An interesting question related to deducting gambling losses was posted on our tax forum. Preparer’s client won the lottery in 2014 and chose to take installment payments for the rest of her life. Then in 2015 the taxpayer incurred gambling losses. The question was, can gambling losses incurred in one year be used to offset installment payments from gambling winnings in a prior year.
Reg. Sec. 1.165-10 says: Losses sustained during the taxable year on wagering transactions shall be allowed as a deduction but only to the extent of the gains during the taxable year from such transactions.
The wording in the regulations would lead you to believe that the later year losses could not offset winnings installment payments from a prior year.
However, further research came up with the following:
Where a gambling gain is paid out to and properly recognized by the recipient in tax years after the year in which the gain was won, the gain retains its character as a gambling gain in the later years. So where taxpayers won a state lottery in Year 1, and their winnings were payable in annual installments beginning in Year 1 and ending in Year 20, and taxpayers properly recognized the gain only as each installment was received, the payments in Years 2 – 20 were gambling gains in those years, and taxpayers were entitled to deduct gambling losses in each year up to the amount of their income from their lottery winnings received in that year.
Rusnak, Charles C., (1987) TC Memo 1987-249, PH TCM ¶87249, 53 CCH TCM 835; IRS Letter Ruling 9808002;