When filing your taxes, you can deduct gambling losses up to the amount of your winnings. This allows you to offset taxes on any gambling income you received. However, you must have proper documentation to prove your losses to the IRS.
What records should you keep for gambling losses?
The IRS requires you to maintain detailed records of your gambling activity. This includes keeping an accurate diary or similar record of all losses and winnings. Your records should include the following information:
- The date and type of gambling activity
- The name and location of the gambling establishment
- The names of others present with you at the gambling establishment
- The amount you won or lost
In addition to your diary or log, you should keep other documentation such as:
- Receipts, tickets, statements, or other records that show gambling activity
- Documentation for gambling-related expenses such as travel, meals, and lodging
- Records of bank deposits/withdrawals or credit card charges/payments related to gambling
- Copies of Form W-2G, Certain Gambling Winnings
Having a complete paper trail of your gambling transactions will help validate your activity if audited by the IRS. Your diary combined with third-party records can provide critical substantiation.
What if you don’t have complete records?
The IRS recognizes that gamblers don’t always keep perfect documentation. If you lack complete records, you can prove losses using the following methods:
- Reasonable Reconstruction: Make a good faith effort to reconstruct your gambling activity using any records and receipts you have available.
- Third Party Statements: Obtain statements from the gambling establishment to verify your activity for days you were present.
- Witness Testimony: Have other individuals sign an affidavit swearing to your gambling activity and corroborating losses.
While it takes more effort to prove losses without complete records, it can be done. You may need to rely more heavily on tax law related to the burden of proof and substantiation requirements.
When is documentation required by the IRS?
There are certain situations that will trigger the IRS to require documentation of your gambling activity:
- You claim a loss but don’t report any gambling winnings.
- You report large or frequent amounts of gambling losses.
- Your losses offset most or all of your income.
- You are audited by the IRS for any reason.
In these cases, having detailed records and third-party verification will help avoid problems. The IRS needs to confirm you did participate in gambling activity and incurred the losses claimed.
What records are acceptable as proof?
The IRS allows a wide variety of records as acceptable proof of gambling activity. Some examples include:
- Casino credit records
- State lottery records
- Keno tickets
- Canceled checks, cashier’s checks, or money orders
- Credit records and bank withdrawals
- Racetrack fee statements
- diaries or logs
- Records of bingo, raffles, or lottery purchases
- Hotel bills from gambling destinations
As long as the records clearly document your gambling losses, the IRS will generally accept them as proof. The more types of records you have to draw on, the stronger your documentation will be.
What if you only have ATM withdrawals and no other records?
Having only ATM withdrawals at casinos as proof of losses is risky. The IRS may disallow the losses because you lack any other documentation. However, if the only way to gamble at that establishment is by using a player’s card connected to the ATM card, then the withdrawals can substantiate the losses, provided you have records to show the dates you were present gambling.
Do you need receipts for every single gambling transaction?
The IRS does not require a gambling diary and slips to reflect every single wager. As long as your records are accurate and relatively complete, you do not need 100% documentation of every transaction. But the more comprehensive your records, the less likely to raise audit red flags.
Does your diary need to be handwritten or can it be digital?
It is fine to keep your gambling diary or log in digital formats such as a spreadsheet or word processing document. The records can be handwritten, typed, or maintained digitally as long as they are reliable and consistent.
Should you keep gambling logs concurrent or recreate them later?
Concurrent gambling logs made at the time of your actual gambling activity provide stronger documentation than recreating logs from memory after the fact. However, if you lacked the awareness or discipline to log concurrently, reconstructing logs is better than no logs.
Do you have to record gambling losses separately or can you lump sum?
Your gambling diary should itemize losses separately for each gambling session rather than lump summing daily totals. This provides greater detail in case the IRS ever requires an audit. But if you maintained reasonable contemporaneous totals, the IRS likely won’t disallow the deduction entirely.
How long should you keep gambling loss records?
You should keep gambling loss records until the statute of limitations expires on that tax return. The general statute of limitations is 3 years after filing for most returns. However, the statute extends to 6 years if you understate gross income by more than 25%. To be safe, keep records for at least 6 years.
Are there penalties if you don’t have proof of losses and are audited?
Yes, lack of records opens you up to penalties if the IRS chooses to disallow undocumented gambling loss deductions. The most common penalties are:
- Accuracy Penalty: 20% of the amount of additional tax owed.
- Civil Fraud Penalty: 75% of the amount of additional tax owed.
- Criminal Penalty: Up to $250,000 fine, 5 years imprisonment, or both.
These stiff penalties make it critical to maintain adequate gambling loss documentation.
Should you report losses even if you have poor documentation?
You should still claim gambling losses up to the amount of winnings reported, even if documentation is weak. Simply explain on your return that records were lost or destroyed. Reporting accurately reflects good faith and can help avoid an audit. Avoiding reporting losses due to lack of documentation will raise red flags.
If audited, what’s the worst case scenario for lack of records?
In a worst case audit scenario where you have virtually no records to support losses claimed, the IRS may completely disallow the deductions. You would then owe tax on the full amount of gambling winnings reported. Accuracy and fraud penalties could potentially apply too.
Should you tell your tax preparer you have poor documentation?
Yes, you should inform your tax preparer if you lack complete records to prove gambling losses claimed. They can then advise you on the strength of documentation needed. They can also add notes to your return addressing any documentation gaps. This demonstrates you are not willfully misreporting losses.
When can gambling losses only offset winnings?
Gambling losses are an itemized deduction. However, recreational gamblers who do not qualify as professional gamblers can only deduct losses up to the amount of winnings reported. Losses cannot create a net loss to lower other income.
Can you claim gambling losses without reporting the winnings?
No, you cannot legally deduct gambling losses without reporting gambling winnings on your return. Losses are specifically limited to the amount of winnings you report. Only professional gamblers can deduct non-wager losses and business expenses that create a net gambling loss.
Do you have to itemize deductions to claim gambling losses?
Yes, gambling losses are only deductible as an itemized deduction on Schedule A. You cannot claim gambling losses if taking the standard deduction. Since the standard deduction doubled under the Tax Cuts and Jobs Act, fewer taxpayers now itemize. But if you report significant gambling winnings and losses, you likely still benefit from itemizing.
Can you prove losses via credit card statements or checks?
Yes, credit card statements and images of cashed checks can help establish gambling losses if they identify the payee as a gambling business. ATM withdrawals may also qualify depending on the location. Bank and credit card statements alone generally won’t fully satisfy documentation requirements, but they can contribute to proving activity.
Are losses proven by telling IRS the highest amount you bet?
No, the IRS will not accept your highest wager amount alone as proof of sustained losses. Stating you bet “up to” a certain dollar figure per hand or spin may establish the extent of activity but does little to prove consistent losing outcomes.
Do you have to report winnings under $600 if you have losses?
You need not report gambling winnings under $600 since the casino does not have to issue a Form W-2G. However, to deduct losses, you should report the winnings and related losses even if under $600. Otherwise, it appears you are deducting losses with no associated winnings, which raises audit risk.
Can you prove losses via tax statements from online gambling sites?
Yes, annual account statements from online gambling sites can help validate both losses and winnings. These third party reports may itemize wagers, outcomes, deposits, withdrawals, bonuses and other relevant activity. Even without detailed logs, these statements assist in evidencing your participation and net results.
Should you modify records to expand losses if audited?
You should never modify or embellish your gambling loss records once your return is filed. Doing so constitutes tax fraud with criminal penalties. If audited, stick to your original documentation. If records are incomplete, be honest and reconstruct losses in good faith.
Do you have to report bingo, lottery and raffle losses?
Winning bingo, lottery or raffle amounts over $600 trigger a W2-G filing requirement and are reported as gambling winnings. Losses from these activities are deductible up to reported winnings. Keep records of purchases and winning tickets. Smaller winnings can also be reported and offset by losses if you have documentation.
Should you stop gambling if you lack proper documentation?
If gambling recreationally, lack of documentation should not necessarily deter you from the activity. Simply be aware it raises audit risk and try to improve record keeping. If pursuing professional gambling, strict contemporaneous documentation is crucial. In that case, you may need to cease gambling until able to properly track activity.
Are there mileage tracking apps that help document gambling trips?
Yes, apps like MileIQ, TripLog and Everlance can track mileage driven to gambling establishments. They log dates, locations, mileage, and map routes traveled. These serve as solid supporting records to supplement gambling diaries and third-party documentation.
Table 1: Record Keeping Tips for Documenting Gambling Activity and Losses
| Record Type | Details |
|---|---|
| Gambling Log or Diary | Date, establishment, type of gambling, amounts won/lost |
| Receipts and Tickets | Keno, bingo, lottery, table game markers, racetrack tickets, etc. |
| Casino Records | ATM, credit card, slot club and table game receipts |
| Bank and Credit Card Statements | Withdrawals and advances at gambling establishments |
| IRS Form W-2G | Records certain gambling winnings |
| Tax Statements | Year-end win/loss statements from online gambling sites |
| Travel Records | Lodging, airline, rental car receipts |
This table summarizes key records to keep for documenting gambling wins and losses.
Table 2: Tax Penalties for Inaccurate Reporting of Gambling Activity
| Penalty Type | Details |
|---|---|
| Accuracy-Related Penalty | 20% of underpaid tax |
| Civil Fraud Penalty | 75% of underpaid tax |
| Criminal Penalty | Up to $250,000 fine and/or 5 years prison |
This table outlines civil and criminal penalties the IRS may impose if they determine you inaccurately reported gambling activity due to lack of documentation.
Conclusion
Proving gambling losses requires maintaining detailed records such as diaries, logs, receipts and third-party statements. Keeping exhaustive documentation minimizes audit risk if you claim large losses. Reasonable reconstruction and good faith efforts also allow deducting unsupported losses, but you may still incur penalties. Responsible record keeping remains key to smoothly deducting gambling losses and avoiding trouble with the IRS.