Gambling As a Business Activity

The Internal Revenue Service requires the reporting of gambling winnings as income. Gambling losses are tax deductible for taxpayers who itemize deductions. However, the deduction for gambling losses is limited to the amount of gambling winnings. Consequently, gambling losses cannot apply to the reduction of income from sources other than gambling.

The IRS therefore treats gambling like a recreational hobby. Part of an enrolled agent job is defending eligible tax deductions for clients. Only the losses on business activities are tax-deductible because there is an expectation of taxable profit in the future. But what happens to taxpayers that treat gambling as a profession? They may need to select someone from an enrolled agent list to help prove their activity is a business.

The Tax Court has recently ruled that an individual can qualify as a professional gambler despite pursuing the activity part-time. As taught in enrolled agent classes, part-time business pursuits receive the same tax treatment as full-time self-employment. If part-time gambling is eligible for tax classification as a professional business, then all expenses are deductible. However, gambling winnings that exceed gambling expenses for a professional gambler are a business profit. They are therefore subject to self-employment tax.

The past basic position of the IRS was that gambling cannot be a business activity because it doesn’t involve selling goods or services to customers. The Supreme Court rejected this concept because traders are recognized as engaging in a business.

One notion that the IRS persisted in following is that only those who pursue gambling on a full-time basis are eligible for tax treatment as a professional business. This conflicts with the numerous situations where a part-time activity is recognized as a business. As long as a taxpayer can demonstrate a serious commitment to earning a profit, the taxpayer is conducting a business. A tax CPE course provides details about IRS treatment of business losses.

The Tax Court uses various criteria to identify whether an activity is a profession. A taxpayer whose endeavor is treated as a business may deduct all ordinary and necessary expenses. As such, any loss resulting from expenses that exceed revenue is deductible against other types of income.

The Tax Court’s decision was only a summary judgment rejecting the IRS claim that gambling cannot qualify as a business activity unless it’s pursued full-time. However, it clearly established the ability of gamblers to obtain professional business status while engaging in gambling part-time.

The IRS and the Tax Court have used similar guidelines relating to business activity classification for both investment traders and gamblers. Casual traders-like recreational gamblers-are distinguished from those pursuing an activity as a business. However, if a part-time gambler may obtain business status, so might a securities trader. Therefore, a tax professional with enrolled agent certification can find prospective new clients among active securities traders as well as poker players-even part-time participants.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.