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Casual gambling: Taxpayers lose in court, but you win

by on
in Small Business Tax

How do you account for gambling wins and losses at a casino? A new Tax Court case provides some guidance. (Shollenberger, TC Memo 2009-36)

Facts: A married couple withdrew $500 from their bank account to go to a casino for the day. After the husband won a $2,000 jackpot on a slot machine, they each took $200 out of the winnings for more play. They left the casino with $1,600.

The couple, who had losses from other casino trips in the same year, did not report any gambling winnings. The IRS sent them a deficiency notice of $2,000.

Tax Court’s view: A casual gambler recognizes a gain or loss only when a gambling session ends. At that time, the gambler can redeem his or her tokens (if any are left) and count his or her cash (if any is left) to see how much was won or lost during the session. The IRS can’t expect taxpayers to account for every spin of the roulette wheel or pull of a slot machine handle. So the couple must realize taxable income of $1,100 ($1,600 redemption minus $500 bank withdrawal), not $2,000.

Bottom line:
This new decision represents a victory for casual gamblers, because it says they can determine their net win or net loss at the end of each gambling session. In contrast, the IRS has historically made the argument that a win or loss must be recorded after each slot machine pull or roll of the dice.

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