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Certain special rules apply to gambling income, and there are strict recordkeeping requirements. According to some tax professionals, this deduction is so frequently misused that the IRS views taking the home office deduction as one factor that may contribute to receiving an audit. See PublicationTaxable and Nontaxable Income for rules on this topic. The truth is that U. Deduct fee from refund.Gambling winnings are fully taxable and you must report the income on your tax return. Gambling income includes but isn't limited to winnings from lotteries. You'll also receive a Form W-2G if the payer withholds federal income tax from You may deduct your gambling losses on Schedule A, Itemized Deductions. Gambling winnings are fully taxable and must be reported on your tax return. Gambling income includes, but is not limited to, winnings from lotteries, raffles.