Gambling Winnings and Losses: IRS Reporting Rules and Tax Deductions Explained
- Viktoriya Barsukova, EA, MBA
- Sep 9
- 5 min read
NATP - Ann Campbell, CPA and CIA, delivered a comprehensive overview of the taxation and reporting of gambling winnings and losses, with particular focus on the changes introduced by the One Big Beautiful Bill Act (OBBBA) beginning in 2026. All gambling winnings—whether from lotteries, casinos, sports betting, racing, keno, cards, online platforms, or raffles—are taxable under IRC §61, even when no Form W-2G is issued. Non-gambling income, such as contests and sweepstakes, is reported separately on Form 1099-MISC. Winnings are reported on Form 1040, Schedule 1, while professional gamblers report on Schedule C. Casual gamblers may deduct losses only if they itemize and only up to the amount of their winnings. Professional gamblers may deduct both ordinary and necessary business expenses and wagering losses; however, beginning in 2026, losses will be capped at 90% of winnings under §165(d). The “basketing rule” applies, meaning that gambling losses may offset only gambling winnings and not other forms of income. Professional gambler status requires continuity, regularity, and a genuine profit motive, as established in Commissioner v. Groetzinger.
Accurate documentation is essential. Gamblers should maintain a diary that includes dates, wager types, locations, and amounts, supported by receipts, tickets, and casino reports. The IRS and Tax Court recognize the session method for netting wins and losses, and Form 8275 may be used to disclose differences between reported totals and W-2Gs. Audit red flags include inconsistent or missing records, improper netting, failure to report W-2G income, or activity that appears more like a hobby than a business. Special rules apply to nonresident aliens, who are subject to a flat 30% withholding on U.S. gambling winnings, and to group winnings, where Form 5754 must be completed before payout so the payer can issue W-2Gs to each participant. State laws also vary, with some jurisdictions disallowing the deduction of gambling losses altogether. Finally, digital gambling and cryptocurrency winnings must be valued at fair market value at the time they are won and reported in full.
Gambling Tax Q&A Guide
1. Professional vs. Casual Gamblers
Gambling Winnings and Losses: IRS Reporting Rules and Tax Deductions Explained
Q: How do you determine if someone is a professional gambler versus a casual gambler?
A: It depends on facts and circumstances (similar to the hobby loss rules). Consider:
Whether the taxpayer has another job or relies on gambling for their livelihood.
The amount of time spent gambling.
Whether gambling is conducted in a businesslike manner, with proper records and consistency.
Whether gambling income is the taxpayer’s primary source of support.
Q: If a taxpayer has a full-time W-2 job but receives many W-2Gs, could they still be a professional gambler?
A: Generally no. Multiple W-2Gs reflect multiple jackpots, not professional status. Professional status is unlikely if wages are the main livelihood, unless gambling is operated as a bona fide business (e.g., content creation, algorithms, or professional betting).
Q: Is there a set threshold of winnings or W-2Gs to qualify as a professional gambler?
A: No. There is no fixed threshold. It depends entirely on facts and circumstances.
Q: What expenses can professional gamblers deduct?
A: Ordinary and necessary business expenses, such as travel, hotels, meals, equipment, software, and even employee wages. Records must be thorough.
Q: What are examples of professional gamblers?
A: A mathematician running betting algorithms with employees, or a retired taxpayer who systematically gambles full-time with proper records and discipline.
2. Reporting Winnings and Losses
Q: How do casual gamblers report winnings and losses?
A: All winnings must be reported as income. Losses can be deducted only if the taxpayer itemizes on Schedule A, and only up to the amount of winnings.
Q: How do professional gamblers report winnings and losses?
A: Income and losses are reported on Schedule C. Losses are deductible only up to gambling income, but business expenses are deductible in addition.
Q: What is the sessions method?
A: The sessions method nets wins and losses at the session level, not per wager, providing a fairer reflection of activity.
Q: If you use the sessions method one year, must you continue it?
A: No. Consistency is required within a given year, but a different method may be chosen in a future year.
Q: How does the 90% rule apply?
A: Beginning in 2026, gambling losses are limited to 90% of winnings, even when using the sessions method.
Q: Why might casino win-loss statements show smaller losses than total W-2G winnings?
A: Because a taxpayer can win more than they lost—for example, $3,200 in winnings versus $2,500 in losses.
3. Substantiation and Records
Q: Can casino win-loss statements substantiate losses?
A: Yes, if relying solely on the casino’s official numbers. They are most accurate when all gambling is tracked at one casino using a player card.
Q: Why should a gambler keep a log if they have casino statements?
A: A log is essential if multiple casinos are used, if cash games are played, or if gambling occurs outside of player-card systems.
Q: What records are useful for table games?
A: A detailed log, supported by evidence such as date-stamped photos of chip stacks before and after a session.
Q: Are comps (such as free hotel rooms) taxable?
A: Yes. For casual gamblers, comps are taxable income. Professional gamblers may deduct offsetting business expenses.
Q: How should multiple W-2Gs be entered into software?
A: Each W-2G should be entered separately to ensure proper IRS matching.
Q: How does the IRS view “Other income” on Schedule 1?
A: Gambling winnings are reported there. If additional detail is appropriate, attach an explanatory schedule.
4. Special Situations
Q: How are nonresident aliens taxed on gambling winnings?
A: A flat 30% withholding applies to U.S. gambling winnings.
Q: Do states allow deduction of gambling losses?
A: Rules vary. Some states disallow the deduction of gambling losses altogether.
Q: How is sports betting or online token wagering taxed?
A: All gambling winnings are taxable, whether from sports betting, tokens, or digital asset platforms.
5. Group Winnings and Form 5754
Q: What is Form 5754 used for?
A: To instruct the payer how to split winnings among multiple participants. It provides names, addresses, and taxpayer IDs so the payer can issue separate W-2Gs.
Q: Can winnings be split unequally on Form 5754?
A: Yes. The group decides the allocation, and the payer issues W-2Gs accordingly.
Q: When must Form 5754 be completed?
A: Before payout. Once winnings are reported to the IRS, the split cannot be changed.
Q: What if a group forgets Form 5754 and the W-2G is issued to one person?
A: That person must report the entire income but can treat part as nominee income if they document the split with IDs, agreements, and proof of payment to others.
"Gambling Winnings and Losses: IRS Reporting Rules and Tax Deductions Explained"
IRS References
IRS Pub 525 – Taxable and Nontaxable Income
IRS Pub 529 – Miscellaneous Deductions
IRS Pub 505 – Withholding and Estimated Tax
IRS Topic 419 – Gambling Income and Losses
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