Much confusion exists about gambling income and how it is calculated. For instance, IRC 165(d) does not even use the term “income” – it mentions losses, gains and transactions – but, it never mentions the term “income.”
So how is “gambling income” calculated?
The mnemonic “J+O-I” is the easiest way to remember the “gambling income” formula.
“J” = Hand-Paid Jackpots
The letter “J” represents hand-paid jackpots. Typically, if a slot machine player hits a jackpot of $1,200 or more, the slot machine locks up to prevent further play, the casino immediately hand pays the gambler/taxpayer the amount just won and issues a W-2G, and then and only then, is the slot machine unlocked.
In other words, a gambler/taxpayer’s total of hand-paid jackpots are easy to calculate and determine. Since casinos are required by law to issue a W-2G for every hand-paid jackpot. Currently, a casino is required to immediately issue a W-2G when a slot machine player wins a jackpot of $1,200 or more.
“O” = Cash-Out
The letter “O” represents the cash-out that a gambler/taxpayer receives. This amount is made up of 2 possible components. First, this amount can include amounts won for which a W-2G was not issued. As an example, a slot machine player could win ten jackpots of $500. Although the slot machine player has won $5,000 (an amount greater than $1,200), the casino is not required to issue a W-2G because each of the individual jackpots was below the $1,200 requirement.
Second, this amount could simply be a refund of the gambler/taxpayer’s own money. In “accountant-speak”, this amount represents a “return-of-basis.” For example, if a slot-machine player inserts $20 into a machine and makes $5 worth of bets without winning anything and then decides to move to a different machine, the player would have a “cash-out” of $15. Similarly, if a blackjack player buys $20 worth of chips and makes $5 worth of bets without winning anything and then decides to redeem his chips, the player would have “cash-out” of $15.
“I” = Cash-In
The letter “I” represents the amount of the gambler/taxpayer’s bet. Again in “account-speak”, this amount is the gambler/taxpayer’s “basis” in the transaction or wager.
J + O – I = Gambling Income
Putting it all together now, gambling income equals handpaid jackpots PLUS cash-out minus cash-in.
