Using AI to Calculate Gambling Wins and Losses
Session netting is essential for tax minimization
Your client, Carl, loves to gamble online. For tax year 2024, he presents you with a log of all his online gambling activity from the platform he uses - and there are 337,708 individual bets, with total wagers of $6,915,615 and total wins of $6,620,455, for a total loss of $295,160.
As you look at this information, your blood pressure and (hopefully) your fees are quickly increasing. But how do you handle it?
Overview of the Gambling Tax Treatment
§165(d) limits the deduction from wagering transaction losses to the extent of wagering transaction gains. Wagering gains are included in gross income, but wagering losses are an itemized deduction on Schedule A.
Under Rev. Rul. 83-130, gross income from a wagering transaction is calculated by subtracting the wager placed to produce the payout from the payout. The wager amount is treated as the “basis” in the wagering transaction.
Gross income from wagering transactions is determined on a session basis. Determining whether a series of wagers is a session is a matter of the particular facts and circumstances. See Shollenberger v. Comm., T.C. Memo 2009-306 and LaPlante v. Comm., T.C. Memo. 2009-226 (2009) as examples of this.
Option 1: Simple But Incorrect Method
Include the total wins of $6,620,455 as gross income on Schedule 1, line 8b, and the gross wagers as deductible losses on Schedule A, line 16. The deduction is limited to $6,620,455, because the loss deduction cannot exceed total gambling gains.
The gain or loss from a bet is the amount won less the amount wagered; therefore, simply aggregating all proceeds as “gains” and all wager amounts as “losses” is not a proper analysis.
This method also skyrockets Carl’s adjusted gross income, potentially causing the loss of tax benefits, the imposition of additional taxes (such as the net investment income tax), and the addition of Medicare premium surcharges (IRMAA).
If Carl’s state does not allow gambling loss deductions, this method creates a huge state tax hit. In this case, he lives in Connecticut (which does not allow gambling losses), and this method would cost him over $150,000 in excess state income tax compared to Option 3 below.
Option 2: Individual Bet Calculations
I used ChatGPT to determine the individual bet gains and losses, and it segregated the winning and losing bets. If each bet is categorized as a wagering gain or loss, Carl has $4,418,193 in gambling wins and $4,713,353 in losses. While this is a better (and more accurate) result than Option 1, his AGI is still wildly increased from a losing gambling activity.
Option 3: Gambling Session Calculations
There is no official guidance on applying the gambling session method to online gambling; however, in Notice 2015-21, the IRS issued a proposed revenue procedure that provided a safe harbor for applying the session method to electronically tracked slot machine play. While no final version was issued, it indicates the IRS believed (at one time) the session method could apply to electronically tracked wagers.
I used ChatGPT to determine the session gains and losses with a four-hour rule: if Carl did not place a wager for four hours, the gambling session ended, and the next one began with the next wager.
Using the session method, Carl had total gambling session gains of $323,486 and total gambling losses of $618,646, resulting in a substantial reduction in his AGI compared to either Option 1 or Option 2.
OB3 Act Impacts
Starting in tax year 2026, under the One Big Beautiful Bill Act (OB3 Act), revised §165(d) limits a taxpayer’s wagering loss deduction to the lesser of (1) 90% of wagering losses incurred, or (2) wagering gains.
Using Option 1 in tax year 2026, Carl can only deduct $6,224,054 of gambling losses, increasing taxable income by at least $396,402 compared to the pre-2026 law.
Using Option 2 in tax year 2026, Carl can only deduct $4,242,018 of gambling losses, increasing taxable income by at least $176,175 compared to the pre-2026 law.
Using Option 3 in tax year 2026, Carl can only deduct $556,781 of gambling losses; however, this still exceeds the gambling wins, so there is no net taxable income increase compared to the pre-2026 law.
In addition, starting in tax year 2026, revised §68 limits the value of itemized deductions to 35% for taxpayers whose itemized deductions fall within the 37% tax bracket; this will reduce the value of gambling loss deductions for wealthy taxpayers.