I know that in the U.S. that income from gambling winnings can be offset by gambling losses up to the amount of the winnings, but only if you itemize your deductions on Schedule A instead of taking the standard deduction. My question is not about that.
Suppose I bought only one Powerball ticket in the tax year for $2.00 and won $1,000,000.00. How much income would the I.R.S. say resulted from that transaction? $1,000,000.00? I assert that my income from the transaction was actually $999,998.00 because I had to spend $2.00 to get the $1,000,000.00. The $2.00 was not a gambling loss; I was a winner! Is there a regulation in the tax code that addresses this?
It looks to me (not a tax professional in any way) like winnings of $1,000,000 on a $2 ticket fall under “The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager …” meaning that the lottery agency gets to decide whether they subtract the ticket price from the your winnings or not. The ticket price isn’t a loss, so you can’t deduct it yourself separately if the payer doesn’t subtract it.
Practically speaking, the highest tax bracket in the US is currently 37%. On a $10 ticket the maximum possible tax savings is only $3.70. Hardly worth worrying about.
In other cases (such as poker tournaments) where the buy-in/wager tend to be much higher, the instructions mandate that the buy-in/wager is subtracted from the winnings to find the taxable amount.
What about situations where the balance is a lot more even? I’ve sometimes wondered about how casinos manage this when big shots break even at the table, but with large amounts. Say Richie McGambler sits down to play blackjack and cashed in $500,000. After some ups and downs, he is back at $500,000 and decides he’s played enough. How does the casino handle that? What if it’s someone who starts with a more pedestrian $15,000 and winds up with $15,000? Maybe the first gambler has some sort of dedicated concierge who keeps track of how much he cashed in with, but what about the second gambler who just walks up to a busy table, drops down 15K and asks for change?