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Lessons from the Tax Court: No tax luck for gambler

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in Small Business Tax

Generally, you can deduct gambling losses you suffer during the year but only up to the amount of your winnings. Any excess is nondeductible.

In comparison, if you are a professional gambler—in other words, you’re “in the business” of gambling—you can also deduct gambling-related nonwagering expenses (such as lodging and 50% of meals for out-of-town ventures) as business expenses.

To qualify as a professional gambler, you must show that you have a legitimate intention of turning a profit. But the IRS often takes a dim view of taxpayers who claim to be professional gamblers and the Tax Court usually sides with the IRS.

New case: The taxpayer, who worked for the Port Authority of New York and New Jersey, drove 125 miles to Atlantic City after his regular shift ended. Instead of keeping a permanent residence, he stayed at the hotels where he would gamble. Then he headed right back to work.

On his 2010 return, the taxpayer claimed a $25,000 loss, which he claimed he had suffered from gambling, primarily playing baccarat and other table games. But the taxpayer had no records and kept track of his losses “in his head.”

Under the prevailing regulations, the profit motive, or lack thereof, is determined by the following nine factors:

•    The manner in which the taxpayer carries on the activity

•    The expertise of the taxpayer or his advisors

•    The time and effort expended by the taxpayer in carrying on the activity

•    The expectation that assets used in the activity may appreciate in value

•    The success of the taxpayer 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, which are earned

•    The financial status of the taxpayer

•    The elements of personal pleasure or recreation.

No single factor, or group of factors, is persuasive.

Based on the evidence in the case, the Tax Court made a relatively easy call on the taxpayer’s loss deduction: no dice. (Boneparte, TC Memo 2015-128)     

Tip: Wagering losses incurred by an amateur gambler (up to the amount of winnings) are deductible as a miscellaneous itemized expense without regard to the usual 2%-of-AGI deduction threshold.

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