Deducting Gambling Losses - 08-15-25

The tax code is not kind to gamblers. All gambling wins are reportable as income. Losses are only deductible to the extent of wins and even that has limitations. Expenses of gambling, such as travel, meals, and lodging, are not deductible for casual gamblers.

In Part 1 of this two-part podcast we will discuss deducting gambling losses for recreational and professional gamblers. We will also discuss additional deductions professional gamblers can take and how to report those deductions. Listen in!

This podcast is meant for entertainment purposes only. For the more thorough, complete, and accurately written version of this article which includes citations, visit us at http://www.tottb.tax

Transcript

We've all been there. Right? You have those clients, the ones who come into your office maybe after a, quote, unquote, successful trip to Vegas. They're excited about their winnings Uh-huh. Only for you to break the news that their, well, their net gain might actually be a tax headache.

Or maybe they're a more serious player trying to make a living and finding the IRS sees things differently. Yeah. That happens a lot. So today, for all of you listening, the CPAs, the EAs, the tax law practitioners, we're gonna try and cut through some of that complexity around deducting gambling losses. It's definitely a tricky area.

Our goal here in this deep dive is really to pull out the crucial nuggets, the, you know, the real game changers from some recent expert insights, stuff that could genuinely change how you advise your clients. Mhmm. We're looking at a really thorough article from Keith Schroeder. He's an EA over at Wealthy Accountant. And we've also got some, frankly, essential insights from Rob Gould Wetmore, who's a senior accountant at Alvin, Randall, and Bennett.

Both excellent sources. We wanna give you a shortcut really to getting up to speed on this niche, but, you know, pretty important area for your practice. So we'll cover the current situation for recreational and professional gamblers, then really get into record keeping, which is just critical. Absolutely critical. And maybe most importantly, we'll look at some big changes coming down the pike that are gonna impact your client's tax returns pretty soon.

Yeah. Those are definitely on the horizon. Okay. So let's start with, well, maybe a harsh reality that often catches clients off guard. The tax code's view on gambling wins and losses.

It's, well, it's generally not kind to gamblers. I was putting it mildly sometimes. Right. Every single dollar 1 gambling is reportable income, period. And here's the kicker, losses.

They're only deductible up to the amount of those wins. And even then, there are other limits recreational players almost always miss. Exactly. Like, for your average casual gambler, things you might think are related expenses, travel to the casino, meals, lodging. Nope.

Simply not deductible at all. Precisely. Yeah. And what's well, what's fascinating for you as tax professionals is just how often clients don't grasp that basic idea. They might think, oh, I lost money overall this year, so no tax issue.

Yeah. I'm down $5. I'm good. Right. But that's rarely how it works.

So understanding this fundamental split, recreational versus professional, is just paramount for you to advise them properly and, you know, prevent those nasty surprises come tax time. Okay. Let's dig into the recreational gamblers first because as the sources say, they often face the worst tax situation. They really do. So like we said, loss is only deductible up to winnings, aggregated annually.

All the wins deductible up to winnings aggregated annually. All the wins for the year get added up. All the losses get added up. For reporting, wins go on schedule one, line a b that's based on the twenty twenty four forms. Losses go on schedule a, line 16.

And it's important for your compliance work that even if they get multiple w two g showing wins, you aggregate all the losses for the year and put one total on schedule a, and that total can never exceed the total gambling winnings reported. Right. But here's the really crucial point for you practitioners. If your client's other itemized deductions like mortgage interest, state taxes, whatever, plus their allowable gambling losses still don't add up to more than their standard deduction. And there's zero tax benefit.

Exactly. Zero tax benefit for those gambling losses. And just to hammer it home, all other gambling related expenses for them, travel, food, hotels, not deductible. It's a tough pill to swallow for some clients. It really is.

So, okay, that's the deal for casual players. But what about people who treat gambling more like a business, a full time thing? Do they get a better shake from the IRS? They do fare a bit better as the source puts it. Yes.

But, and this is a big but, sporadic gambling, even if it's frequent, doesn't make someone a professional in the IRS's eyes. It can't just be a hobby they sometimes profit from. Okay. So this brings up a really important question for your practice. How do you actually figure out if a client qualifies as a professional gambler?

The guidance says it's based on facts and circumstances. Which sounds vague. It is. And to get a better handle on it, you really have to look back at a key supreme court case, Gruetzinger, from 1987. This case set the standard.

It said, basically, if one's gambling activity is pursued full time, in good faith, and with regularity to the production of income for a livelihood, and is not a mere hobby, it is a trade or business. Okay. But you hear those words, full time, good faith, regularity. They still sound pretty subjective, don't they? It's not like you can just show up in Vegas with a spreadsheet and declare yourself a pro.

Definitely not. The IRS needs more than that. These are exactly the gray areas where your professional judgment as their adviser is key. Maybe a helpful way to frame it for your clients is looking through the lens of those hobby loss rules. Okay.

The hobby loss rules. So to pin down that intent to make a profit, the tax court might use the a nine factor test. It's in the regs, section 1.183 dash two b one. Now there are nine factors, but maybe we can highlight a few key ones for tax pros evaluating a client. Sure.

Things like the manner in which the taxpayer carries on the activity. Are they businesslike, keeping good records, operating like a real business? Right. Makes sense. Also, the time and effort they put in, is this a major commitment or just something they do on weekends?

Okay. The taxpayer's history of income or losses in that activity is relevant too Mhmm. And, importantly, the elements of personal pleasure or recreation. If it looks too much like fun, it might undermine the business argument. Got it.

And this distinction, professional versus recreational, this is where things really change, especially regarding expenses. Right? Exactly. This is the crucial difference. While professional gamblers still can only deduct their actual gambling losses up to their gambling wins for the year Same limit there.

Same limit on the wagering losses themselves. Yes. But their other ordinary and necessary business expenses are deductible. This was confirmed in the Mayo case back in 02/2001. Okay.

So this means, and this is huge, a professional gambler could actually show an overall loss from their gambling activity, a loss that could potentially offset other income, unlike the recreational player. That's the potential advantage. Yes. It sounds good, and it can be, but we need to connect this to the practicalities for your tax practice. Professional gamblers report everything on schedule c like any other sole proprietor.

Right. Schedule c. So this opens the door to deducting expenses that recreational players just can't touch. Things like, consulting fees, maybe strategy coaching, education, tournament entry fees, travel costs directly related to the gambling business, even meals and lodging while conducting that business. Okay.

That's a significant list of potential deductions? It is. However, there's always a however in tax, isn't there? Usually. The big downside you need to flag for clients considering this path, because they are officially in a trade or business, professional gamblers are subject to self employment tax on their net earnings from gambling.

Ah, SC tax. That can be a hefty bite. It absolutely can. It often offsets a good chunk of the benefit from deducting those extra expenses. It's a crucial calculation for them to understand.

Okay. So whether the recreational or professional, all these rules, these deductions, they hinge on one thing, proof. Precisely. And that brings us to record keeping. I feel like we can't say this enough to clients, but meticulous accurate records are just fundamental for supporting gambling wins and especially any losses you wanna deduct.

You really can't overstate it. For compliance and definitely for audit defense, this is absolutely where the rubber meets the road. The IRS is crystal clear. RevPro pick. $77.29 requires a written log or diary.

No ifs, ands, or buts. Think of it as nonnegotiable. So what exactly has to be in this log or diary? You need to guide your clients on this. The details matter.

They do. You need first the type of gambling activity, slots, craps, poker at least each one separately. Okay. Then the date of the activity, the name and location of the place, you know, the casino or track, and interestingly, the names of other people who are there with the taxpayer, just their group, not everyone in the casino. Okay.

That's specific. It is. And crucially, the wager amount. Now this is generally interpreted as an aggregate for a session. Like, if your client takes a thousand dollars to the blackjack table, that's the wager amount for that session.

They don't need to track every single hand. Thank goodness. That would be impossible. Right. Then the type of gambling, regular casino play, tournament, etcetera, and, of course, the wins and losses for that specific session or activity on that date.

And the sources mentioned going even further for different game types. Yes. For an even stronger position. Notice twenty fifteen, 21, and other guidance suggest more specifics for bingo, number of games, ticket costs. For table games Mhmm.

The table number. Table number. For slots. Right. Date, time, machine number, maybe even machine plate if they know it.

Keno, keep copies of tickets. Casino credit records help too. Lottery, record ticket buys, keep payment slips, even unredeemed tickets. Wow. And for horse or dog racing.

Track the races, wagers, amounts won or lost, ideally on a per race basis. The more detail, the better prepared your client is if the IRS comes knocking. Okay. That's a lot on record keeping, but clearly vital. Now let's shift gears and talk about the future because things are apparently set to change in a pretty big way, I guess this is the, the bad news part.

You could call it that. It's definitely significant news you need to be aware of. Everything we've just discussed, the rules for 2024 or 2025, that's current federal law, but changes are coming. And this is where tax professionals really need to lean in. Right?

Absolutely. Starting with the 2026 filing season. Oh. For tax years beginning after 12/31/2025, there's a major shift. Deductible gambling losses will be limited to 90% of winnings.

90%. Wow. Okay. And that applies to? Everyone, both recreational and professional gamblers.

The source article also mentions this will likely apply on a possession basis, which add another layer of complexity, though details are still forthcoming on that. But the 90% cap hits everybody. Okay. Let's get specific. This comes from the, the one big beautiful bill act, the OBBBA, section seven a row one one two.

That's the one. It amends section one sixty five d g of the code. The key text basically says that the deduction allowed for wagering losses and a tax year Yeah. Shall be equal to 90% of those losses, and it's still only allowed up to the amount of the gains from wagering. And importantly, it clarifies that losses from wagering transactions includes any deductible expense incurred in carrying on wagering, so that hits the pro gamblers other expenses too.

Okay. So it's a double hit potentially for pros, 90% limit on the loss itself, and that limit applies even when considering their other business expenses related to gambling. Correct. And it's really important to stress as Rob Gould Whitmore points out, the industry is still waiting on regulations to clarify exactly how this will work in practice. There's potential for some, let's say, odd outcomes depending on how things are sequenced.

Okay. So let's walk through those scenarios Gold Wetmore laid out. They really show the practical impact for your clients. First, a breakeven year. Client has $10,000 in wins, $10,000 in losses.

Simple enough. Right? You'd think no tax. But under the new law, they can only deduct 90% of the loss, so $9,000. Which leaves A thousand dollars of taxable income even though they broke even financially.

Wow. Okay. That's a huge shift. What about a winning year? A hot streak.

Say, $50,000 in wins, $30,000 in losses. Okay. So the losses are limited to 90%, which is $27,000, $30000.0.99. So they deduct $27,000 from their $50,000 winnings. Leaving $23,000 of net gambling income subject to tax.

Correct. Now interestingly, in this specific winning scenario, the current 2025 rules are actually better for the taxpayer as they deduct the full $30,000 loss, leaving only $20,000 taxable. Right. Good point. Okay.

Now the more common scenario may be a rough year. $8,000 in wins, $12,000 in losses. So 90% of the $12,000 loss is $10,800, but remember, losses are still limited to the extent of winnings. So even though 90% of the loss is 10,800, they only have $8,000 in winnings. So they can only deduct $8,000.

Their net taxable income from gambling is zero. But this highlights that sequencing issue. How exactly the two limits interact will need clarification from treasury. Gotcha. Okay.

Final scenario. A high volume professional. Let's say $200,000 in wins, but $220,000 in losses, so a net financial loss for the year. Under the new rules, you take 90% of losses. So 90% of $220,000 is a $198,000.

Okay. That $198,000 loss deduction is less than their $200,000 in winnings. So wait. Even though they lost $20,000 overall for the year? They will still pay tax on $2,000 of gambling income.

$200,000 win a $198,000 deductible loss. That is counterintuitive to say the least. A professional gambler with a net loss for the year ends up with taxable gambling income. Exactly. It's a significant change.

And we should also just briefly mention, there was proposed legislation introduced back in July 2025 aiming to repeal this 90% limit and go back to a 100% deductibility up to winnings. Right. So the final chapter might not be written yet. But as of now, the 90% rule is lost starting in 2026. We'll have to wait and see if that repeal effort gains traction.

Definitely something to watch. Alright. Okay. So let's try to wrap this up. Key takeaways from this deep dive for your practice.

First, the really stark tax differences between recreational and professional gamblers. Pros have more deduction potential, but that SE tax is a big factor. And second, the absolute necessity of rigorous detailed record keeping. Those logs, those diaries, they aren't optional if you wanna claim losses. Cannot stress that enough.

And third, this big change coming in 2026 with the one big beautiful bill act limiting deductible losses to 90% of winnings for everyone. So this really brings up a critical question for you, the tax professionals listening. How do you begin advising your clients now about these upcoming changes, especially regarding record keeping and managing their expectations about potentially owing tax even in years they feel they broke even or lost money? Proactive communication seems essential. Absolutely.

And maybe here's a final thought to leave you with. Given that new legislation was introduced almost immediately to try and reverse this 90% limit, how much certainty can taxpayers and you as their advisers really count on in this area of tax law? It seems to be constantly shifting. It does. What does that volatility mean for any kind of long term tax planning for your clients who gamble, whether recreationally or professionally?

Something to definitely mull over until our next deep dive.