In early September, there was an invitational event at the M resort for their Icon guests, which is their highest tier level. Perhaps others were invited as well, but I’m not sure.
Just for showing up, you received your choice of nice brand name gifts — there was a Fitbit Watch, Dooney and Burke handbags, some TUMI accessories and some more choices. About 1/3 of the gifts were geared towards men and 2/3 were geared towards women. Since I’m no dummy, I took Bonnie along and let her pick what she wanted. In addition to the free gift, there were some better-than-average hors d’ oeuvres and an open bar.
While you didn’t need to play to get the gift, they had three separate drawings — 9 p.m., 9:30 p.m., and 10 p.m. — for some Louis Vuitton “packages,” consisting of a handbag, sunglasses, and one additional item. And entry tickets for this drawing was based on play.
Bonnie isn’t much into brand names. She took the attitude of, “Don’t play extra for me. Louis Vuitton accessories are way more expensive than what I normally use. Plus, I already have three handbags in closets won in other promotions that I haven’t used yet.”
It’s nice when Bonnie takes this “sensible” attitude. However, this time it would have been nice had she been a bit greedier. I had already decided that I should probably play at least $100,000 in coin-in to justify the invitation. The casino was putting out quite a bit of money for this promotion, and when they put out that kind of money, they expect players to play. If I took their nice gift without playing at all, perhaps I wouldn’t receive the invitation next time.
There was a combination of promotions going on there, so playing that much was probably a decent play — if I valued the Louis Vuitton package at close to retail. Bonnie’s sensible attitude took some of the value away. If she had a “Boy, that would be so special to win that prize!” attitude, clearly winning the package would be more valuable. Dollars and sense is one way to measure value, but how happy something makes Bonnie is also part of the equation for me.
I didn’t know how good of a chance for the Louis Vuitton package playing $100,000 coin-in would get me. I didn’t see a lot of players “going for it.” One lady who typically plays a lot at this kind of event had concert tickets somewhere else, so wasn’t going to play for a “must be there to win” drawing. She went, ordered her gift, and then went to the concert. Like Bonnie, she had a number of unused handbags from other casino promotions.
As luck would have it, my name was called at the 9 p.m. drawing. (Perhaps I had a competitive number of entries. Perhaps it was simply blind luck. I really don’t know.) There was a choice of three Louis Vuitton packages, so Bonnie decided which one suited her best. In addition to the Louis Vuitton package, she picked out a Dooney and Burke bag for her regular gift. So much for having too many handbags!
I checked to see if you could win more than once and found out the answer was “No.” That was the fair way to do it, but in case they didn’t have that rule, I’d make sure to stick around for the last two drawings as well. Since we couldn’t win again, we didn’t stick around.
Just before I left, one of the promotion managers came over and had me sign a $3,000 Tax Form 1099 for the Louis Vuitton package. Whoa! What’s this? I was not expecting this at all.
“That’s the retail price for the prize, so if you want to keep it, you have to sign for it. If you don’t want to keep it, we’ll call somebody else’s name.”
Bonnie had already fallen in love with her new handbag, so there was no way in the world that I would make her give it back. But the tax implications did surprise me some.
Had I known of the $3,000 1099 would I have still played for it? Probably. I get enough W2Gs and 1099s throughout the year that one more would not be a showstopper. It’s just most of the ones I get come with cash (like winning a $3,000 drawing). Having the tax form come with a gift is a bit unusual for me. And, naïve guy that I am about designer things, I was thinking $600 or so was the appropriate price for the gift.
I’m not complaining. Winning this prize was far more good news than bad. It was simply a surprise I wasn’t expecting.
I believe you got taken. A possibly marked up $600 bag being valued at $3000 and a 1099 to boot- what a joke.
I don’t think that the package was valued too high. That brand is as expensive as Chanel and never goes on sale. Yay for Bonnie!
No different than winning a “prize” on a game show.
Interesting article Bob. Wouldn’t have expected that either. I’ve only won cash or FP so have not had that experience. Roughly how much starting bankroll would you need to run 100k CI on JoB or DW?
If you get no quads, straight flushes, or royals, you’re looking at about a -9% money pit, about the same as your average dummy slot. But with video poker you have to add some extra allowance for play mistakes, sticky buttons, and so on. The -9% assumes computer perfect play on 9-6 Jacks or Better, your actual mileage may vary.
Or through a sweepstakes.
Regardless of what they claim the prize is worth, you can do a “fair market value” of what it would cost and claim that amount on your taxes instead of what they claim. I did this with a trip to NY. I kept documentation of what the flights and hotel I received would have cost on the market on the day they booked them. If I recall correctly, provider claimed the prize was worth $1,500, but I valued it at $850 based on fair market value and used that.
As always, when dealing with taxes, consult with a professional – which I am not.
A good reminder that the real value of a prize–any prize, cash or goodies–is (value to you) – (attendant tax liability). So if your prize is an autographed portrait of Steve Bannon “worth $8000 retail,” and you are in a 25% tax bracket, its real worth is $40 (hey, the frame is worth something) minus $2,000, which means you should refuse the prize altogether. This applies, by the way, whether or not you actually get handed a W2-G at the time.
Back when the game show Wheel of Fortune awarded gift prizes, not cash, people used to win big piles of stuff and then find that they had to hold the world’s juiciest garage sale just to be able to pay the tax liability on the (inflated) full retail value of all the stuff they had won.
Reno Kevin Lewis?
If Trump has his way with his propose tax reform, we will lose our deductability of all the W2Gs . All winnings will be viewed as income for tax purposes. This will have a serious impact upon the gaming industry.
The real value of the prize is what it is selling for in an open market. If identical Louis Vuitton packages are routinely selling for about $1500 on eBay, then that’s the value of what you won.
If there is no good data available about the real worth of the package, then there is always the option of selling it yourself to the highest bidder on eBay. The highest bid becomes the fair market value, and that’s the figure you should pay taxes on.
FWIW, a few years ago I spun a big wheel that landed on $4000 worth of free play, and there was no tax form involved, which surprised me…apparently free play is not considered taxable, or maybe they just didn’t know better.
Good article. I’d always suspected as much as far as tax reporting for prizes of substantial retail cost. I’d be interested in experiences of others who win big prizes, i.e. cars. If they didn’t want the car, were they able to sell it, and get a good enough selling price to offset their tax liability? Particularly in cases of minnows like me (as opposed to whales), was it a problem?
Candy, the rule is that your tax liability is based on the FULL RETAIL VALUE of the prize AS REPORTED BY THE ENTITY THAT AWARDED THE PRIZE. This is significant, as the giver of the prize has a strong incentive to inflate its reported value, as it is an advertising and promotion expense.
This means that you only really get the actual value that you’re being hit with tax for when the prize is something fungible and with a fixed retail peice. A gold coin’s value is easy to quantify; a week in Cancun’s isn’t. This has been an ongoing issue between gamblers, casinos, and the IRS. The gambler almost always receives the worst possible interpretation of the law (the one leading to the greatest tax liability)–surprise, surprise!
Thank you, Kevin, for your input. I pretty much avoid prize drawing promos after suffering through humans pushing and shoving for lousy food and drinks in the hopes of hearing my name called. I won’t say those are rigged…but another reason to use my time more wisely, like sitting in my room watching Law and Order re-runs. But I have been curious about how it goes, taxation-wise when one wins a car or something else big.
Kevin Lewis wrote, “Candy, the rule is that your tax liability is based on the FULL RETAIL VALUE of the prize AS REPORTED BY THE ENTITY THAT AWARDED THE PRIZE.”
I believe that Mr. Lewis is incorrect, and that the rule is that a prize is taxable at its fair market value, as others in this thread have said. The IRS’ Tax Topic 419 says as much–“Gambling income includes…the fair market value of prizes, such as cars and trips.” See https://www.irs.gov/taxtopics/tc400/tc419 . It is to be remembered that a Form W-2G is only evidence of income. It isn’t a definition of income. This somewhat begs the question of what is “fair market value.” It could be retail price, wholesale price, or the price obtainable from selling the item through a want ad, eBay, or the like. If retail price, it should be the lowest price available for a new item from an established seller–a discounter, not necessarily a high end retail store catering to customers’ vanities, like Barney’s New York. Publication 561 gives some guidance, but doesn’t really answer the question. As that publication says, “Determining the value of donated property would be a simple matter if you could rely only on fixed formulas, rules, or methods. Usually it is not that simple.” As a practical matter, all of this becomes important only if you are audited. In that setting, you may have the challenge of being up against a not-too-bright auditor who it’s hard to budge from an assumption that whatever a casino puts in writing must be correct. And a volume of Forms W-2Gs exceeding your net gambling income may itself raise red flags and trigger an audit. That risk is hard to avoid.
I’m inclined to agree with Dunbar that what you ACTUALLY sell something for on eBay is a good measure of fair market value. Any good real estate professional should tell you that exposure to the market is what actually discovers the value of an asset.
Another point raised by this discussion deserves note. It is a shallow, incorrect approach to analyze the worth of a video poker play, or of any gambling proposition, by comparing the after-tax benefit of a potential win to the pre-tax impact of a potential loss. If you’re Bob Dancer, one hopes that you will have positive income for the year whether you win or lose on any one play. In that case, you should be comparing after-tax win to after-tax loss. If you’re in a 40 percent total tax bracket, a loss of $1000 only costs you $600 after tax. Disregarding taxes entirely will usually give you the right answer. The situation only becomes asymmetrical if you are teetering on the fence of having a win or loss for the year–or to a lesser degree if you are close to the border of moving into a higher or lower tax bracket. One often sees bad advice on this subject.
T Hunt wrote, “If Trump has his way with his propose tax reform, we will lose our deductibility of all the W2Gs.” Trump’s proposals so far are a real sketchy outline. The last time Russell Fox was on GWAE, he opined on what might happen to treatment of gamblers in case of tax “reform.” (I put that in quotes because reform is always in the eye of the beholder. It’s a matter of whose ox is being gored.) He thought it likely that either the Schedule A deduction for gambling losses would be maintained, or that taxpayers would be allowed to simply net out wins and losses when reporting gambling income on Form 1040. The latter would be great. That’s how it should be, if anyone wants to be sensible about it. Of course, it’s already true that if you live in any of certain states that do not allow ANY deduction of losses by non-professionals, it doesn’t pay to gamble, period. It’s suicidal.
The way T Hunt phrased this does bring up another a common misconception. Gambling winnings are taxable income whether or not you receive Forms W-2Gs, and whether or not those forms are accurate. Losses are deductible whether or not the casino has any record of them. Again, those tax reports are evidence of income, not a definition of income.
Mike, receiving free play is not a taxable event. Playing it through and cashing out is a taxable event.
WRX wrote: “If you’re Bob Dancer, one hopes that you will have positive income for the year whether you win or lose on any one play.”
I think Bob has stated that he has had losing years. These are important because annual gambling losses can not be carried forward. For example, you could be playing a breakeven game, and have expectations of breaking even and thus owing no taxes when in reality you will pay taxes on your winning years while not getting a tax benefit from your losing years, thus paying taxes on money you’re not really winning. The important metric here is called N0 or Nzero, it’s variance/edge/edge hands, and you want to at least exceed that in a given tax year otherwise you will be paying a tax penalty by not being able to deduct losing years, in effect, your true edge will be less that you think it is. As an example of an Nzero calculation, say you’re playing something like full play deuces with a one percent net edge considering all promos, N0=26/.01/.01 = 260,000 hands. If you’re playing at least 260,000 hands per year, you will still have a losing year every six on average, so there is still some tax penalty, but it is substantially reduced. Play less than N0 and you get more tax penalty, play more than N0 and the tax penalty is reduced.
A friend of mine while in college got on The Price Is Right. He won a sterling silver punchbowl set and a canopy bed — just what every college frat boy needs. He signed the 1099 for the prizes at full retail value and they were shipped to his father. The friend’s dad was angry about paying taxes on these items so he assembled the canopy bed and forced his son to sleep in it every night at home for the next 3 years. He tried to have his accountant declare the actual value of the prize to be the market value but not the value on the 1099. The accountant wouldn’t do that stating that since they were new, the market value would be the retail price.
Liz wrote: I think Bob has stated that he has had losing years. These are important because annual gambling losses cannot be carried forward.
Yes and no.
Yes I have had a few years with gambling losses — although other income made me positive in all but one year. Following an N0 strategy would have cost me many, many tens of thousands of dollars over the years. No thank you.
Let’s say on August 1 you are behind $1,000 or $10,000 or $100,000 or whatever would be a fairly significant amount for the stakes you play. You still have some probability of being positive for the year. That’s a whole lot different than being that far behind on December 15.
Also, if you’re a senior and you have IRA accounts, you CAN effectively carry your gambling losses forward. On December 15, if you’re behind for the year, simply arrange to cash in some percentage of your IRAs. They are taxed at your current tax rate, which would be zero if you are having a losing year.
If you have a winning year, do not cash in the IRAs this year and add as much as you can to them for withdrawal down the road if and when you have a losing year.
Even if you’re not a senior, letting your slot club cash back accumulate during winning years and taking them down to zero in your losing years is a way to get around some of the tax code restrictions.
I have never been a proponent of N0 arguments and suspect I never will be. They strike me as something devised by non-playing theoreticians and not by actual winning players. I’ve read arguments by “Liz” on this subject numerous times over the years and they just don’t make sense to me. Having them reiterated one more time isn’t going to come close to convincing me.
I’m not a tax expert but I don’t believe gambling losses can be used to offset non gambling gains. It is my understanding that gambling losses can only be used to offset gambling wins.
Liz, the N0 concept is an important one. It is one measure of what it takes to get into the long run, and a reminder to professional gamblers of the importance of getting into the long run so as to have a high probability of coming out a significant winner over one’s career. It is also true that due to the asymmetrical tax laws, one is much better off having a high probability of not being a loser in any one tax year.
However, there is nothing magical about getting exactly to the point of N0. It’s an arbitrary choice of measure. As you say, if you play exactly to N0 in a year, you will still have about a one in six chance of being a loser for the year. But if your amount of play falls SLIGHTLY short of N0, then your probability of being a loser will be SLIGHTLY higher than one in six. If your play SLIGHTLY exceeds N0, then your probability of being a loser will be SLIGHTLY less than one in six. There is no tipping point where your odds of being an overall winner shift dramatically.
As a practical matter, these things may largely take care of themselves if you respect a Kelly betting criterion. (Or in the simplest terms, don’t overbet your bankroll.)
Furthermore, these considerations have NO EFFECT AT ALL on the advisability of engaging in any one-time play that forms only a small part of all your play for the year or over your career. About the most that can be said is that engaging in high-variance plays increases the time needed to get to N0 (or to any fraction or multiple of N0), and that low-variance plays make it easier to get to N0.
I believe Bob’s point to be that if you are obsessed with avoiding variance, and are chasing N0 or some other similarly arbitrary goal, you will have to give up a lot of value. You don’t get rich by declining to take risks.
When I wrote earlier that the after-tax effects of a potential win or a potential loss could be asymmetrical, I should have noted that this would only be true if you were likely to be on the fence as to having taxable income or no taxable income for the full year, or on the fence between lower and higher tax brackets for the full year. As Bob says, if it’s August 1, your play for the rest of the year is likely to take your taxable income to a much higher level anyway. If it’s December 15, maybe not.
I, too, am at least somewhat unclear on Bob’s point about offsetting gambling losses with other income. If he is just saying, if your taxable income from gambling and other activities is zero, you can cash in an IRA up to the threshold for having to pay taxes (ordinarily the amount of the standard deduction), and not have to pay taxes on that cash-in, I understand. But Liz, I believe you are right that even a professional cannot show gambling losses on Schedule C as “expenses” in an amount exceeding the “revenue” shown from gambling wins. HOWEVER, it has been established that a professional can subtract all other proper expenses on Schedule C, and that if this results in a negative number, that net loss can be carried over to Form 1040 as a business loss. That line on Form 1040 could then be offset against income for the year from other sources, in determining adjusted gross income.
A professional gambler would be much more likely to be a loser for the year as a result of travel and other business expenses, than purely as a result of netting gambling wins and losses.
Finally, I don’t take the fact that Skippy’s friend got screwed as a source of tax law authority.
OK, I guess I get it. So, if you’re between 60 and 70 you can use an IRA as a tax deferred account, if gambling is your only source of income, then on winning years fund your IRA and on losing years take a distribution, but this would only work for small losses and after 70 1/2 you have to take required minimum distributions. Seems a little complicated. Personally I’d go with N0, maybe like not playing the lottery you limit your upside, but you avoid fooling yourself into thinking you have winnings which actually disappear after taxes. Of course you are free to not believe in N0, but it’s just math, it doesn’t matter whether you believe or not, it always applies, it’s basically a rule of the universe. If you’re not exactly sure how math rules your world, check out the Nova episode titled “The Great Math Mystery”.
I hate to dredge up an old blog topic from two years ago, but Bob Dancer brought up an interesting issue for many of us regarding whether or not we can deduct gambling losses on Schedule A from casino drawing prizes won where a 1099 is issued.
The conventional wisdom says you cannot do this; you can only deduct losses from strict gambling wins. However, there is a 1996 ruling in IRS Tax Court. Libutti v. Commissioner (Google Libutti tcm 1996-108) which states if there is a “STRONG NEXUS” of gains from drawing income related to gambling activities, then you can go ahead and deduct gambling losses from drawing prize money.
I would think the Libutti ruling would apply in situations where you earn more entries from gambling, wouldn’t it?
I’ve already racked up close to $8,000 in prizes myself this year along with having to lose a bunch to earn those prizes, so it has become a worthwhile issue for me to examine.
Anyone have insights on the Libutti ruling and whether it would apply to earned entries towards casino prize drawings?