Can you reduce your tax liability by reporting gambling income & losses?

Like this officer, many people (nearly 149,000, with winnings over $15,000, between 2018 and 2020^[2]) avoid reporting their gambling winnings out of fear of losing money to taxes only to end up in trouble with the IRS. But what they don’t realize is that the tax code can actually work in their favor. 

Instead of seeing gambling taxes as an unavoidable burden, smart filers use legal deductions and income reporting strategies to lower their tax liability, sometimes significantly. The IRS allows you to offset winnings with losses, meaning that with proper documentation, you may end up owing far less than expected or even nothing at all.

Let’s see how.

How reporting gambling income can actually slash your tax liability

Most people don’t realize that the IRS allows you to deduct gambling losses from your winnings to offset your taxes. In other words, you only pay taxes on your net winnings rather than the full amount you won.

For example, if you win $20,000 from a casino, but over the course of the year you also lose $12,000, you only owe taxes on the net amount of $8,000 ($20,000 – $12,000).

However, losses can only be deducted:

• Up to the amount of your reported winnings. For example, if you had a rough gambling year and won $5000 but lost $10,000, you’d only be able to deduct losses up to your winnings, which is $5000. This brings your taxable gambling income down to $0, but you cannot use the extra $5,000 in losses to reduce other income (like wages or business income).
  
• If you itemize deductions on Schedule A of your Form 1040. If you take the standard deduction, you cannot claim gambling losses, meaning your tax liability remains higher.

Also read: What is tax liability and how to calculate it (Step-by-step guide)

Accurate record-keeping is necessary to claim loss deductions

The IRS requires detailed records to support gambling loss deductions. To successfully claim losses, you must keep:

• A log of gambling activity (date, location, type of gambling).
• Amount wagered, winnings, and losses.
• Receipts, tickets, bank statements, or W-2G forms^[3] as proof of winnings and losses.
• Records from casinos or betting platforms that track wins and losses.

Without proper documentation, the IRS may disallow loss deductions, leading to a much higher tax bill than necessary. That’s why accurate bookkeeping is essential—especially for frequent gamblers. 

And if you’re in a gambling hub like Las Vegas, maintaining organized financial records is even more critical. This is because Las Vegas casinos, sportsbooks, and online platforms closely track gambling transactions and report large winnings to the IRS, making it easier for discrepancies to trigger audits if your records don’t match.

This is where professional bookkeeping services in Las Vegas can make a huge difference. The best Las Vegas bookkeeping services provide real-time tracking of gambling transactions, categorize winnings and losses for maximum tax efficiency, and ensure that every deduction is backed by audit-proof documentation. 

Also read: 5 benefits of bookkeeping and accounting services—and what happens without them

Professional gamblers have greater tax advantages

The IRS recognizes professional gambling as a legitimate business if a taxpayer engages in gambling with regularity, continuity, and a profit motive. If you qualify as a professional gambler, you can report your gambling income and expenses on Schedule C (Self-Employment Income)^[4].

This offers significant self-employment tax benefits, such as:

• Deduct way more than just gambling losses. This includes travel costs for tournaments, training materials or coaching to improve your skills, equipment like computers for online gambling, and even certain memberships or subscription services related to your gambling activities.
• Write off business expenses even if you take the standard deduction.
• Deduct more losses than winnings and offset other income.
• Reduce tax liability through retirement plan contributions.

Remember that the IRS scrutinizes professional gambler status, requiring proof that gambling is conducted regularly and with the intent to make a profit.

State tax rules may affect your ability to reduce liability

While the federal government taxes all gambling winnings, states have their own rules. 

Some states, like Nevada, Florida, Alaska, Tennesse, South Dakota, Texas, Washington, and Wyoming^[5], do not impose a state income tax, meaning gambling winnings are not taxed at the state level.

However, other states, such as New Jersey^[6] and Pennsylvania^[7], do tax gambling winnings and require residents to report these earnings on their state tax returns. The tax rates and regulations vary.

Adding to this complexity, not all states align with federal tax rules when it comes to deducting gambling losses. At the federal level, you can deduct gambling losses up to the amount of your winnings if you itemize deductions. However, not all states follow this approach. For instance, Connecticut does not allow residents to deduct gambling losses^[8] on their state tax returns, even though such deductions are permitted federally.

Additionally, if you win money in a state where you are not a resident, that state may require you to file a non-resident tax return and pay taxes on those winnings. Your home state may also tax the same winnings but often provides a credit for taxes paid to other states to prevent double taxation. 

For example, if you are an Ohio resident who wins in another state, Ohio will allow a credit for any tax paid to the state^[9] where the winnings were earned.

To navigate these complexities:

1. Research the specific tax rules regarding gambling income and losses in both your state of residence and any state where you gamble.
2. Keep thorough documentation of all gambling activities, including winnings, losses, dates, locations, and any related expenses.
3. Seek advice from a tax advisor familiar with both federal and state gambling tax laws to ensure compliance and optimize your tax situation.

The bottom line

This means that if you’ve already paid taxes on your gambling winnings, you may still be eligible for a refund. If 24% of your winnings were withheld but your actual tax liability is lower (especially with gambling losses), you could get some of that money back.

However, the IRS won’t send it automatically. To claim what you’re entitled to, you need detailed records of your winnings, losses, and tax withholdings, along with proper reporting on your return. In some cases, filing an amended return on Form 1040-X^[11] may be necessary to correct past filings and recover overpaid taxes.

This process can be complex, and errors could lead to missed deductions or IRS scrutiny. That’s where CoCountant comes in. We provide expert bookkeeping services in Las Vegas, ensuring your gambling income and losses are accurately tracked and IRS-compliant. Our team reviews past tax returns, identifies overpayments, and assists with filing amendments to help you claim every dollar you’re owed.

With state tax laws varying, we offer tailored tax advisory services to ensure compliance at both federal and state levels—so you never overpay or risk penalties. And if you’re audited or receive an IRS notice, we handle it, providing documentation and support to protect your finances.

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