses were already offset by winnings other than those reported on his return. In Lutz,5 the IRS conceded unproven gambling losses of $43,818.75 to the taxpayers, then asserted they were not entitled to a deduction, because those losses were less than the unreported gross gambling winnings omitted from the notice of deficiency. The court responded that, to establish their entitlement to deduct gambling losses from gross gambling income, the taxpayers had to show that their gambling losses exceeded the $50,995 of unreported gross gambling income not reflected in the notice of deficiency. This approach may save the Service from having to reconstruct a taxpayer’s unreported winnings, which can be daunting.6
A taxpayer’s logical response to the IRS should be to produce his or her books and records regarding the year’s gambling activities, as required by Rev. Proc. 77-29.7 This procedure requires taxpayer-gamblers to maintain an accurate diary or similar record, supplemented by verifiable documentation of wagering winnings and losses. The diary must contain the following information:
1. Date and type of specific wager or wagering activity;
2. Name and address or location of gambling establishment;
3. Name(s) of other person(s) (if any) present with the taxpayer at the gambling establishment; and
4. Amounts won or lost.
For slot machines, the Service further requires that a taxpayer record all winnings by date, time and slot machine number (see Exhibit 1). But because few taxpayers (especially recreational gamblers) maintain convincing records of their gambling activities, they can be left paying tax on their gross W-2G winnings, without any offset for gambling losses. Unreported W-2G winnings can also result in the imposition of penalties and interest.
In Kalisch,8 the taxpayer reported $41,979 in gambling income and claimed offsetting gambling losses in the same amount on his 1981 return. In its notice of deficiency, the IRS accepted the taxpayer’s income figure, but disallowed the deduction for gambling losses, because the taxpayer failed to substantiate them and because he had additional unreported winnings that exceeded his losses for the year. The court rejected the additional-income argument and allowed the loss deduction. Fortunately for taxpayers, the courts do not always agree with the Service’s reasoning. A Growing Problem
What is the potential magnitude of this problem? Should practitioners and their clients be concerned? Part of the answer lies in the growing number of people participating in gambling. In 2000, the U.S. General Accounting Office reported that legalized gambling had spread to every state, except Utah and Hawaii.9 Legalized gambling in the U.S. has seen a steady increase since the advent of Indian tribal casinos and the subsequent legalization of casino gambling by states other than Nevada. Gaming revenue for 2002 totaled $68 billion (up from $30 billion in 1992, or 127%), while in 2003, it totaled $73 billion, rising 7.4% from the previous year.10 Of this total, $40 billion stems from casino revenue.11 In addition, for 2004 (the most recent data available), 1.7 million taxpayers reported gambling winnings to the IRS totaling $23.3 billion. This is up from the 1.5 million taxpayers in 2003 who reported winnings of $19 billion.12 An estimated 86% of Americans have participated in gambling in some form, and 63% reported gambling at least once in the past year.13 The number of individuals visiting casinos in 2003 was 53 million—more than one quarter of the U.S. adult population.14 Tax advisers should assume the same percentages apply to their clients, as gambling cuts across demographic and regional boundaries. As one tax observer recently noted, “Gambling is increasingly looked upon as a legitimate entertainment option akin to sporting events, the theater, and amusement parks.”15 What are the practical consequences of the spread of gambling?
As with other areas requiring recordkeeping (such as automobile mileage and entertainment), clients must be informed of the legal requirements for reporting gambling winnings, even if they erroneously believe they have no reportable winnings or they have sufficient gambling losses to offset them. It is crucial to determine gross gambling winnings and to separately establish the amount and basis for deducting gambling losses. As noted, the IRS wields a powerful argument in its arsenal; taxpayers and their advisers need to be educated.Educating Clients
Education covers two fronts. First, which types or amounts of gambling winnings must be reported? The requirement to report gambling winnings (legal or illegal) at gross, even if the year’s net result is a loss, is not frequently recognized by taxpayers, including recreational gamblers. Gross gambling income is reported on page one of Form 1040, while gambling losses are a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income (AGI) limit).
Taxpayers often believe their winnings are immune from reporting unless they receive a Form W-2G. In Hamilton,16 taxpayers failed to include $134,041 in lottery winnings in income on the grounds that they were neither professional nor part-time gamblers. The court disagreed, asserting that “an accession to wealth on account of gambling winnings is includable in an individual taxpayer’s gross income whether he or she is a professional gambler, a part-time gambler, or simply a onetime gambler.”
Taxpayers must also segregate winnings from losses to allow proper reporting. In Clemons,17 the taxpayer argued that his $44,833 in gambling winnings need not be included in gross income, because he had sufficient gambling losses to offset them. According to the court, the taxpayer “steadfastly rejects or ignores certain basic principles of the Federal income tax laws.” The taxpayer insisted on netting his winnings and losses and reporting only net winnings on his return.18
Once the need to report gambling, like any other form of income, is established and the corresponding requirement to segregate (as opposed to netting) winnings and losses is acknowledged, the next step is establishing a basis for gambling losses.Tax Adviser’s Responsibility
Tax advisers need to recognize the pitfalls involved in determining the amount of gambling losses available to offset winnings. As most taxpayers do not keep sophisticated books and records of their gambling activity, the tax preparer is in a potentially perilous position when advising a client on documentation requirements for establishing gambling losses. If the taxpayer is reporting Form W-2G winnings (and no other gambling income), a preparer should not take a taxpayer’s word for the fact that he or she suffered sufficient offsetting losses without at least discussing the issue of documentation and the Service’s expectations in Rev. Proc. 77-29. The IRS and the courts, for example, view the documentation required for gambling no differently from that for employee business expenses, charitable donations, casualty losses and medical expenses. In Schooler,19 the court stated that there is no reason to treat taxpayers who claim deductions for wagering losses more favorably than other taxpayers by allowing a deduction for wagering losses when the evidence is inadequate. Calculating Gambling Income
Sec. 165(d) allows a deduction for losses from wagering transactions only to the extent of gains therefrom.20 Gambling winnings are defined in Sec. 3402(q)(4)(A) as proceeds from a wager that is determined by reducing the amount received by the amount of the wager. Literally construed, this means that each pull of the lever or push of the button on a slot machine, hand of blackjack or spin of a roulette wheel is an individual wager that may result in gambling winnings.
The Service’s position is: “a gambling gain is the difference between wagering proceeds received and the amount wagered on a gambling transaction. I.R.C. section 1001(a) defines gain as [the] difference between amount realized and [the] adjusted basis.”21 However, the IRS also admits a problem with the position that the cost of a winning wager should be excluded from gross income. In determining what constitutes a winning wager, it concedes, ’[t]here is a definitional problem of one gambling transaction.” (Emphasis added.) The Service’s guidance continues, “[a]lthough the purchase of a lottery ticket or a bet on a horse race seems to be an individual transaction, one hand of a poker game or one pull of the lever of a slot machine may not be one gambling transaction. This seems to be a factual issue which varies in accordance with the nature of the wager.” In Letter Ruling 8123015,22 the Service stated that a wagering transaction for purposes of withholding taxes is one in which all wagers are identical because bets are placed on the same animal (or team) to win the contest. If the wagers are not identical, there is more than one wagering transaction.
Further, according to the Service, each bet on a different possible winning combination is a separate wagering transaction for purposes of determining taxable income. It is apparent from this that, because each bet on a slot machine is a bet on a different set of contingencies programmed for the machine, each push of the button is a different gambling transaction. While it is clear that there may be a “definitional problem” in determining what constitutes one gambling transaction, it is not obvious that a practical distinction can be established between an individual bet on a horserace and an individual hand of poker, or between an individual lottery ticket purchase and a single push of the button on a slot machine. The key to resolving this issue may reside in application of the constructive-receipt doctrine.Constructive Receipt
Because individuals usually report their income on a cash basis, the constructive-receipt doctrine applies to their gambling transactions, as well as to other accessions to wealth. Constructive receipt means that income occurs when the taxpayer has the opportunity, whether exercised or not, to draw on the cash freely.23 The crux of constructive receipt is essentially unfettered taxpayer control over the time funds are actually received; control is not subject to any substantial limit or restriction. In this respect, gambling is analogous to earning interest on a savings account, but not actually retrieving it.24 The interest (or the gambling transaction winning) is taxable when available for withdrawal; whether one chooses to remove the cash at that point or leave it on account (in the slot machine or on the blackjack table) is irrelevant to its taxability.
Based on this reasoning, each winning or losing wager should constitute a gambling transaction, because a gambler could stop betting after any given wager. Thus, winnings (and losses) should be tracked for each individual bet, not, as many (most) gamblers (anecdotally) assume, on the basis of the day’s (or year’s) final tally. Reporting the outcome of each wager results in reporting gambling winnings at gross—as the law requires—and in an objectively determinable manner (although cumbersome, because of the recordkeeping). Without this interpretation of a gambling transaction, reporting losses separately from winnings becomes subjective and places the taxation of gambling gains effectively at the taxpayer’s discretion.Slot Machine (In-Out) Reports
Exhibit 2 is a sample report issued by casinos to slot machine players who register for the casino’s “Players’ Club” and use the card to record their slot machine play. The Players’ Club cards are magnetic-strip cards inserted by the gambler into the casino’s slot machines, which electronically track the player’s wins and losses.25 Taxpayer-gamblers who frequent casinos will often have this report available in their tax records.26
The win/loss amount is net; its accuracy hinges on several factors. The first is the consistency of the taxpayer’s use of the card when playing slot machines. (If he or she played at more than one casino, was a card used at each? Was the card employed at each machine? Did anyone else use the card?) The second is the taxpayer’s record of cash available before playing the slots, as well as after playing them; the “dollars in” figure includes amounts bet plus amounts placed in the machine’s currency accepter, but does not break them out. If the slot player cashes out the same amount he or she originally placed in the machine (i.e., breaks even), the amounts wagered and won are reliable indicators of gross winnings and wagers (given the above limits). If this is not the case, the win/loss amount must be adjusted by the change in cash position from the beginning of play to the end.27
The columns are calculated as described in Exhibit 3, which includes comparing amounts wagered to winnings and cash at the outset with cash at the end.
Taxpayer-gamblers are sometimes shocked by the numbers presented in the report in relation to their memories of actual amounts wagered. This results in part because “dollars in” represents not only the amount originally placed in the slot machine, but also the cumulative wagers—although the amounts wagered were likely never available to the gambler at any one time.28
Example 1: A gambler placed $2,000 of his own funds into slot machines over the course of a year. These wagers, together with credits from winning bets, generated cumulative wagers of $10,375.75, of which $8,729.50 was derived from winnings ($2,000 was cashed out). The result is a $1,646 net loss; see Exhibit 4.
The “dollars out” column includes winnings plus funds cashed out, if any (not including jackpots, which are paid by hand and reported separately). In this example, the amounts originally deposited in the slot machine plus the amounts wagered exceed the amounts won plus dollars cashed out. When the hand-paid jackpot of $1,200 is subtracted, the loss is reduced to $446.25, as indicated in the report in Exhibit 2.Reporting Losses
The fact that a taxpayer incurred a net loss for a year does not relieve him or her of the obligation to report winnings. In Exhibit 2, the Form W-2G received for the $1,200 jackpot will likely encourage the taxpayer to report such winnings on his return. The Exhibit 2 report states that there was a net loss for the year; this may lead the taxpayer to conclude that a $1,200 deduction in offsetting losses is warranted on Form 1040, Schedule A. This is how the problem of demonstrating a basis for losses arises, because the losses on the report are linked to income that may be unreported.
It is up to the taxpayer to establish the out-of-pocket amount ($2,000 in Example 1). The process of establishing gross winnings requires the taxpayer to prove the amount originally wagered, as well as the funds remaining at the end of a gambling session. The IRS lists bank records as one means of corroborating amounts gambled; thus, taxpayers can accomplish this by making automated teller machine (ATM) withdrawals at the casino and retaining these records. After the amount of the taxpayer’s own funds provided and retained is determined, he or she can establish gross winnings and losses from the in-out report. While it
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