- You can't deduct more than the amount you won.
- You must have documentation of all losses.
- Losses are deductible only on Schedule A – Itemized Deductions
What this means is that gambling winnings go on the front of Form 1040, under "Other Income" and the losses may not be deductible at all. You can't just say, "I won $4,000, but I lost $10,000, so I don't have any real winnings." You have $4,000 in winnings, and you may have $4,000 in deductions.
The reason I say "may" is that if you take the standard deduction ($5,800 for a single person in 2011), you can't deduct the $4,000 at all.
If you have enough other Schedule A items (medical expenses, taxes, mortgage interest, etc.) that the additional $4,000 gives you more than the standard deduction, then the part that’s greater than the standard deduction is an additional deduction.
The only way the entire $4,000 is deductible is if you already have enough Schedule A items that you would be itemizing anyway. Even then, there's still one catch. The winnings are part of your AGI (Adjusted Gross Income), which is used to figure limitations on other items on your tax return, including your medical expenses deduction, so the deduction doesn’t quite cancel out the income, even if you take all of it.
So to the old advice "Don't bet more than you can afford to lose," I would add, "Don't win more than you can pay taxes on." And have the casino deduct income tax from your winnings. Come tax season, you'll be glad you did.