Joe goes to Las Vegas for the weekend with $1,000 to spend. On Saturday he wins $9,000 playing blackjack. Then on Sunday he loses $8,950 playing blackjack. He comes home with $1,050. Joe knows that he must report his gambling winnings because the tax code defines gross income as “all income from whatever source derived.” Assuming this was the only time he gambled all year, he can report $50 in gambling winnings as income on his tax return, right?
Wrong. Taxpayers must include the full amount of gambling winnings in gross income. They may not reduce gambling winnings by gambling losses with only the net difference included, otherwise it ceases to be gross income. Instead, taxpayers can deduct gambling losses (up to the amount of gambling winnings) as an itemized deduction [see Internal Revenue Code section 165(d)].
So Joe needs to report his $9,000 in winnings and then claim his $8,950 in losses as an itemized deduction.