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Gambling and taxes, part 2: How are wins and losses treated?

Opinions on gambling run the gamut. Some say it's not gambling if you don't lose. Others say that gambling usually involves getting nothing for something.

Regardless of how you view it, however, gambling has tax implications. In the first part of this post, we discussed the tax aspects of fantasy sports leagues.

In this part of the post, let's look more generally at how gambling income and losses are treated for tax purposes.

The general rule is that gambling losses are deductible if the gambling is "casual." Different rules apply for professional gamblers.

Professional vs. casual

Sometimes, however, there is a gray area between professional and casual; this is the realm of so-called "hobby loss."

A good example of this was the case a couple of years ago of the golfer John Daly. Daly regularly wagered big money and sometimes won big. But more often he lost.

When that is the case, gambling losses are not deductible. This is because the gambling activity does not meet the legal test articulated in a Supreme Court case. That test defines professional activity as something "pursued full time, in good faith, and with regularity, to the production of income for a livelihood."

Types of gambling income

On federal tax returns, gambling winnings are reported as income on the "other income" line of Form 1040. But there are differing amounts that trigger the obligation of the payer to issue a form - Form W-2G that reflects the amount paid out. 

For bingo or slot machines, this amount is $1,200. For poker tournaments, it is $5, 0000.

The general rule is that gambling losses can be claimed as itemized deductions, but only up to the amount of your winnings. This is done on Schedule A.

This means that if you come out ahead in a given year on gambling, you can't simply subtract your losses from your winnings and report the difference. You have to report the full amount you won and claim losses separately.

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