Tax tips for accountants with gambling clients

The legalization of sports betting and online gambling has led to an explosion in gaming across America. With millions trying their luck, complex tax rules for reporting and deducting gambling winnings and losses present new challenges for taxpayers. From W-2Gs to 1099-Ks, the IRS reporting requirements leave much confusion.

That’s why the deep expertise of Zachary Zimbile offers such a valuable perspective. With over a decade specializing in gambling taxes, this Las Vegas CPA has worked with everyone from professional poker players to casual sports bettors.

This article summarizes Zak’s insights from my recent Earmark Podcast interview to provide accountants and tax professionals with key guidance. Tune into the full episode—you can even earn free CPE credit by taking a short quiz on the Earmark app.

Tax advantages of filing as a professional gambler

If a client qualifies as a professional gambler, there are significant tax advantages:

• They can deduct ordinary and necessary expenses related to their gambling activity, just like any other business. This includes travel costs, subscriptions for betting advice, home office expenses, and more.
• Professionals report gambling wins and losses on Schedule C rather than as “Other Income.” This allows netting wins and losses to arrive at a net profit or loss from gambling for the year. Most importantly, it avoids any impact on adjusted gross income.
• There is no need to worry about whether the client itemizes deductions or takes the standard deduction. Gambling losses can be deducted above the line as business expenses.

How to qualify as a professional gambler

There is no black-and-white definition of a professional gambler versus a recreational gambler; it is addressed on a case-by-case basis. However, the IRS does provide guidelines. Zak Zimbile explains that, in essence, “you need to be treating gambling as a profession. So that means you need to be gambling regularly with the intent to make a profit.”

The volume of activity alone does not necessarily qualify someone as a professional gambler in the eyes of the IRS. You should also:

• Maintain separate bank accounts and credit cards exclusively for gambling activity.
• Keep detailed records of all gambling sessions, expenses, wins, and losses.
• Demonstrate a potential for long-term profitability.
• Have the expertise and skill set to gamble at a professional level.
• Spend considerable time practicing, analyzing, and improving gambling strategy.

Simply filing taxes as a “pro” for the tax benefits without meeting these criteria can draw IRS scrutiny. Thorough recordkeeping is critical to validating one’s professional gambling status if audited.

Mastering the “session method” for tracking activity

When reporting gambling wins and losses, the IRS-approved “session method” is critical, especially at the state level. The session method allows the netting of wins and losses within a continuous gambling session. This can result in much lower gross winnings, and therefore, lower taxes owed. Professional and recreational gamblers can use this method.

For example, a gambler may receive a W-2G, Certain Gambling Winnings, from a casino showing $15,000 of winnings from a slot machine. However, they may have only profited $5,000 from that session. The W-2G only reflects the result of a single wager. It does not account for any losses incurred. If gamblers take advantage of the session method, they would only report their net win of $5,000 from the session.

Proper implementation of the session method involves:

• Defining sessions appropriately based on the gambling activity— slot play for a full day or one poker tournament, for example. Note that each individual sports bet is considered a session based on the best interpretation of IRS guidance.
• Tracking buy-in and cash-out amounts for each session.
• Recording sessions accurately as they occur—not weeks or months later.
• Providing supporting documentation of sessions if audited.

Accountants should understand session method mechanics and help clients properly utilize it to minimize taxes owed.

Navigating complex state tax policies

Accountants must understand the multitude of state-specific policies to best advise clients on minimizing total gambling taxes. State income tax rules for gambling winnings and losses vary widely across the country, creating a complex patchwork of regulations. 

Only recreational gamblers face issues at the state level. Since professional gamblers are conducting business, any losses are automatically deductible as a business expense at the state level (even in those states that disallow losses for recreational gamblers).

Some states such as New Jersey and Pennsylvania allow the netting of wins and losses to arrive at taxable gambling income for recreational gamblers. Connecticut and North Carolina, on the other hand, offer no deduction at all for gambling losses—meaning gross winnings are fully taxable.

Strategies such as using the session method take on even greater importance for taxpayers gambling in these less favorable states.

Gambling outside one’s home state can also trigger tax filing requirements in the state where the gambling occurred, even if no income tax is owed. This creates additional compliance obligations.

Avoiding unnecessary 1099-K headaches

As more individuals use online sportsbooks and gambling sites, 1099-K reporting has become a headache for taxpayers. Third-party services such as PayPal issue 1099-Ks, Payment Card and Third Party Network Transactions, for funds transferred in or out of gambling sites. But these do not reflect actual taxable gambling income.

 Zak advises that “the best way to avoid it is just not to use those third-party payment processors.”

Accountants should inform clients to withdraw or deposit gambling funds directly from a bank account via ACH transfer. This avoids erroneous 1099-Ks that create the impression of unreported income, triggering IRS letters.

Reducing audit risk with proper documentation

Detailed recordkeeping provides critical support and protection in the event of an audit. Clients should retain:

• A gambling log tracking every session’s date, location, buy-in, cash-out, and net profit/loss.
• Documentation of expenses related to professional gambling activity.
• Receipts and statements to validate significant wins and losses.
• Annual records of losses to carry forward if net losses cannot be fully deducted.

Certain red flags may increase audit risk, including:

• Lack of sufficient documentation for reported activity and outcomes.
• Drastic changes in level of gambling income versus prior years.

Proactive planning and communication can deter audits and resolve inquiries efficiently if selected.

Helping gambling clients win at taxes

Determining professional vs. amateur gambling status and leveraging strategies like the session method can lead to considerable tax savings for clients.

To put this guidance into action:

• Review records to assess if clients qualify as pros.
• Implement contemporaneous session tracking.
• Set up procedures for collecting substantiating documentation.

Following best practices can reduce gambling clients’ effective tax rate from 30-40% down to low single digits in some cases.

Equipped with these strategies, tax accountants can strategically guide clients through the complex world of gambling taxes, enabling substantial savings. Your expertise provides the winning advantage.

Editor’s note: This article was originally published in the CPA Practice Advisor.