The full amount of gambling income, less the cost of the winning bet, is included on the casino winnings tax return. "The amount of income from a winning bet or wager is the full amount of the winnings less the cost of placing that winning bet or wager," reports Robert McKenzie in his in-depth article on "Gambling and Taxes." The cost of losing bets are reported elsewhere on the tax return as gambling losses.
Where to Report Gambling Income
Persons who are not professional gamblers report any gambling income as other income on Form 1040, Line 21.
The expense of bets, wagers, lottery tickets and similar gambling losses are deducted as a miscellaneous itemized deduction on Schedule A. However, "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions." (Internal Revenue Code section 165(d), see also Treasury Regulations section 1.165-10.)
Gambling losses are reported on Schedule A as other miscellaneous deductions that are not limited by the 2% of adjusted gross income threshold. On the Year 2012 Schedule A, this is located at Line 28.
"A gambler is considered to be engaged in the business of gambling if he or she gambles full time to earn a livelihood and not merely as a hobby" (J.K. Lasser's Your Income Tax, page 274). Professional gamblers report their gambling income and related expenses on Schedule C as self-employed income. Net Schedule C income is subject to the federal income tax and the self-employment tax, plus any state income tax.
Recordkeeping for Gambling Activities
The IRS advises gamblers to keep extensive records of their gambling bets and winnings:
"You must keep an accurate diary or similar record of your losses and winnings. "Your diary should contain at least the following information.
"The date and type of your specific wager or wagering activity.
"The name and address or location of the gambling establishment.
"The names of other persons present with you at the gambling establishment.
"The amount(s) you won or lost.
"Proof of winnings and losses. In addition to your diary, you should also have other documentation. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.