Do you have clients who are avid gamblers? If they incur losses from their gambling activities, at least they may be able to salvage a limited tax deduction on their personal return. As shown by a new case, Zalesiak, TC Summary Opinion 2019-16, 7/15/19, it’s difficult to convince the Tax Court that you’re in the “business” of gambling.
Generally, you can deduct gambling losses that are properly substantiated, but only up to the amount of your winnings from gambling activities during the year. In the past, this deduction was available regardless of the amount of your adjusted gross income (AGI), unlike most other miscellaneous expenses. Note that the Tax Cuts and Jobs Act (TCJA) has suspended the regular miscellaneous expense deduction for 2018 through 2025.
The TCJA also modified the gambling loss deduction, beginning in 2018. It broadened the definition of gambling losses to include other expenses incurred in gambling activities, such as a travel back and forth from a casino or racetrack.
But professional gamblers may deduct expenses and losses from gambling activities like other self-employed taxpayers. To qualify as a professional gambler—in other words, you’re in the business of gambling – you must show that you are legitimately engaged in gambling activities in order to turn a profit. The IRS often contests these claims and usually prevails in court.
The taxpayer in the new case received a BS degree in education and social policy from Northwestern University. Near the end of his college education, he began playing poker online at in-person tournaments and cash games. After about a year of doing this, he obtained full-time employment as a construction manager in Chicago, a position he has held with various companies through the date of trial.
In 2011, the taxpayer passionately pursued poker on nights and weekends and his construction manager position provided him with a substantial financial support system for his poker playing ambitions. Although he reported a small profit from poker in 2011, he did not profit from playing poker in 2012, 2013 or 2014.
For 2015, the tax year in question, the taxpayer worked as a construction manager for about 30 hours per week on average, with approximately one-third of his time working onsite. Occasionally, he engaged in poker-related activities when he was working remotely or during breaks. During 2015, the taxpayer also played poker extensively in private games and at casinos.
According to his testimony, the taxpayer spent about 271 days gambling, reviewing results and studying relevant poker literature. Out of this time, he contends that he played poker approximately 75 days. On the days he did not actually play poker, he watched videos, read books and listened to podcasts. He did not track his time spent on poker-related activities.
Although the taxpayer says that he intended to be a profitable poker player, he did not have a formal business plan regarding his poker activities, didn’t teach poker in an official capacity, didn’t accept any endorsements in relation to playing poker and was not featured in any televised poker tournaments. However, he readily offered poker advice to others without charge.
Finally, the taxpayer contemporaneously compiled a spreadsheet reflecting his poker activities, recording game locations, winnings, losses and expenses (i.e., mileage, tolls and lodging). He did not, however, have a separate bank account for deposits and withdrawals related to playing poker.
Out of Luck
After examining the facts, the Tax Court concluded that the poker playing activities did not rise to the level of a business engaged in for profit. The taxpayer generally incurred losses and received substantial wages from a regular job. Thus, his poker playing activities were personal in nature.
Clients in a similar position face an uphill battle. The bottom line is that unless you can demonstrate a legitimate profit motive, your gambling losses will be limited to the amount of your winnings.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...