Ask the Slot Expert: Is slot cash back gambling income?

Question: Many casinos offer cashback programs. If you cash in your points for cash when you leave the casino, is this taxable income? Does the casino include this cashback as 1099-Misc income as they do for prizes and awards not included as a W-2G win?

I know that comps are not being reported or taxed (so far), but what do the tax experts say about how one handles the cashback or merchandise you get from the cashback programs?

Answer: My go-to reference for gambling-related tax matters is Tax Help for Gamblers by Jean Scott and Marissa Chien. They write that the IRS has not issued a ruling on how to treat cash back and there's no consensus among tax experts on how to treat it. As a general rule, casinos do not report cashback above $600 or $1,200, but they write that a few casinos do.

Jean and Marissa treat cash back as gambling income. One reason is because cash back is awarded according to a formula, while comps can be up to a host's discretion. Another reason is that Nevada Gaming Control has ruled that if you're barred from a Nevada casino, you're entitled to any cash back you have earned, but your comps are forfeited.

Note that free play is different from cash back. Free play downloaded to a machine can't be cashed out, so it is not income. Whatever you earn from the free play is income.

Rather than collecting cash, I download cash back to a machine and play with it. In my records, I include the downloaded cash back as an addition to my bankroll during the session, just like taking out a marker. (Even though I can't cash out the downloaded credits, I treat them as income because I could have gotten cash instead and put that in the machine.)

Gifts are another gray area. Most gifts are of relatively small value and most tax experts have agreed that they do not need to be reported. When the gift is of substantial value (Jean writes of a cruise she was awarded in a promotion and she got a 1099), the IRS has ruled that the fair-market value of the gift has to be reported and included in gambling income.

Question: How much should I play on a $10 or $25 machine?

I understand at some point it's time to move to something else, but how much should be played to get things going?

Answer: This is the old theory that you have to warm up a machine before it will pay off. I just had someone say that to me today after a video poker machine I was playing started paying off a few hands after I started playing it.

There is no answer to the question of when a player should switch machines. The odds of hitting any winning combination are the same on every spin, so if a machine was good to play on spin 1, it's still good to play on spin 100. Nothing has changed.

I recommend that players keep playing a machine while it's fun to play. If a machine isn't paying off but you're still enjoying playing it -- okay, maybe that's not likely — stick with it. If you're getting frustrated and you think the machine owes you, it's probably time to move on to potentially greener pastures.

Question: For a decade or more I swore I would never play a penny slot machine, but these days, they are nearly just as expensive as a dollar or five-dollar machine, given you really have to play maximum credits for jackpot qualifications, for the most part.

I like the Willy Wonka three-reel machine a lot, but I have noticed on this machine, and many penny machines, numerous "winning" spins return less than what you bet. That is just plain ridiculous. To bet $3.50 a spin, which is the max, and then win $1 is completely uncalled for.

Why is this even allowed on penny machines? I don't know of any dollar machines or higher that return less than the amount bet on any spin. It seems there should be a law regarding no winners less than amount bet.

Answer: Many penny slots pay back less than the amount bet? How about all? I can't think of any that have a minimum win of the amount bet. Paying back less than a push and, thus, being able to have a high hit frequency are the primary purposes of the multi-line/multi-coin machine.

Paying off less than a push is not new, though. Some traditional reel-spinning games paid less than a push. A multi-line machine could require three or five coins to enable all of the paylines and then pay only a credit or two for a low winning combination on a payline. Buy-a-Pay machines like some versions of Blazing 7s require three credits to be eligible for the progressive and then pay only two credits for three blanks.

The three-reel mechanical Willy Wonka you like to play is just like a traditional reel-spinning multi-line machine in terms of paying off less than a push. The dollar and up mechanical machines are mostly single-payline machines now and most of them are multipliers (which always pay at least the amount bet) with some Buy-a-Pays left — well, I guess there's really only one Buy-a-Pay left on the casino floor, Blazing 7s. Players who want a multi-line machine have gone to the pennies.