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Client name and identifying details have been changed to protect privacy. This is a real case.
Dave had paid $62,000 in federal and state taxes on gambling income he never actually kept. The W-2Gs were real. The jackpots happened. But the money that came out of those machines went right back in, and when his original preparer added up the forms without accounting for session-level losses, the result was a six-figure tax bill on income that existed only on paper.
By the time he came to us, he had already paid once. The IRS was back for another year, and the number on the new notice was larger.
This is not an unusual situation. It is, however, a fixable one, and the mechanism for fixing it has been established in IRS guidance for decades. Most general-practice preparers simply do not know it exists.
The W-2G Problem: Gross Jackpots Are Not Net Income
Under IRC § 61, all income from whatever source is includable in gross income. Gambling winnings are no exception. When a slot machine pays out $1,200 or more on a single spin, the casino issues a W-2G reporting that amount to both the taxpayer and the IRS.
What the W-2G does not capture is the amount wagered to produce that jackpot. A player can put $3,000 into a machine, hit a $1,500 jackpot, feed in another $2,500, and walk away down $4,000 for the session. The W-2G reports $1,500 in income. A return prepared only from the W-2Gs, without corresponding loss documentation, will show taxable income the player never netted.
At high-limit slot play, that gap between reported income and actual economic outcome can be substantial. Add the Alternative Minimum Tax, which phases in at higher income levels and does not respond well to paper income with offsetting deductions, and the result is a tax liability that has no relationship to what the taxpayer actually won.
This is phantom income. The tax code provides a way to address it.
The Session Method
Revenue Procedure 77-29 provides that a taxpayer may calculate gambling gains and losses on a session-by-session basis rather than transaction by transaction. A session is a single, continuous period of play at a gambling establishment. Sessions with net gains produce income. Sessions with net losses produce deductible losses under IRC § 165(d), to the extent of total gambling winnings. Winnings and losses are netted across sessions, and only the net positive amount from winning sessions appears as gross income on Schedule 1.
The practical effect is significant. A taxpayer who had $40,000 in W-2G jackpots across twenty sessions but who also had $38,000 in losing session activity does not have $40,000 in gambling income. Properly calculated, that taxpayer has $2,000. The $38,000 does not disappear, but it offsets gross income directly rather than being buried as an itemized deduction that may be limited or lost entirely.
The IRS has consistently recognized this method. Our firm has represented clients on gambling income disputes, including AMT assessments driven by jackpot reporting that did not reflect actual take-home income, and the session method has been the foundation of every successful resolution. The issue is never the method. The issue is documentation.
The DraftKings Question
Dave also played daily fantasy sports, which added a layer of complexity that more clients are now encountering.
DraftKings and similar platforms issue a 1099-MISC for net profits rather than a W-2G. The operators have historically classified daily fantasy sports as games of skill rather than games of chance, a distinction that affects both state licensing and federal tax reporting. The question is whether casino losses can offset DraftKings income.
The IRS resolved this definitively in Chief Counsel Advice 202042015. The Service rejected the games-of-skill classification for federal tax purposes, holding that because daily fantasy outcomes depend on the unpredictable live performances of athletes, DFS constitutes a wagering transaction within the meaning of IRC § 165(d). DraftKings income and casino income are therefore treated identically for federal tax purposes, subject to the same loss limitations, and eligible for offset by the same session-level losses. The 1099-MISC label does not change the analysis.
Building the Record
The session method requires documentation that most taxpayers do not think to preserve until they are already in trouble.
Casino win-loss statements, available through player card accounts, provide a baseline. They are not sufficient on their own. Statements aggregate activity by day but do not always break sessions down in a way that satisfies IRS scrutiny, particularly when a taxpayer visited multiple properties or played at different times of day. Bank withdrawal records corroborate session dates and amounts. A contemporaneous gambling journal that logs entry time, exit time, location, machine denomination, and session result provides the strongest documentation layer.
In Dave’s case, we needed records from multiple casinos across several tax years. Some were immediately available through player card portals. Others required direct contact with casino host departments. One issue that emerged during reconstruction: two W-2Gs from Mystic Lake had been omitted from the win-loss summary used to prepare prior returns. That kind of discrepancy has to be caught and corrected. An amended return that understates gross income while claiming a large refund creates a different problem than the one it is solving.
Getting the documentation right took weeks. The alternative was continuing to pay taxes on income that was not income.
The Amended Returns and the Deadline That Cannot Be Extended
We prepared amended returns for multiple years. The 2022 amendment had a hard constraint: under IRC § 6511, a claim for refund must be filed within three years of the original return’s due date. For 2022 returns filed by April 15, 2023, the refund window closed April 15, 2026. We filed with approximately 48 hours to spare. The projected refund on 2022 alone exceeded $30,000 at the state level, with additional federal recovery on top of that.
For 2023, the IRS had already issued a CP2000, a proposed assessment based on information returns in their system. The appropriate response to a CP2000 is not to accept the proposed balance. It is to respond with documentation showing why the proposed assessment is incorrect, which is exactly what we did. The session method documentation went in as a response to the notice rather than as a standalone amendment.
For 2025, we prepared the return correctly from the start. No amended return will be necessary. That is how this is supposed to work.
What Happens After You File
Amended returns claiming significant refunds are not automatically paid. The IRS may process the amendment and issue a refund, or it may refer the return for examination, particularly when the gambling income figures are large and the refund represents a substantial reversal of prior reported income. That is a known risk, not a reason to avoid filing correctly.
An examination of a properly documented session method return is a manageable process. The documentation exists, the legal authority is clear, and the math is defensible. An unrepresented taxpayer who filed on W-2Gs for years and then filed a large correction without documentation does not have the same options.
One additional note: the IRS pays interest on refunds under IRC § 6611, calculated from the original filing date to the date of payment. In multi-year cases involving several prior tax years, that interest accrual can be meaningful and offsets some of the cost of having overpaid in the first place.
What Changed in 2026
Two changes to gambling tax law took effect on January 1, 2026 that every regular gambler should understand.
First, the W-2G reporting threshold for slot machine jackpots increased from $1,200 to $2,000, adjusted for inflation going forward. Fewer individual jackpots will trigger a form, which reduces the administrative burden but does not change the underlying obligation to report gambling income.
Second, and more significantly, H.R. 1 (Public Law 119-21) amended IRC § 165(d) to cap gambling loss deductions at 90% of gambling winnings, down from 100%. The full text of the amended statute reads that the amount allowed as a deduction “shall be equal to 90 percent of the amount of such losses during such taxable year” and “shall be allowed only to the extent of the gains from such transactions.” This applies to all gamblers who itemize, regardless of state, and it means that a taxpayer who broke even for the year can now have taxable gambling income despite netting zero. The calculation that worked last year may not produce the same result this year, and that is worth reviewing before filing.
CLAW Tax Group handles gambling tax issues for clients across Minnesota and nationwide. If you have received IRS notices related to gambling income, have unfiled or under-reported years with W-2G activity, or have never had your returns reviewed using the session method, contact us for a consultation. Refund deadlines under IRC § 6511 are absolute. The sooner the record is reviewed, the more options remain open.
