Gambling income includes, but is not limited to, lottery, raffle winnings, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips.
If winnings are paid in installments, include in income the amount received in the tax year including interest. If future payments are sold for a lump sum, report the amount received from the sale in the year received.
Prizes won in drawings, quiz shows, beauty contests, photo contests, etc. are taxable income but are not gambling winnings. (Prizes recognizing literary, scientific, and similar accomplishments aren't taxable income if transferred to a charity.)
A payer is required to issue the gambler a Form W-2G if they receive certain gambling winnings or if they have any gambling winnings subject to Federal income tax withholding. The taxpayer must report the full amount of their gambling winnings for the year on Form 1040 regardless of whether any portion is subject to withholding. In addition, the taxpayer may be required to pay an estimated tax on their gambling winnings.
Gambling losses for the year can be deducted on Schedule A, however the taxpayer cannot deduct more in gambling losses than winnings. Additionally, winnings and losses must be reported separately, i.e., you cannot reduce the gambling winnings by the gambling losses and report the difference. The full amount of winnings must be reported as income, and the losses can be claimed as an an itemized deduction up to the amount of the winnings.
Starting in 2018 with the passage of the Tax Cuts and Jobs Act, gambling losses can also include the costs associated with making the wagers such as reasonable travel expenses necessary to the gaming location.
It is important for the taxpayer to keep an accurate diary or similar record of their winnings and losses that at a minimum includes the following information:
- The date and type of their specific wager or wagering activity.
- The name and address or location of the gambling establishment.
- The names of other persons present with them at the gambling establishment.
- The amount(s) won or lost.
In addition to the diary, they should also retain other documentation, such as wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to them by the gambling establishment.
For additional information see Publication 529 - Miscellaneous Deductions. The recordkeeping suggestions in the publication are not all-inclusive but are general guidelines to help the taxpayer establish their winnings and losses.