Deputy Editor
Connecticut may soon change a longstanding policy against allowing itemized deductions of gambling losses on tax returns. It’s one of only a few states where the local tax code still taxes gross gambling wins without allowing the deduction of losses. Several other states that had such laws on the book have, in recent years, updated their policies to match the federal one, which allows loss deductions (although now only 90% of them).
Connecticut has dragged its heels. Yet, SB 183, introduced on Wednesday, would bring its tax policy in line with most other states’. It does so efficiently, with little text and its purpose summarized simply:
To establish a personal income tax deduction for gambling losses incurred by a taxpayer, to offset any taxable winnings.
State Rep. Mike Demicco and State Sen. Derek Slap, both Democrats, are sponsoring the bill in their respective chambers. Thus far, the only legislative action on the bill has been its referral to the Joint Committee on Finance, Revenue and Bonding.
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Connecticut a Rarity in Not Allowing Itemized Gambling Deductions
At one time, states were split on whether to allow gamblers to offset gambling losses against their winnings for tax purposes, though most now do so. In most states — and federally — gamblers are expected to include net gambling winnings as income. A player that is a net loser will not owe taxes, even if they had some wins along the way.
That’s not currently the case in Connecticut. Any state-level tax withholding on gambling wins can’t be recovered, even if the player continues to gamble and ends up in the red./
Essentially, it’s an even more drastic version of the “phantom income” issue that the entire country now grapples with thanks to Donald Trump’s One Big Beautiful Bill. The OBBB included a clause that limited gamblers to deducting 90% of their losses rather than 100%. Ongoing efforts to repeal that change have met with resistance, though industry experts expect a fix at some point. The status quo for state tax in Connecticut is that 0% of a player’s losses are deductible.
Connecticut residents must weather a double whammy now, unless SB 183 passes. Both the federal and state governments are looking to tax them on more money than they actually win at gambling.
Online Casinos Have Driven Tax Code Changes
It’s possible that the furor over the Big Beautiful Bill has inspired Connecticut legislators to do some housekeeping. However, based on other states that have made similar changes, the legalization of online casinos may also be a driving factor.
Connecticut launched its legal iGaming market in October 2021. It’s one of just eight states with legal online casinos, though Virginia is making some headway toward becoming No. 9.
Prior to legal iGaming, most casino patrons probably didn’t track every dollar they were winning and losing, even if technically they should have been. Nor has the state been aggressive in going after winnings, other than for jackpots that trigger mandatory withholding for federal taxes. If a player went into Foxwoods or Mohegan Sun and won $2,000 while staying below the reporting threshold, then lost it all before leaving, nobody would have been the wiser.
However, online casinos track every single dollar in and out of the games. That arrangement would make it much harder for a state to correct for an unfairly punitive tax policy by being lax about enforcement.
That may be why two other states with similar policies amended them in the immediate wake of legalizing iGaming. West Virginia launched online casinos in 2020 and amended its tax policy the same year. It was the same story with Michigan, which saw online casinos launch in 2021 and had retroactively changed its laws to allow loss deductions before the year was out.
If Connecticut’s SB 183 makes the legislative journey into law, it will be following the same pattern, albeit with a few years’ delay.
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