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State lotteries provide revenue for government coffers in more than one way. Apart from ticket sales, lotteries also produce new income for winners, income that's subject to federal and state taxes. The Internal Revenue Service requires states to withhold federal taxes from some prizes. Depending on where you live or where you win, the state may also withhold state taxes. The amount of tax you'll pay overall on Lotto winnings depends on the prize, the state and your other income.

Sports betting losses are tax-deductible, but under very specific conditions. The most important of these conditions is that you can’t claim losses that total more than your gains. So, if you lost $5,000 on sports betting last year but took home $7,000 in the end, you’d be able to deduct all of those losses. For NYS, gambling loss deductions are limited to the amount of gambling income reported. Other miscellaneous deductions are claimed on Form IT-196, lines 29 through 37. You asked (1) if the legislature has considered proposals to allow taxpayers to deduct gambling losses from gambling winnings when determining Connecticut income tax liability, (2) whether other states with casinos allow deductions for gambling losses for purposes of their state income taxes, and (3) what the revenue loss would be if Connecticut allowed such a deduction. Losses are allowed as an itemized deduction dollar for dollar against the gain. Gambling losses cannot be greater than gambling wins for the tax year. Example: John wins $23,500 during the year playing slots and other casino games. His gambling losses are $37,900. Land-based sports betting has been legal in the U.S. State of New York since July 2019. In February 2020 as it generated a loss in revenue that month. Tax revenues from the online gambling.

Federal Income Taxes

State lotteries must issue a federal W-2G form for winnings of $600 or more as of early 2011. If you're a U.S. resident, but don't have a Social Security number, the state withholds 28 percent from winnings of $600 or more to pay federal income taxes. Each state must withhold 25 percent from prizes greater than $5,000 won by U.S. citizens and resident aliens with Social Security numbers. They withhold 30 percent from all prizes won by citizens of other countries who aren't U.S. residents.

State and Local Income Taxes

State income tax rates and rules vary from state to state, so the amount you'll pay in state taxes depends on where you live and the state that issues the prize. Florida and Texas, for example, have no state personal income taxes as of 2011, so residents of those states who win a Florida or Texas Lotto prize don't pay state income tax on their winnings. New York does have a state income tax. If you win the New York State Lotto, New York will withhold New York taxes on prizes of more than $5,000, regardless of where you live. The state income tax rate is 8.82%. New York City withholding 3.876%. Yonkers withholding 1.323%.

FAQs: New York State Lottery Winners Tax Responsibilities

This publication provides guidance on the New York State, New York City, and Yonkers personal income tax treatment of lottery prizes. This guidance applies specifically to prizes from lottery games conducted by the New York State Division of Lottery (New York State Lottery). New York State lottery prizes include prizes from all games conducted by the New York State Lottery, including the multi-state Mega Millions game (if the winning ticket was purchased in New York State) and video lottery games at a video-gaming facility that has been licensed by the New York State Lottery. (See the New York State Lottery Web site (www.nylottery.org) for more information on lottery games.)

In many instances, the New York State, New York City, and Yonkers tax treatment of prize payments depends upon the amount of the proceeds from the prize. For this purpose, proceeds means the total amount of the prize won (not each installment amount, if the prize is payable in installments), less the cost to purchase the winning ticket. If the prize is won by a group, proceeds means the total prize won by the group (not each group member.s share of the prize) less the cost of the winning ticket.

1)Q: I am a resident of New York State and I won a prize in the New York State Lottery. Is the prize payment I received subject to New York State income tax?

A:Yes. If you are a resident of New York State, your prize payment is subject to New York State income tax if the prize payment is includable in your federal adjusted gross income for the tax year. If you are a resident of New York City or Yonkers, the prize payment will also be subject to the applicable city resident income taxes.

2)Q: I am a nonresident of New York State. I won a prize in the New York State Lottery. Is the prize payment I received and any future installment payments (if the prize is payable in installments) subject to New York State income tax?

A:If you won the prize on or after October 1, 2000, and the proceeds exceed $5,000, your lottery prize payment is New York source income and is subject to New York State income tax.

If the proceeds are $5,000 or less, or the prize was won before October 1, 2000, the prize payment(s) is not considered New York source income and is not subject to New York income tax.

3)Q: Is my New York State lottery prize payment subject to New York State, New York City, or Yonkers withholding taxes?

A:All prizes won on or after October 1, 2000, are subject to New York State withholding tax if the proceeds exceed $5,000. Prizes won prior to October 1, 2000, are subject to New York State withholding if the proceeds exceed $5,000 and you were a New York State resident at the time you won the prize. These prize payments are also subject to New York City and Yonkers withholding if you were a resident of New York City or Yonkers at the time you won the prize.

If withholding is required, the New York State Lottery is required by law to withhold tax using the highest effective rate of state tax for the year in which a payment is made, without any allowance for deductions or exemptions. If you are a resident of New York City or Yonkers, the prize payment(s) is also subject to city withholding at the city.s highest effective rate of tax.To ensure that you will not be subject to a penalty for failure to pay estimated tax, you should estimate your total income tax liability for the year to determine if you should be paying estimated tax, even though your lottery prize is subject to New York State, New York City, or Yonkers withholding tax. For more information on estimated tax, see the instructions for Form IT-2105, Estimated Income Tax Payment Voucher for Individuals; Form IT-2106, Estimated Income Tax Payment Voucher for Fiduciaries; or Publication 94, Should You Be Paying Estimated Tax?

4)Q: If I move into New York State during the year, how does my change from a nonresident to a resident affect my state income tax obligation with respect to a New York State lottery prize payment(s) that I am entitled to receive after the move?

A:When you change your status from a nonresident of New York State to a resident of New York State and are entitled to receive a New York State lottery prize payment(s) from a lottery prize won while you were a nonresident, the tax treatment depends on the amount of the proceeds and when you won your prize.

If the proceeds are $5,000 or less, the prize payment is not considered New York source income and it is not subject to New York State income tax.

If the proceeds exceed $5,000, and the prize was won on or after October 1, 2000, the prize payment(s) is considered New York source income and is subject to New York State income tax.

If you won the prize before October 1, 2000, and you are receiving installment payments, special accrual rules apply. Under these accrual rules, in the year of the change you must include, in your New York adjusted gross income in the Federal amount column of Form IT-203, Nonresident and Part-Year Resident Income Tax Return, the total amount of the installment payments you are entitled to receive in the future. However, do not include that amount in your New York source income (the New York State amount column of Form IT-203). In addition, the installment payment(s) received in the following tax year(s) must be subtracted from federal adjusted gross income in computing New York adjusted gross income, and therefore is not subject to New York State income tax. (The subtraction is limited to the amount of the installment payment included in federal adjusted gross income.)

5)Q: I won a prize in a New York State Lottery drawing that was held while I was a resident of New York State. I moved out of New York State before I claimed my prize. Later that same year, I came back to New York State just to claim my prize payment. How does my change from a resident to a nonresident affect my New York State income tax obligation with respect to the lottery prize payment that I received as a nonresident? Do I still have to pay New York State taxes?

A:When you change your status from a resident of New York State to a nonresident of New York State and are entitled to receive a prize payment from a lottery prize won while you were a resident, you must pay New York State income tax on the payment(s) you are entitled to receive, even if the prize payment is received during the nonresident period of your tax year. As a part-year New York State resident, you must file Form IT-203, Nonresident and Part-Year Resident Income Tax Return, and include in New York source income the amount of the prize payment received.

6)Q: I won a prize in the New York State Lottery while I was a resident of New York State. I then moved out of New York State and will not return to claim my prize until the following year when I am a nonresident. How will the change from a resident to a nonresident affect my New York State income tax obligation with respect to the lottery prize payment (or installment payments) that I will claim and receive in a future tax year(s) as a nonresident? Do I still have to pay New York State taxes?

A:When you change your status from a resident of New York State to a nonresident of New York State and are entitled to receive a payment or installment payments from a lottery prize won while you were a resident, you must pay New York State income tax on the prize payment(s) you are entitled to receive in a future tax year(s). However, when the tax must be paid depends upon whether or not the prize payment is subject to New York State withholding tax.

If the proceeds from the prize are less than $5,000, the prize payment is not subject to New York State withholding tax. Instead, the prize is subject to special accrual rules. Under these special accrual rules:

The total amount of the unpaid prize that is not included in your federal adjusted gross income for the year of change on your federal income tax return must be included in New York adjusted gross income (Federal amount column of Form IT-203) and New York source income (New York State amount column of Form IT-203) for the year of change of residence on your New York State income tax return, unless you file a bond or other acceptable security with the Tax Department.

If you file a bond or other acceptable security with the Tax Department, the payment (or installment payments) is taxed in the year that the payment is actually received. As a result, you must file a New York State nonresident return (Form IT-203), and include in New York source income the amount of the payment received in that year. In the case of a prize that is payable in installments, you must file Form IT-203 for each future tax year that you receive an installment payment.

For more information on special accruals and change of resident status, see the instructions for Form IT-203, Form IT-260, New York State and City of New York Surety Bond Form . Change of Resident Status . Special Accruals, and Form IT-260.1, Change of Resident Status . Special Accruals.

A lottery prize that is subject to New York State withholding tax (whether it is one payment or multiple installment payments) is included in New York source income and is subject to New York State income tax in the year the payment is received. As a result, you must file a New York State nonresident return (Form IT-203), and include in New York source income the amount of the payment received in that year. In the case of a prize that is payable in installments, you must file Form IT-203 for each future year that you receive an installment payment.

7)Q: If I move into New York City during the year, how does my change from a New York City nonresident to a New York City resident affect my city resident income tax obligation with respect to a New York State lottery prize payment(s) that I am entitled to receive after the move?

A:When you change your status from a nonresident of New York City to a resident of New York City and are entitled to receive a New York State lottery payment(s) from a lottery prize won while you were a nonresident of the city, the tax treatment depends on the amount of the proceeds and when you won your prize.

If the proceeds are $5,000 or less or you won the lottery prize before October 1, 2000 (regardless of the amount), special accrual rules apply. Under these accrual rules, any future payment(s) is not included in determining New York City taxable income for the year of change and any future year.

If the proceeds exceed $5,000 and you won the lottery prize on or after October 1, 2000, any payment(s) you receive during the city resident period in the year you changed residence must be included in New York City taxable income for the year of change. In addition, the payments (if the prize is payable in installments) received in future years will also be subject to New York City resident income tax.

Note: The New York City change of resident status income tax rules apply whether or not you changed your New York State resident status.

8)Q: I won a prize in a New York State Lottery drawing that was held while I was a resident of New York City. I moved out of the city and did not claim my prize until later that same year when I was a nonresident of New York City. How does my change from a New York City resident to a New York City nonresident affect my city resident income tax obligation with respect to a New York State lottery prize payment(s) that I received as a nonresident of the city? Do I still have to pay New York City income tax?

A:When you change your status from a resident of New York City to a nonresident of New York City and are entitled to receive a prize payment from a lottery prize you won while you were a New York City resident, you must pay New York City income taxes on the prize payment(s) you are entitled to receive, even if the prize payment is received after you became a nonresident of New York City. As a part-year New York City resident, you must include the amount of the prize payment(s) received in New York City taxable income.

Note: The New York City change of resident status income tax rules apply whether or not you changed your New York State resident status.

9)Q: I won a prize in the New York State Lottery while I was a resident of New York City. I then moved out of New York City and will not actually claim my prize until the following year when I am a nonresident of New York City. How will the change from a resident to a nonresident affect my New York City income tax obligation with respect to the lottery prize payment (or installment payments) that I will claim and receive in a future tax year(s) as a nonresident of the city? Do I still have to pay New York City taxes?

A:When you change your status from a resident of New York City to a nonresident of New York City and are entitled to receive a payment or installment payments from a lottery prize won while you were a resident, you must pay New York City income tax on the prize payment(s) you are entitled to receive in a future tax year(s). However, when the tax must be paid depends upon whether or not the prize payment is subject to New York City withholding tax.

If the proceeds from the prize are less than $5,000, the prize payment is not subject to New York City withholding tax. Instead, the prize is subject to special accrual rules. Under these special accrual rules:

The total amount of the unpaid prize that is not included in your federal adjusted gross income for the year of change on your federal income tax return must be included in New York City taxable income for the year of change of residence, unless you file a bond or other acceptable security with the Tax Department.

If you file a bond or other acceptable security with the Tax Department, the payment (or installment payments) is taxed in the year that the payment is actually received. As a result, you must compute the New York City tax using the New York City resident tax rates and include in New York City taxable income the amount of the payment received in that year. In the case of a prize that is payable in installments, you must compute the New York City tax for each future tax year that you receive an installment payment(s).

For more information on special accruals and change of resident status, see the instructions for Form IT-203, Form IT-260, New York State and City of New York Surety Bond Form 'Change of Resident Status' Special Accruals, and Form IT-260.1, Change of Resident Status . Special Accruals.

A lottery prize that is subject to New York City withholding tax (whether it is one payment or multiple installment payments) is included in New York City taxable income and is subject to New York City income tax in the year the payment is received. As a result, you must compute the New York City tax using the New York City resident tax rates and include in New York City taxable income the amount of the payment received in that year. In the case of a prize that is payable in installments, you must compute the New York City tax for each future year that you receive an installment payment(s).

Note: The New York City change of resident status income tax rules apply whether or not you changed your New York State resident status.

10)Q: If I move into Yonkers during the year, how does my change from a Yonkers nonresident to a Yonkers resident affect my city income tax obligation with respect to a New York State lottery prize payment(s) that I am entitled to receive after the move?

A:When you change your status from a nonresident of Yonkers to a resident of Yonkers and are entitled to receive a New York State lottery payment(s) from a lottery prize won while you were a Yonkers nonresident, special accrual rules apply. Under these accrual rules, the total amount of the payment(s) you are entitled to receive in the future is includable in the portion of the year prior to the time you changed your residence. Any payment(s) accrued for this purpose must be excluded in determining your Yonkers resident income tax surcharge for the year of change and any future year.

Note: The Yonkers change of resident status income tax rules apply whether or not you changed your New York State resident status.

11)Q: I won a prize in a New York State Lottery drawing that was held while I was a resident of Yonkers. I moved out of Yonkers and did not claim my prize until later that same year when I was a nonresident of Yonkers. How does my change from a Yonkers resident to a Yonkers nonresident affect my Yonkers income tax obligation with respect to a New York State lottery prize payment(s) that I received as a nonresident of Yonkers? Do I still have to pay Yonkers income tax?

A:When you change your status from a Yonkers resident to a Yonkers nonresident and are entitled to receive a prize payment from a lottery prize won while you were a Yonkers resident, you must pay Yonkers income tax on the prize payment(s) you are entitled to receive, even if the prize payment is received after you became a nonresident. As a part-year Yonkers resident, you must include the amount of the prize payment(s) received when computing your Yonkers income tax surcharge.

Note: The Yonkers change of resident status income tax rules apply whether or not you changed your New York State resident status.

12)Q: I won a prize in the New York State Lottery while I was a resident of Yonkers. I then moved out of Yonkers and will not actually claim my prize until the following year when I am a Yonkers nonresident. How will the change from a Yonkers resident to a Yonkers nonresident affect my Yonkers income tax obligation with respect to the lottery prize payment (or installment payments) that I will claim and receive in a future tax year(s) as a Yonkers nonresident? Do I still have to pay Yonkers income taxes?

A:When you change your status from a Yonkers resident to a Yonkers nonresident and are entitled to receive a payment or installment payments from a lottery prize won while you were a Yonkers resident, you must pay Yonkers income tax on the prize payment(s) you are entitled to receive in a future tax year(s). However, when the tax must be paid depends upon whether or not the prize payment is subject to Yonkers withholding tax.

If the proceeds from the prize are less than $5,000, the prize payment is not subject to Yonkers withholding tax. Instead, the prize is subject to special accrual rules. Under these special accrual rules:

The total amount of the unpaid prize that is not included in your federal adjusted gross income for the year of change on your federal income tax return must be included when computing your Yonkers income tax surcharge for the year of change of residence, unless you file a bond or other acceptable security with the Tax Department.

If you file a bond or other acceptable security with the Tax Department, the payment (or installment payments) is taxed in the year that the payment is actually received. As a result, you must report the payment(s) and compute the Yonkers income tax surcharge using the resident income tax rate. In the case of a prize that is payable in installments, you must compute the Yonkers income tax surcharge for each future tax year that you receive an installment payment(s).

A lottery prize that is subject to Yonkers withholding tax (whether it is one payment or multiple installment payments) is subject to the Yonkers income tax surcharge in the year the payment is actually received. As a result, you must report the payment(s) and compute the Yonkers income tax surcharge using the Yonkers resident tax rate. In the case of a prize that is payable in installments, you must compute the Yonkers income tax surcharge for each future year that you receive an installment payment(s).

Note: The Yonkers change of resident status income tax rules apply whether or not you changed your New York State resident status.

13)Q: I am a nonresident of New York State and my New York State lottery prize is subject to New York State income tax. The state that I live in will also tax the prize. Will I have to pay taxes in both states?

A:Tax laws vary by state, but most states provide a credit to their residents for taxes paid to other states. For information on your state.s tax credit rules, check with the taxing authority in your state.

14)Q: I am one member of a group of winners of a single New York State lottery prize. We formed an entity (for example, a partnership, trust, or New York S corporation) to collect the lottery prize. What are my income tax obligations?

A:As a partner of a partnership, beneficiary of a trust, or shareholder of a New York S corporation, you may be required to include your share of the prize passed on to you from the entity in determining your New York State income tax and any applicable city taxes. The taxability of the prize depends on the amount of the proceeds from the wager and your resident status.

If you are a resident of New York State, your prize payment is subject to New York State income tax if the prize payment is includable in your federal adjusted gross income for the tax year. If you are a resident of New York City or Yonkers, the prize payment will also be subject to the applicable city resident income taxes.

If you are a nonresident and if the proceeds are $5,000 or less, the prize payment is not considered New York source income and it is not subject to New York State income tax. If you won the prize on or after October 1, 2000, and the proceeds exceed $5,000, your lottery prize payment is New York source income and is subject to New York State income tax.

15)Q: How will New York State tax my lottery prize payment(s) if I sell the right to future payments to a third party for a lump-sum payment?

A:If the prize payment(s) was subject to New York State income tax prior to the sale, the lump-sum payment received is also subject to tax. The lump-sum payment received from a third party represents the present value of the New York State lottery prize payment(s) sold. The lottery prize payment(s) is gambling winnings taxed as ordinary income. Therefore, the payment from the third-party purchaser is considered a payment of gambling winnings and is taxed as ordinary income. Accordingly, the amount of the payment that is includable in federal adjusted gross income should be reported on the Other Income line of Form IT-201, Resident Income Tax Return; Form IT-203, Nonresident and Part-Year Resident Income Tax Return; or Form IT-205, Fiduciary Income Tax Return, as applicable. (Nonresidents and part-year residents must include the lump-sum payment in both the Federal amount and New York State amount columns of Form IT-203).

New York State Tax Gambling Losses Rules

16)Q: Does New York State report the amount of lottery prize to the Internal Revenue Service?

A:Yes. The New York State Lottery is required to report all prizes where the proceeds from the wager are greater than $600 and at least 300 times the amount of the wager. A federal

Form W-2G, Certain Gambling Winnings, will be issued to you reporting the total prize payment. In addition, Form W-2G will also show the amount, if any, of federal, New York State, New York City, and Yonkers income tax withheld.

17)Q: If I die before I collect all of my New York State lottery prize payments, is the unpaid lottery payment(s) that is distributed to my estate or to a beneficiary of my estate subject to New York State income tax?

A:Lottery payments made to your estate or to your heirs are taxable if they were taxable to you. They must be reported on the Other Income line of Form IT-205, Fiduciary Income Tax Return;

Form IT-201, Resident Income Tax Return; or Form IT-203, Nonresident and Part-Year Resident Income Tax Return, as applicable. (Nonresident and part-year residents must include the amount of the payment in both the Federal and New York State columns of Form IT-203.)

18)Q: If I die before I collect all of my New York State lottery prize payments, will my estate be subject to New York State estate tax?

A:If the value of your unpaid payments and other property is substantial, your estate may be required to file Form ET-706, New York State Estate Tax Return, and pay a New York State estate tax on the value of your overall estate, which will include the value of any future lottery payments. For more information on estate tax, see the instructions for Form ET-706.

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.

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.

New York State Gambling Losses Income Tax

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.

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

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.

New York State Tax Gambling Losses Statute Of Limitations

For additional information about these items, contact Mr. Heroux at 312-729-8005 or mark.heroux@bakertilly.com.

New York State Tax Gambling Losses Tax

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