Academic journal article Journal of Accountancy

Tax Issues for Professional Gamblers: A Pro Gambler May Net All Wagering Activity but Cannot Report an Overall Wagering Loss

Academic journal article Journal of Accountancy

Tax Issues for Professional Gamblers: A Pro Gambler May Net All Wagering Activity but Cannot Report an Overall Wagering Loss

Article excerpt

Professional gamblers are treated differently from amateur gamblers for tax purposes because a professional gambler is viewed as engaged in the trade or business of gambling. The professional gambler reports gambling winnings and losses for federal purposes on Schedule C, Profit or Loss From Business. To compute his or her business income, the professional gambler may net all wagering activity but cannot report an overall wagering loss. In addition, the taxpayer may deduct "ordinary and necessary" business expenses (expenses other than wagers) incurred in connection with the business.

Whether a gambler is an amateur or a professional for tax purposes is based on the "facts and circumstances." In Groetzinger, 480 U.S. 23 (1987), the Supreme Court established the professional gambler standard: "If one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business." The burden is on the gambler to prove this status.

In addition to applying the standard established in Groetzinger, courts sometimes apply the following nonexhaustive nine-factor test in Regs. Sec. 1.183-2(b)(l) used to determine intent to make a profit under the hobby loss rules to decide whether a taxpayer is a professional gambler:

* The manner in which the taxpayer carries on the activity;

* The expertise of the taxpayer or his advisers;

* The time and effort the taxpayer expended in carrying on the activity;

* An expectation that assets used in the activity may appreciate in value;

* The taxpayer's success in carrying on other similar or dissimilar activities;

* The taxpayer's history of income or losses with respect to the activity;

* The amount of occasional profits, if any, that are earned;

* The financial status of the taxpayer; and

* Elements of personal pleasure or recreation.

What if a professional gambler's "ordinary and necessary" business expenses exceed the net gambling winnings for the year? In Mayo, 136 T.C. 81 (2011), the court held the limitation on deducting gambling losses does not apply to ordinary and necessary business expenses incurred in connection with the trade or business of gambling. …

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