Making Sense of Tax Laws That Are Stacked Against Gamblers
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Gamblers don’t have it easy.
If their game is slots or blackjack or craps, there’s the house edge. Poker players have to deal with the rake. Sports bettors face an uphill climb against the vig.
And if the gambler — whether she or he is a pro, or just one of the tens of millions of casual gambling customers — gets a little lucky and collects some cash, there’s the not so insignificant issue of taxes. And even there, the deck is stacked against gamblers.
It really always has been that way, but the 2017 tax reform (technically known as the Tax Cut and Jobs Act, or TCJA) really underscored the inequity that gamblers, most prominently casual gamblers, face.
Here’s one problem. Many people realize that gamblers can’t calculate their net losses from gambling and use those excess losses to offset other types of income. Tax rules have always been that way; whatever gambling losses a gambler suffers, those losses could be used to offset gambling winnings but only up to the total amount of money won. Any excess losses, well, the gambler just ate those.
Technically, the rule of being able to deduct losses to offset winnings is still part of the tax code, but in practice, most casual gamblers don’t ever get to use that deduction these days. Why? Because those deductions are reported on Schedule A of a person’s tax return as part of itemized deductions.
But — and here it comes — the new standard deduction for taxpayers under the 2017 tax reform is so high that the vast majority of taxpayers no longer itemize deductions. Hence, the casual gambler’s net gambling losses are no longer in play because the taxpayer can’t both itemize a gambling-loss deduction and take the standard deduction. The standard deduction for 2020 is $12,400 for single filers and married filing separately, $24,800 for married filing jointly and $18,650 for head of household.
Reporting Your Gambling Winnings
OK, so that takes care of deducting gambling losses (most taxpayers won’t get to take them), but the really uncomfortable news is what gamblers have to do in reporting their gambling winnings. Those winnings get reported on the front of the Form 1040 on Line 8. And that would be the gross figure of winnings absent any allowance for losses. Let that sink in.
Meanwhile, just above that Line 8 is (logically) Line 7 where taxpayers report capital gains or losses. That’s right. A stock trader can wheel-and-deal, even as a day trader (which some characterize as gambling) and those taxpayers get to net their results.
“It’s certainly not equitable when you consider how business income and expenses are treated and how capital gains and losses are treated compared to gaming wins and losses,” said Marissa Chien, a Las Vegas-based tax preparer and book author whose clients include professional gamblers. “It really goes back to our puritanical roots as a country, that gambling has been seen as a ‘sin’ — even though that view is certainly changing.”
The consequences of taxpayers being required to report gross winnings is substantial. That amount gets carried down to Line 11, the adjusted gross income, which can affect a range of wide tax circumstances, such as whether someone qualifies for a stimulus check, or how much of their Social Security benefits are taxable.
AGA Takes Issue With Tax Cut and Jobs Act
How gamblers and winnings are treated is not lost on the American Gaming Association. When the TCJA of 2017 was wending its way through Congress, the AGA, the trade group that represents the gambling industry, sent a letter to Capitol Hill noting how the gambling loss deduction was really all but disappearing for many taxpayers.
Noting the higher standard deduction, the AGA’s letter said, in part:
“Under such a higher standard deduction, small and mid-level slot machine players may not be able to itemize their deductions, even with their gaming losses, and hence may not be able to offset gaming wins reported as income with the full amount of their gaming losses.
“AGA strongly recommends, as a matter of tax simplification, that gaming players should be permitted to subtract gaming losses from gaming winnings in order to compute their taxable net gaming income for purposes of reporting adjusted gross income, without being required to itemize their deductions.”
That appeal went nowhere.
And note that the AGA pointed out it would be “small and mid-level slot machine players” who would be impacted.
Why?
Because the slot players get tax documentation (a W-2G) every time they hit for a $1,200 jackpot, a tidy sum but certainly not serious. Meanwhile, $500-a-hand baccarat players can have stacks of chips move back-and-forth without those discreet events generating similar documentation.
“When you're thinking about somebody who is … a modest income person, who goes and wins a $1,200 slot jackpot and then has $2,000 in losses on the year but still is responsible for paying marginal tax on that $1,200 because that's the (tax) form that they got — and they don't have any way to itemize — that's a very potentially regressive tax on somebody who's actually not gotten any income on that,” said Chris Cylke, the AGA’s senior vice president for government relations.
Slot Jackpot Appeal
A tax area where the AGA hopes to make some headway is the threshold for generating those W-2Gs on slot jackpots. That limit was set more than 40 years ago and has never been recalibrated accounting for inflation. Using common inflation adjustment formulas, the $1,200 jackpot during the Jimmy Carter administration when the limit was set would be more than $5,000 today.
The AGA is making its appeal to the Treasury Department to raise the limit for those slot machine W-2Gs, but it may take Congressional action to make it happen.
“I wouldn't say anything's imminent but I'd say we feel like we have some momentum here and it's going to be something we're going to continue to focus on,” Cylke said. “Because while there's a lot of different areas of disagreement within the gaming industry, I think this is one that we've talked to all of the operators across the industry who say, ‘This is ridiculous, this creates a lot of overhead costs.’ And during COVID, the less interaction you have to have with a customer, unnecessarily, the better. And so, there's just too many of these $1,200 jackpots (today) which was never the intent.”
The emergence of online gaming, whether it’s sports betting or online casino play, is obviously creating tax obligations for gamblers who may be surprised to find that they’re receiving notifications from gambling operators of their winnings. It has always been a good idea for gamblers to keep track of their gambling sessions and maintaining logs of online wagering is just as important, especially since mobile betting can occur at a brisk pace.
Professional Gamblers Hit Hard
While casual gamblers and slot players who make up the gambling industry’s customer base are buffeted by not being able to net out their gambling outcomes, professional gamblers also got a rude jolt with the 2017 tax reform. First of all, there is quite a test for a taxpayer to qualify as someone who pursues gambling as a professional with the intent of making a living doing it, as opposed to someone who gambles for recreation, in which case the gambling activity is a hobby.
Professional gamblers, let’s say a poker player who spends most of his or her time traveling the country playing in tournaments and cash games, use Schedule C (Profit or Loss from Business), like any other businessperson. That's where pro poker players would list travel expenses, meals, lodging and the like.
And as other business operators would do, if those expenses exceeded income, then the business loss could be used to offset other income. That was until the 2017 tax reform. Now, professional gamblers can only use those expenses to offset their gambling winnings. The limitation expires in 2025, and it remains to be seen whether Congress extends it.
Don’t Forget State Taxes
Finally, gamblers can even get a raw deal from their home states. A handful of states — as many as 11 according to some who are keeping track — don’t allow any deductions at all for gambling losses, so every penny that gamblers win is treated as income to be taxed.
Some of those states that don’t allow deductions for gambling losses — Michigan online casino is one — have recently passed legislation legalizing sports wagering and online gambling.
A point that’s often made when legislators consider such gambling legislation is that a lure for attracting gamblers who have been taking their business to offshore bookmakers is that it’s better to deal with legal, regulated gambling operators where bettors can be sure that they’ll collect their winnings and where there’s recourse in case of a dispute.
While all of that is true, it seems that lawmakers, when crafting gambling law, might also consider giving those customers who they’re trying to attract a fair shake at tax time.
Remember, federal taxes are due by May 17 after the date was extended by the IRS from its normal April 15 deadline.
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