What it is:
A gambling loss is anylost in lottery tickets, slot machines, table games (craps, poker, blackjack, etc.), bingo games, racing bets and keno.
How it works (Example):
For example, let's say John Doe goes on a bender in Las Vegas and wins $12,000 the first night but loses $10,000 at the craps table in the Bellagio the next night. He comes home empty-handed and has to sleep on the couch for a few weeks because the Bellagio sends him home with a W-2 for the $12,000 he won, even though he incurred $10,000 of gambling losses the next night.
Why it Matters:
The IRS allows to deduct gambling losses if they itemize their deductions. The amount of losses a deducts cannot be more than the amount of gambling income reported on a return, however. In our example, this means that although John Doe has to pay income on the $12,000 he won, he also gets to deduct the $10,000 he lost as a gambling loss, which offsets the tax. It is important to that in order to do this, you must keep records of the loss, such as the table number at which you played, your losing lottery tickets, etc. It is also important to that you must report gambling winnings in order to deduct gambling losses -- the cost of a streak of bad lottery tickets with no wins is generally not deductible.