IRS issues guidance on determining wagering gains and losses.

The Office of Chief Counsel issued a memorandum explaining how to determine the wagering gains and losses of casual gamblers.

Scenario

In the scenario in the memorandum, the taxpayer is a casual gambler on a fixed income. Therefore, she carefully limits the amount of money she gambles. Her practice is to commit only $100 to slot machine play on any visit to a casino, playing until she loses the original $100 committed to gambling or until she stops gambling and cashes out.

The taxpayer went to a casino to play the slot machines on 10 separate occasions throughout the year. On each visit to the casino, the taxpayer exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble. On five occasions, the taxpayer lost her entire $100 in tokens before terminating play. On the other five occasions, the taxpayer redeemed her remaining tokens for the following amounts of cash: $20, $70, $150, $200, and $300.

Applicable Law

Sec. 165(d) states that "losses from wagering transactions shall be allowed only to the extent of the gains from such transactions" but does not provide a technical definition of the terms "gains" and "losses." However, if the statute's language is plain, clear, and unambiguous, the statutory language is to be applied according to its terms, unless a literal interpretation of the statutory language would lead to absurd results. In ordinary parlance, a wagering "gain" means the amount won in excess of the amount bet (basis). Therefore, a wagering gain is the total winnings less the amount of the wager and a wagering loss is the amount of the wager (basis) lost.

Casual gamblers may deduct their wagering losses only to the extent of their wagering gains; they may not carry over excess wagering losses to offset wagering gains in another tax year or offset non-wagering income. In addition, casual gamblers may not net their gains and losses from slot machine play throughout the year and report only the net amount for the year.

As the memorandum explains, the term "transactions" in Sec. 165(d) could mean every single play in a game of chance or every wager made. This interpretation would require a taxpayer to (1) calculate the gain or loss on every transaction separately and treat every play or wager as a taxable event and (2) trace and recompute the basis through all transactions to calculate the result of each play or wager. However, as the memorandum points out, courts considering that reading have found it unduly burdensome and unreasonable. Furthermore, the use of the plural term "transactions" in the statute implies that gain or loss may be calculated over a series of separate plays or wagers.

According to the memorandum, the better interpretation of wagering transactions is that a casual gambler recognizes a wagering gain or loss at the time he or she redeems his or her tokens. Based on Glenshaw Glass, 348 U.S. 426 (1955), the Office of Chief Counsel believes that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems his or her tokens and can definitively calculate the amount above or below basis (the wager) realized. Under this view, a taxpayer who goes to a casino and purchases tokens bases his or her gain or loss for that visit on the amount received when cashing in his or her tokens at the end of play, regardless of the aggregate amount of the taxpayer's separate wins and losses during the entire visit.

Calculating the Taxpayer's Gains and Losses

Based on the principles for determining wagering gains and losses discussed above, the taxpayer in the memorandum scenario had gains and losses for the tax year as shown in the exhibit. The taxpayer must report the $350 of wagering gains as gross income under Sec. 61. However, under Sec. 165(d), the taxpayer may deduct only $350 of the $610 wagering losses. The taxpayer may not carry over the excess wagering losses to offset wagering gains in another tax year or offset nonwagering income.

A casual gambler who elects to itemize deductions may deduct wagering losses, up to wagering gains, on Form 1040, Schedule A. In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction. A casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses.

Reflections

In this memorandum, the Office of Chief Counsel has taken a common-sense approach to this issue. Although the IRS could arguably require a casual gambler to track wins and losses separately for each wager made, there is no compelling reason for requiring such a detailed accounting of the gambler's activity, and the requirement would be so burdensome that there would be no realistic possibility that any gambler would comply.

Office of Chief Counsel Memorandum AM 2008-011

James Beavers, J.D., LL.M., CPA 

Exhibit: Taxpayer's wagering gains and losses

       $1 tokens   Tokens   Wagering  Wagering
Visit   bought    redeemed    gain      loss

  1       100         0         0       100
  2       100         0         0       100
  3       100         0         0       100
  4       100         0         0       100
  5       100         0         0       100
  6       100        20         0        80
  7       100        70         0        30
  8       100       150        50         0
  9       100       200       100         0
 10       100       300       200         0
Total    1000       740       350       610