Tom Talks Taxes - February 22, 2022

How to calculate gain or loss from a gambling session

In this edition, I want to walk through a common scenario you might see in practice related to gambling, and how it should be treated on the tax return.

Sharon and John provide their 2021 tax information to you, and they have adjusted gross income (AGI) of $152,000 without taking into consideration a Form W-2G, Certain Gambling Winnings, showing $3,000. They did not receive a 2021 economic impact payment due to prior AGI being too high. They take the standard deduction and have no children.

If $3,000 is added to other income, then AGI increases to $155,000, and their tax liability net of the 2021 recovery rebate credit is $18,675.

Let’s assume you ask them additional information about this transaction. They were on vacation and went to a casino with friends. They brought $300 cash to gamble (which they withdrew by ATM upon arrival); by the time they left the casino, they left with $2,200, because they wagered some of the jackpot winnings (and lost). They went to a bank branch and deposited the $2,200 in cash because they did not want to carry that much cash.

Both the IRS and the Tax Court recognize that wagering activities are accounted for on a per-session basis. A taxpayer looks at the net gain or loss from a wagering session, and the sessions with gains are reported as other income on Schedule 1, Line 8b, and the sessions with losses are reported on Schedule A (but only to the extent of total wagering gains). Chief Counsel Advice AM 2008-11 provides additional explanation along with appropriate citations supporting this approach.

If you calculate Sharon and John’s wagering gain using the per-session method, then their wagering gain is only $1,900: $2,200 taken from the casino less $300 brought to the casino. The intervening transactions, including the jackpot reported on Form W-2G, are not considered. The Tax Court used the same calculation method in a similar situation in Shollenberger v. Comm., T.C. Memo 2009-306.

If only $1,900 is added to other income, then AGI increases to $153,900, and their tax liability net of the 2021 recovery rebate credit is $18,125, saving $550 in federal income tax.

What if the gambling session consists of one wager? The wagering gain, if any, is the total amount won less the bet placed. Rev. Rul. 83-130 explicitly states this approach.

Here is the take-home: if the gross winnings from Form W-2G are simply thrown into other income, the taxpayer’s adjusted gross income is inflated. This could cause increased taxable income, loss of AGI-dependent tax benefits (e.g. retirement savings credit, lifetime learning credit), increased AGI-dependent additional taxes (e.g. net investment income tax), and increased Medicare premiums.

If you’d like to learn more, I taught a 2 CE course on Gambling Tax Issues with Compass Tax Educators, and I’ll also be teaching it at several live tax events during 2022.

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