What are the Tax Rules for Gamblers?

Matt Pottmeyer | October 25th, 2012

With the new Cleveland Horeshoe Casino, gaming is becoming big business in Ohio.  From occasional slot machine players to poker pros, Ohioans are experiencing gambling and all the wins and losses that come with it.  While residents of Las Vegas may already be familiar with the IRS’s tax treatment of gambling wins and losses, Ohio gamers might not be  The IRS has special rules for gaming income and losses, which I’ll describe below, but the general rule is this: gambling winnings are taxable.

Professional Gambling Tax

Gambling, as a profession, is most often frowned upon by the IRS.  Whether a taxpayer’s gambling rises to the level of a trade or business depends on the facts and circumstances. Numerous court cases have dealt with this issue, and taxpayers have generally lost.  Few taxpayers are likely to gamble to the extent required to treat the activity as a trade or business.

Where gambling losses are reported on Form 1040 depends on whether or not the taxpayer is in the trade or business of gambling.  While most individuals would not qualify to be professional gamblers, the Supreme Court ruled in one case that an individual could be in the trade or business of gambling (a professional gambler) if he pursued gambling full-time, as a livelihood, in good faith, and regularly, rather than as a hobby. In one such case, the taxpayer had no other employment and gambled full-time at a dog track.  The Court found that his activity required skill, which he applied, and was more than a mere hobby. In another case, the taxpayer held a part-time job in addition to spending 40 hours per week carrying on his gambling activity betting on horse racing. Although the taxpayer was employed part-time in a job unrelated to gambling, the Tax Court held that the amount of time devoted to his gambling qualified the activity as a trade or business.  As a result, the taxpayer could deduct his gambling losses on Schedule C as business expenses and not on Schedule A as miscellaneous itemized deductions.

Amateur Gambling Tax

One should note that a large amount of winnings does not qualify a taxpayer as a professional.  Also, there is no distinction between professional gamblers and occasional, amateur gamblers when it comes to the deductibility of gambling losses. The losses need not be from the same type of gambling to offset winnings.  For example, losses from wagering on football can offset gains from playing poker.

The treatment of gambling expenses for professional gamblers is preferable to the treatment afforded to amateur gamblers.  Until recently, professional gamblers did not enjoy the same treatment as persons in other trades. The Tax Court, in Offutt (16 T.C. 1214 (1951)), ruled that taxpayers could deduct gambling losses only to the extent of gambling gains under IRC Sec. 165(d)). In Offutt, the court ruled that this limitation applies even if the taxpayer is in the trade or business of gambling because the more specific rule of IRC Sec. 165(d) overrides the general deduction rule of IRC Sec.162(a).  The Supreme Court, in one court case (Groetzinger (480 U.S. 23 (1987))), ruled only on the issue of engaging in a trade or business and did not address the interplay between IRC Sec.165(d) and IRC Sec. 162(a).  Recently, The Tax Court, in Mayo (136 T.C. 81 (2011)) partially overruled the precedent set in Offutt and subsequent cases.  This will potentially allow a professional gambler to have a net loss in his business, if the facts and circumstances are correct.

Tax Help for Gamblers

Are you a regular gambler?  Not sure if you qualify as an amateur or professional gamer?  Contact Rea & Associates.  Our Ohio tax services team can help you determine your tax status and help you file appropriately.  Whether you’re an amateur or a professional, well help you to file in a way that offsets your wins with your losses, limiting your overall tax burden.


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