New York State Tax Gambling Losses

By Brad Polizzano, J.D., LL.M., New York City

Totaling a taxpayer's Forms W-2G, Certain Gambling Winnings, for the year would seem to be the straightforward way to determine the amount of gambling winnings to report on a tax return. Forms W-2G, however, do not necessarily capture all of a taxpayer's gambling winnings and losses for the year. How are these amounts reported and substantiated on a tax return? Does the answer change if the taxpayer seeks to make a living as a poker player? Do states tax gambling differently?

There are many nuances and recent developments under federal and state tax laws about gambling and other similar activities. With proper recordkeeping and guidance, a taxpayer with gambling winnings may significantly reduce audit exposure.

New York’s top state tax rate is 8.82% as of 2020, but then you’ll have to add another percentage for the local tax. That works out to a hefty 12.7% of your winnings. 3  Your tax bill would come out to almost $127,000 on $1 million in winnings, and about $12.7 million if you won a $100 million lottery. Add §658-a, Tax L: Provides that a taxpayer claiming gambling losses as an itemized deduction under section six hundred fifteen of this article shall submit a paid receipt as proof of purchase of gaming to claim losses against income from winnings. While the IRS does not have a gambling losses tax, it does allow for you to deduct gambling losses on your tax return in the form of a miscellaneous deduction. To deduct your losses from gambling, you will need to: Claim your gambling losses on Form 1040, Schedule A as Other Miscellaneous Deduction (line 28) that is not subject to the 2% limit. Your gambling losses are federal itemized deduction on schedule A. You may or may not benefit based on your other itemized ductions and your overall tax situation. Then for your New York State return, you will either use your federal itemized deductions plus certain state adjustments, or you will use the New York state standard deduction.

Income and Permitted Deductions

Under Sec. 61(a), all income from whatever source derived is includible in a U.S. resident's gross income. Whether the gambling winnings are $5 or $500,000, all amounts are taxable.

A taxpayer may deduct losses from wagering transactions to the extent of gains from those transactions under Sec. 165(d). For amateur gamblers, gambling losses are reported as an itemized deduction on Schedule A, Itemized Deductions. The law is not as kind to nonresidents: While nonresidents must also include U.S.-source gambling winnings as income, they cannot deduct gambling losses against those winnings. Nonresidents whose gambling winnings are connected to a trade or business may deduct gambling losses to the extent of winnings, however, under Sec. 873.

Case law and IRS guidance have established that a taxpayer may determine gambling winnings and losses on a session basis.

Neither the Code nor the regulations define the term 'transactions' as stated in Sec. 165(d). Tax Court cases have recognized that gross income from slot machine transactions is determined on a session basis (see Shollenberger, T.C. Memo. 2009-306; LaPlante, T.C. Memo. 2009-226).

What Is a Session?

In 2008, the IRS Chief Counsel opined that a slot machine player recognizes a wagering gain or loss at the time she redeems her tokens because fluctuating wins and losses left in play are not accessions to wealth until the taxpayer can definitely calculate the amount realized (Advice Memorandum 2008-011). This method is also recognized in both Schollenberger and LaPlante, as a by-bet method would be unduly burdensome and unreasonable for taxpayers. To this end, the IRS issued Notice 2015-21, which provides taxpayers a proposed safe harbor to determine gains or losses from electronically tracked slot machine play.

Under Notice 2015-21, a taxpayer determines wagering gain or loss from electronically tracked slot machine play at the end of a single session of play, rather than on a by-bet basis. Electronically tracked slot machine play uses an electronic player system controlled by the gaming establishment—such as the use of a player's card—that records the amount a specific individual won and wagered on slot machine play. A single session of play begins when a taxpayer places a wager on a particular type of game and ends when the taxpayer completes his or her last wager on the same type of game before the end of the same calendar day.

A taxpayer recognizes a wagering gain if, at the end of a single session of play, the total dollar amount of payouts from electronically tracked slot machine play during that session exceeds the total dollar amount of wagers placed by the taxpayer on the electronically tracked slot machine play during that session. A taxpayer recognizes a wagering loss if, at the end of a single session of play, the total dollar amount of wagers placed by the taxpayer on electronically tracked slot machine play exceeds the total dollar amount of payouts from electronically tracked slot machine play during the session.

There is little to no guidance defining a session for other casino games, such as poker. Furthermore, because there are different poker game formats (cash and tournament) and game types (Texas hold 'em, pot limit Omaha, etc.), it is unclear whether the one-session-per-day analysis would apply to poker in general. A taxpayer who plays different types of poker games may have to record separate sessions for each type of poker game played each day.

In a 2015 Chief Counsel memorandum (CCM), the IRS concluded that a taxpayer's multiple buy-ins for the same poker tournament could not be aggregated for purposes of determining the reportable amount on a taxpayer's Form W-2G (CCM 20153601F). This analysis implies that the IRS may view each poker tournament buy-in as a separate gambling session. A key point leading to the conclusion was that the buy-ins were not identical because the tournament circumstances were different each time the taxpayer made an additional buy-in.

Requirement to Maintain Accurate Records

In Rev. Proc. 77-29, the IRS states that a taxpayer must keep an accurate diary or other similar record of all losses and winnings. According to Rev. Proc. 77-29, the diary should contain:

  • The date and type of the specific wager or wagering activity;
  • The name and address or location of the gambling establishment;
  • The names of other persons present at the gambling establishment; and
  • The amounts won or lost.

It is hard to believe the IRS would disallow a taxpayer's gambling loss deduction solely because the taxpayer did not write down in her diary the names of other persons at her blackjack table. The IRS does acknowledge that a taxpayer may prove winnings and losses with other documentation, such as statements of actual winnings from the gambling establishment.

Special Rules for Professional Gamblers

The professional gambler reports gambling winnings and losses for federal purposes on Schedule C, Profit or Loss From Business. A professional gambler is viewed as engaged in the trade or business of gambling. To compute business income, the taxpayer may net all wagering activity but cannot report an overall wagering loss. In addition, the taxpayer may deduct 'ordinary and necessary' business expenses (expenses other than wagers) incurred in connection with the business.

Whether a gambler is an amateur or a professional for tax purposes is based on the 'facts and circumstances.' In Groetzinger, 480 U.S. 23 (1987), the Supreme Court established the professional gambler standard: 'If one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.' The burden of proof is on the professional gambler to prove this status.

Despite receiving other forms of income in 1978, Robert Groetzinger was held to be a professional gambler for the year because he spent 60 to 80 hours per week gambling at dog races. Gambling was his full-time job and livelihood. Notably, Groetzinger had a net gambling loss in 1978. Thus, actual profit is not a requirement for professional gambler status.

In addition to applying the standard established in Groetzinger, courts sometimes apply the following nonexhaustive nine-factor test in Regs. Sec. 1.183-2(b)(1) used to determine intent to make a profit under the hobby loss rules to decide whether a taxpayer is a professional gambler:

  • Manner in which the taxpayer carries on the activity;
  • The expertise of the taxpayer or his advisers;
  • The time and effort the taxpayer expended in carrying on the activity;
  • Expectation that assets used in the activity may appreciate in value;
  • The taxpayer's success in carrying on other similar or dissimilar activities;
  • The taxpayer's history of income or losses with respect to the activity;
  • The amount of occasional profits, if any, that are earned;
  • The financial status of the taxpayer; and
  • Elements of personal pleasure or recreation.

Amazon poker chips. What if a professional gambler's ordinary and necessary business expenses exceed the net gambling winnings for the year? In Mayo, 136 T.C. 81 (2011), the court held the limitation on deducting gambling losses does not apply to ordinary and necessary business expenses incurred in connection with the trade or business of gambling. Therefore, a professional gambler may report a business loss, which may be applied against other income from the year.

Limitations on Loss Deductions

Some states do not permit amateur taxpayers to deduct gambling losses as an itemized deduction at all. These states include Connecticut, Illinois, Indiana, Kansas, Massachusetts, Michigan, North Carolina, Ohio, Rhode Island, West Virginia, and Wisconsin. A taxpayer who has $50,000 of gambling winnings and $50,000 of gambling losses in Wisconsin for a tax year, for example, must pay Wisconsin income tax on the $50,000 of gambling winnings despite breaking even from gambling for the year.

Because professional gamblers may deduct gambling losses for state income tax purposes, some state tax agencies aggressively challenge a taxpayer's professional gambler status. A taxpayer whose professional gambler status is disallowed could face a particularly egregious state income tax deficiency if the taxpayer reported on Schedule C the total of Forms W-2G instead of using the session method under Notice 2015-21. In this situation, the state may be willing to consider adjusting the assessment based on the session method if the taxpayer provides sufficient documentation.

Changes Ahead Likely
New york state tax gambling losses winnings

Tax laws addressing gambling and other similar activities will continue to evolve as new types of games and technologies emerge. Some related tax issues that will come to the forefront include session treatment for online gambling activity and whether daily fantasy sports are considered gambling. As more and more states legalize online gambling and daily fantasy sports, Congress or the IRS will have no choice but to address these issues.

EditorNotes

Mark Heroux is a principal with the Tax Services Group at Baker Tilly Virchow Krause LLP in Chicago.

For additional information about these items, contact Mr. Heroux at 312-729-8005 or [email protected]

Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.

New York state may legalize online sports betting, which would be boon to DraftKings (DKNG), but the The stock is currently trading at a high valuation. Should you invest ?
This story originally appeared on StockNews

DraftKings Inc. (DKNG - Get Rating), which was up over 5% today due to news that the state of New York may legalize online sports betting, finished the day with a 3.8% loss, at $48.94, as took profits off the table. The stock is up a whopping 357% year-to-date.

DKNG is a digital sports entertainment and gaming company. The company provides users with fantasy sports, sports betting, and iGaming opportunities and is also involved in the design and development of sports betting and casino gaming platform software for online and retail sportsbook and casino gaming products. While the company has a lot of potential, its Price to Sales ratio of 41.3 is considerably high, especially compared to the S&P 500’s 2.7.

The question many investors have is it worth buying at its current price. Wall Street analysts have different views on the stock. Needham analyst Brad Erickson has a $70 price target, while J.P. Morgan initiated coverage with a “Neutral” rating and a $48 price target. J.P. Morgan’s position is that the company may not have room for more expansion due to increasing competition, slowly moving legalization and high price.

On the other side, Erickson believes there is plenty of room for upside, as Needham projects sports betting could grow into a $58 billion industry stateside. There are also mixed views from other analysts. According to the StockNews price target feature, 16 analysts rate the stock a “Strong Buy,” and 9 have it as a “Hold.” The average price target from 22 of the analysts is $60.27, with a low of $39 and a high of $100.

DKNG’s stock has been trending up recently after voters in three states, including Louisiana, Maryland, and South Dakota voted to legalize wagers on sporting events. This makes 24 total states that allow this type of betting. The company also finalized a deal with Foxwood Resorts Casino in Connecticut, even before sports betting is legalized in the state.

In mid-November, DKNG reported strong third-quarter results. Its revenue shot up 98% year over year, driven by its merger with Diamond Eagle. The return of major sports, including the NBA, MLB, NHL, and the start of the NFL season, also contributed to its top line due to strong customer engagement. Even before sports resumed, the company held strong as people betted on other events such as esports.

The company also reached a milestone in the quarter as it surpassed one million monthly users. DKNG revised its full-year guidance from a range of $500 million to $520 million to a range of $540 million to $560 million. It also now expects revenue of $750 million to $850 million for 2021.

New York State Tax Gambling Losses Statute Of Limitations

Once the virus is behind us and we go back to a full calendar year of sports, DKNG’s revenue should see even higher gains. Fantasy sports has grown immensely over the past couple of decades, and DKNG is a pioneer in the industry.

New York State Gambling Losses Income Tax

In more good news for the company, Canada’s Department of Justice decriminalized single-event sports betting. This would allow provinces in Canada to issue licenses to companies that accept bets on sporting events, with the exception of horse racing. This provides the potential for billions of dollars in revenue should DKNG expand into Canada.

In terms of its balance sheet, the company had $1.1 billion in cash at the end of the quarter and no long-term debt. This will allow the company to increase its marketing budget and expand its operations.

The stock is rated “Neutral” in our POWR Ratings system. While I believe the company has more room to grow over the next few years, its current price is a tad high for my liking.

New York State Tax Gambling Losses Winnings

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New York State Tax Gambling Losses Tax

DKNG shares fell $0.05 (-0.10%) in after-hours trading Wednesday. Year-to-date, DKNG has gained 357.38%, versus a 15.61% rise in the benchmark S&P 500 index during the same period.