Ask the Slot Expert: Can a slot machine tell the difference between free play and cash?

Question: I am constantly reading online that a slot machine cannot differentiate between free play and cash. Recently, the operations of my local casino switched ownership, and we no longer accrue points when using free play. This to me indicates that the machine is indeed distinguishing between cash versus free play.

Answer: I hope that I never wrote that a machine can't differentiate between free play and cash because it clearly can, as you discovered. The statement that a machine cannot distinguish between free play and cash just needs an additional phrase to make it correct. A correct statement is: A slot machine doesn't care about the source of the funds when determining the results for a spin.

The machine — or, rather, the casino — cares a great deal about the source of funds when calculating a machine's statistics.

The equation for the Net Win for a machine is: Net Win = Credits Purchased - Credits Cashed Out. How can we purchase credits? By inserting bills or tickets and, maybe, by downloading promotional free play or redeeming points for free play. Let's say that players on a machine insert $1,000 in bills, insert $2,500 in tickets, download $1,000 in free play, and cash out $3,200. If we include the free play in our equation, the net win is $4,500 - $3,200 = $1,300. But if we compare what was added to the cash box with the cash out tickets printed, we get a net win of $3,500 - $3,200 = $300.

Consider if the machine accepted and paid out Benjamins. Players inserted 35 bills and collected 32 bills. The free play was added to the credit meter, but it did not represent money inserted into the machine. The correct net win figure is $300. The accounting team needs to be able to distinguish free play from cash so they can exclude it in the profit/loss calculations.

The slot team, on the other hand, needs to include free play in their calculations to compare how much a machine has paid out with its theoretical payback percentage. For their purposes, they don't care about the source of the funds. A $5 bet is five-dollars' worth of action on the machine regardless of whether it came from cash, a ticket or free play.

Most importantly, another function that doesn't care about the source of the funds is determining the outcome of a spin. The RNG doesn't care — or know — if the money for this spin came from the cash you had set aside to see the new Avengers movie in IMAX 3D, or from the $10 in free slot play that the casino so generously offered to you to entice you to drive the 15 miles from your home to the casino, or from the points you redeemed for slot play. Your chances of landing any winning combination are the same regardless of where the funds came from.

As you stated, in some cases, the machine and the slot club care about the source of funds. In some slot clubs, free play does not earn points. So the machine has to know how much free play you transferred to the machine and use up those funds for your spins before switching to your credit meter.

Finally, there is another instance in which the machine cares about the source of funds. Free play credits are typically non-cashable credits — that is, they must be played off on a machine, they can't be cashed out. If you cash out before your free play is used up, you'll get your winnings and the money you initially put in, but the remainder of your free play will remain on the machine.

You have to be careful with that aspect of free play if you're a player who likes to cash out after hitting a nice payout. I had a friend hit a nice payout on her free play and hit Cash Out, intending to leave the machine, and I had to tell her that she can't leave yet. She still had free play left on the machine.

Question: I won two small jackpots in 2017, however, I lost way more than what I won. I know that you have probably received this question over the years, but I would like to know exactly how I can add my gambling losses to my taxes for slot play.

Answer: Gambling and taxes can be tricky because the IRS hasn't issued clear guidelines. Many IRS employees, furthermore, don't understand gambling, so you have to deal with that too. When I was an expert witness on a tax case, one of the attorneys I worked with said that the IRS doesn't really believe that anyone can make money gambling. That might be one reason why it's very easy for them to find out about the large ($1,200 and up) jackpots you've won, but the IRS makes it difficult for you to deduct the money you lost on the way to winning those jackpots.

You have four options.

First, just put the total of your W-2Gs on Form 1040 and pay the taxes. This is your only choice if you didn't keep your own win/loss records through the year.

Second, if you do have records and you have an overall loss, you can claim a loss equal to your winnings if you itemize deductions. It's not the correct way to report your results, but I have to admit that I did do this one year.

Third, the correct way if you have records is to declare the sum of your winning sessions on Form 1040 and the sum of your losing sessions as an itemized deduction. Reporting winnings separated from losses is categorically unfair because it can inflate your Adjusted Gross Income, thereby jeopardizing your eligibility for various subsidies because of income you didn't really get. Furthermore, businesses declare net profits; they're able to deduct expenses from revenues and use the net.

That brings us to your fourth option. You can declare yourself a professional gambler and file a Schedule C and treat your gambling as a business.

I'm not a CPA or certified tax preparer or an enrolled agent, so take my statements as if you heard them from a guy misplaying every other hand at the video poker machine next to you. Get a copy of Tax Help for Gamblers by Jean Scott and Marissa Chien to learn more about your options and about how other gamblers handle taxes. Most importantly, consult a tax professional, who will have access to all the IRS publications and rulings about gambling and taxes and who will ensure that your taxes are done properly.