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Tax Interplay of Gambling Winnings and Losses: Part I

Welcome to the beginning of the nuts and bolts of poker taxes walk-through.

As mentioned last time, gambling winnings of U.S. residents are fully taxable (I will address the treatment of gambling winnings for non-U.S. residents in a future post).  Gambling income includes, but is not limited to, winnings from online poker.  The full amount of your gambling winnings for the year must be reported on line 21 of the IRS Form 1040, the U.S. Individual Income Tax Return (in some cases the winnings can instead be reported on line 12 as business income; I’ll visit that next week) .  Do not use Form 1040A or 1040EZ if you are reporting gambling winnings.

Sounds simple enough if you always win.  But we don’t always win.  If you do, I want to be your friend.  How are gambling losses treated?

Today’s First Takeaway: Gambling losses are allowed as a deduction to offset gambling winnings only to the extent of gambling winnings.

If you have an overall net loss from gambling in a given year (I’m sure DC members rarely experience this situation), this net loss cannot offset other income (salaries, for example), create a net operating loss carryback or carryover, or be carried to a previous or future tax year to offset gambling winnings in such year.  Ultimately, each year you report either no gambling winnings or some positive amount.  You do not report a net negative gambling loss.

You are probably wondering (as delcrossb did last week), how do you keep track of winnings and losses?

Today’s Second Takeaway:  In order to offset gambling winnings with gambling losses, all gambling activity must first be separated into “sessions.”

The definition of a poker session is not entirely clear, as the IRS has not issued guidance on the matter.  There has been ample discussion on the topic, however, to generate a consensus as to what the IRS would consider to be a poker session:

Each tournament is considered a separate poker session, whether it is online or live.  Cash games in one continuous sitting are considered one session, including online multi-tabling, unless different games are played (e.g. Texas Holdem, Omaha), in which case the different games are separate sessions.

Let’s try an example.  Suppose you win $50 in a cash game, switch to a tournament and lose the $50 entry-fee, then go back to a cash game and lose $20.  Further suppose that is all of your gambling activity for the year.  Here, there are three separate gambling sessions.  The $50 tournament loss offsets the $50 winnings from the cash game, and you are left with a $20 net gambling loss.  Because you finish with a net loss for the year, you do not have gambling income, and the $20 gambling loss cannot offset any other income from the year.  The loss simply goes unused.

This is not the entire story, however, with gambling losses.  Gambling losses offset gambling winnings differently under federal tax law, depending on whether you are considered a “professional” gambler or a “recreational” gambler.  Next week I will discuss the definition of these terms and how gambling losses are treated accordingly.

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