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Lessons from the Tax Court: Are you a professional gambler?

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in Small Business Tax

If you’re serious about your gambling activities, you may find yourself in a better tax position than if you were a casual gambler. Reason: A professional gambler can deduct losses up to the amount of winnings on Schedule C instead of claiming them as miscellaneous itemized expenses on Schedule A. This can lower your adjusted gross income (AGI) for other tax purposes.

But you just can’t call yourself a “pro.” The determination is based on the particular facts and circumstances.

New case: A couple gambled extensively at Nevada casinos during weekends in 2006. They used a system where they would play the slot machines where prior users had lost. The system worked well at first, but eventually their losses mounted.

Over the course of the year, the couple reported losses of around $1,050,000 and winnings of approximately $850,000, for a net loss of $200,000. They ended up depleting their retirement plans and mortgaging their real estate properties to the hilt.

Result: The Tax Court ruled that the gambling was not a mere hobby. The couple qualified as professional gamblers who could deduct their losses (up to their winnings) on Schedule C. (Le, TC Summary Opinion 2010-94)

Note that this “victory” in the Tax Court came at a steep economic price. Subsequently, the couple limited their gambling activities.

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