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Win a Super Bowl bet? It's taxable

"A lot of gamblers think they can file any way that minimizes their tax burden," he says. "But they really don't have a choice. They must pick one category or the other."

And while the tax code generally is very harsh toward gamblers, says Polizzano, professional gamblers recently got some good news from the U.S. Tax Court. In Mayo v Commissioner, the court held that a professional gambler may deduct "ordinary and necessary" business expenses beyond the extent of a taxpayer's net gambling winnings.

Record winnings and losses

Both types of gamblers, however, share one thing. They need to keep very good records of their gambling activities. This, too, is an area of confusion for taxpayers, says Polizzano.

A recreational gambler can't simply net wins and losses -- that is, combine them and report only the total. Rather, a gambler must add all winnings and report them as income. The losses are itemized and can be claimed as a deduction, but only up to the amount of winnings reported that year.

To substantiate these amounts, the IRS says you must keep records of every single gambling session. "You spend 15 minutes at the craps table and finish up with $500. Take a break, then spend 45 minutes at the blackjack table. That's another session," says Polizzano. "In my opinion, that's overly burdensome. Who really does that?"

Another documentation requirement, per IRS Publication 529, Miscellaneous Deductions, is that you keep a diary or log of gambling activities. The log is supposed to show not only the amounts you win or lose, but also the date and type of your specific wager or wagering activity, the name and address or location of the gambling establishment, and the names of other persons present with you when you gambled.

"If they get the 'dear valued taxpayer' letter from the IRS that wants them to substantiate their gambling activity, they won't be able to do that because they haven't kept track," says Polizanno.

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