Can Gambling Losses Be Carried Forward?

All gambling winnings, including cash prizes and the fair market value of non-cash items like cars or trips, are taxable income that must be reported to the Internal Revenue Service (IRS). The rules for reporting this income and using any associated losses depend on whether a taxpayer is a casual or professional gambler. These classifications determine the forms used, deduction limits, and the ability to offset other income.

The General Rule for Deducting Gambling Losses

For most taxpayers, considered casual gamblers, the regulations for deducting losses are restrictive. The rule is that gambling losses are only deductible up to the total amount of gambling winnings reported in the same tax year. For instance, if a taxpayer reports $5,000 in winnings and has $8,000 in losses, their deduction is capped at $5,000. The remaining $3,000 in losses cannot be used to reduce other income, such as wages.

Casual gamblers cannot carry forward excess losses. Any gambling losses that exceed winnings in a given year are permanently lost for tax purposes and cannot be carried forward to offset winnings in a future year.

To claim permitted losses, a taxpayer must itemize deductions by filing Schedule A (Form 1040), Itemized Deductions. Gambling losses are reported on the line for “Other Itemized Deductions.” If a taxpayer’s total itemized deductions do not exceed their available standard deduction, they will receive no tax benefit from those losses.

The Professional Gambler Exception

An exception to the standard rules applies to individuals whose gambling activities qualify as a trade or business. These professional gamblers report their operation on Schedule C (Form 1040), Profit or Loss from Business. This form treats the gambling activity like any other sole proprietorship, allowing for the deduction of ordinary and necessary business expenses.

While professionals can deduct business-related expenses like travel and data analysis in addition to wagering losses, their total deductions cannot exceed their total gambling winnings for the year. This cap means a professional gambler cannot report a net loss or generate a Net Operating Loss (NOL) from the business. Consequently, there is no loss to carry forward to future tax years.

Qualifying as a Professional Gambler

The IRS uses a “facts and circumstances” test to determine if gambling qualifies as a trade or business. The primary motive must be to generate a profit, and the activity must be pursued with continuity and regularity. Occasional gambling, even if profitable, will not meet this standard.

The IRS examines several factors to establish a profit motive, including:

• The businesslike manner of the activity, such as keeping accurate records.
• The taxpayer’s expertise.
• The time and effort expended.
• The history of income or losses from the activity.
• The taxpayer’s financial status.
• Elements of personal pleasure derived from the gambling.

No single factor, like hours spent, confers professional status. A taxpayer must demonstrate a businesslike approach and an expectation of profit. Otherwise, they will be classified as a casual gambler.

Recordkeeping for Gambling Activities

Both casual and professional gamblers must keep detailed records to substantiate any claimed losses, as the IRS can disallow deductions without proper documentation. A primary record is a diary or log of gambling activity, which should contain the following for each session:

• The date and type of gambling activity.
• The name and address of the gambling establishment.
• The amounts won.
• The amounts lost.

Beyond a log, taxpayers should retain other forms of evidence to corroborate their records, including:

• Form W-2G, Certain Gambling Winnings.
• Wagering tickets.
• Canceled checks and credit card records.
• Bank statements.

Professional gamblers must also keep track of all business-related expenses, such as travel, lodging, and subscriptions to data services, with corresponding receipts. This documentation is required to defend the deductions claimed on Schedule C and to help prove the business-like nature of the activity.