Defining a Gambling Transaction: Know when to Hold ‘Em, Know when to Fold ‘Em

Abstract

As the volume of gambling activity continues to expand in the U.S. the question of exactly what constitutes a gambling transaction for income tax purposes takes on increasing significance for taxpayers as well as tax practitioners. The law requires reporting gambling winnings separately from gambling losses. This separation raises the question of what constitutes a gambling winning which rests in turn on the definition of a gambling transaction. Is it a hand of blackjack or a day at the racetrack, a spin of a roulette wheel or the result from $100 placed in a slot machine, a roll of the dice or the night's poker results? Revenue recognition is not often an issue for individual taxpayers who report their income on a cash basis. The income recognition doctrine of constructive receipt reduces the direct control a cash basis taxpayer can exercise over the timing of the recognition of income. For the increasing number of taxpayers engaging in gambling activities, this doctrine may directly impact the amount of income they are required to recognize not merely because of the gambling income itself (some or all of which may be offset with a deduction for gambling losses) but as a result of this income's impact on adjusted gross income (AGI). While the exact definition of a gambling transaction, and thus the proper recognition of gambling income, is addressed by the I.R.S., it remains a contentious issue. However, when the doctrine of constructive receipt is extended to gambling revenue it clarifies the meaning of a gambling transaction and hence the proper amount of gambling income to be reported by taxpayers.