IRS issues guidance on determining wagering gains and losses.

• Author: Beavers, James

The Office of Chief Counsel issued a memorandum explaining how to determine the wagering gains and losses of casual gamblers.

Scenario

In the scenario in the memorandum, the taxpayer is a casual gambler on a fixed income. Therefore, she carefully limits the amount of money she gambles. Her practice is to commit only $100 to slot machine play on any visit to a casino, playing until she loses the original $100 committed to gambling or until she stops gambling and cashes out.

The taxpayer went to a casino to play the slot machines on 10 separate occasions throughout the year. On each visit to the casino, the taxpayer exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble. On five occasions, the taxpayer lost her entire $100 in tokens before terminating play. On the other five occasions, the taxpayer redeemed her remaining tokens for the following amounts of cash: $20, $70, $150, $200, and $300.

Applicable Law

Sec. 165(d) states that "losses from wagering transactions shall be allowed only to the extent of the gains from such transactions" but does not provide a technical definition of the terms "gains" and "losses." However, if the statute's language is plain, clear, and unambiguous, the statutory language is to be applied according to its terms, unless a literal interpretation of the statutory language would lead to absurd results. In ordinary parlance, a wagering "gain" means the amount won in excess of the amount bet (basis). Therefore, a wagering gain is the total winnings less the amount of the wager and a wagering loss is the amount of the wager (basis) lost.

Casual gamblers may deduct their wagering losses only to the extent of their wagering gains; they may not carry over excess wagering losses to offset wagering gains in another tax year or offset non-wagering income. In addition, casual gamblers may not net their gains and losses from slot machine play throughout the year and report only the net amount for the year.

As the memorandum explains, the term "transactions" in Sec. 165(d) could mean every single play in a game of chance or every wager made. This interpretation would require a taxpayer to (1) calculate the gain or loss on every transaction separately and treat every play or wager as a taxable event and (2) trace and recompute the basis through all transactions to calculate the result of each play or wager. However, as the memorandum points out, courts considering that reading have found it...