Written by Matthew Boucher January 15, 2024
At the Tax Partners Institute, we are asked a myriad of questions concerning items that people have come across on social media. As with most things in life, there is often a kernel of truth in what they saw, but is often overly simplified, misinterpreted, or both. Before choosing to follow tax advice on the internet, always check with a professional.
One question that is frequently asked is, “Can I consider myself a professional gambler and write-off my gambling losses?” This question is often accompanied by the following:
If I am a professional gambler can I expense the cost of my hotel room when gambling?
Can I expense the cost of meals and mileage when gambling?
What about the entry cost to a poker tournament?
The answer is maybe, but probably not in the way you were hoping to deduct them. Gambling is not a new form of entertainment, and the IRS has a long history of enforcing the income tax laws in these situations. The potential exists that you could rise to the level of a professional gambler, but it is a very high bar.
What is a professional gambler?
“If I make money gambling, does that make me a professional gambler?” It’s not quite that simple in determining if you reach the level of a professional gambler. You first need to determine if your activities reach the IRS definition of a trade or business. This is a relatively high bar to meet and requires a taxpayer to meet several requirements using a facts and circumstances approach1. This means that when determining the application of a tax provision, the taxpayer and the IRS must take into account both financial and non-financial factors and use the evidence from all factors in the determination. The tricky part is this can create some ambiguity as to whether a taxpayer would meet the requirements or not. Now that we understand how the approach works, let’s take a look at 9 factors:
(1) Manner in which the taxpayer carries on the activity. Does the taxpayer approach the activity in a business like manner with a motive to make a profit and keep contemporaneous and accurate books.
(2) The expertise of the taxpayer or their advisors. Is the taxpayer able to substantiate that they have a deep level of understanding through experience of education. Normally gamblers do not have professional advisors that instruct them which bets to make, so they wouldn’t be able to rely on the expertise of a professional advisor.
(3) The time and effort expended by the taxpayer in carrying on the activity. Does the taxpayer devote a substantial amount of their time to the activity, similar to that of a full-time job?
(4) Expectation that assets used in activity may appreciate in value. This one doesn’t really apply to gambling since by its nature it is very short-term.
(5) The success of the taxpayer in carrying on other similar or dissimilar activities. Does the taxpayer have a history of being able to build and run a successful business. This helps show that the taxpayer has an ability and drive for a profit motive.
(6) The taxpayer’s history of income or losses with respect to the activity. This one is often very difficult for a taxpayer claiming to be a professional gambler to meet. The taxpayer needs to show they have a history of having a profitable endeavor from their gambling activities. A single year of losses would not exclude them from meeting this factor, but several years of losses makes it difficult to substantiate a profit motive.
(7) The amount of occasional profits, if any, which are earned. If the taxpayer has occasional substantial profits, they may be able to meet this factor. One of the reasons for this is because gambling activities only require minimal investment for substantial profit and don’t produce large profits every year.
(8) The financial status of the taxpayer. This factor creates another barrier that is very difficult for most professional gamblers to meet. The taxpayer has to show that gambling provides the majority of their income. If their primary income was from another job, they likely won’t meet this factor.
(9) Elements of personal pleasure or recreation. This is perhaps the most difficult factor for a professional gambler to prove. Gambling’s status in our society is one of recreation. So, the taxpayer is starting at a disadvantage. If the taxpayer is gambling as part of a social activity such as visiting with friends or family, they may not be able to substantiate that the activity is being pursued purely for profit and not personal enjoyment.
What’s the benefit of being a professional gambler?
After the passage of the Tax Cuts and Jobs Act (TCJA) there is less of a benefit to being a professional gambler than there was prior to the act. The biggest benefit of being a professional gambler is that the taxpayer will report their gambling winnings and losses on a Schedule C and they can include ordinary and necessary business expenses on their Schedule C to reduce the net income from their gambling activities. This means expenses for items like airfare, hotel and meals could be expensed against the gambling income. This could effectively reduce the gambling income substantially or even produce an operating loss. Prior to the passage of the TCJA, a professional gambler could use the operating loss to offset income from other sources, but that’s no longer the case. Starting with tax year 2018 and running through the 2025 tax year, the expenses associated with the generation of gambling income will be limited to the gambling income. This means that an operating loss will not be created and therefore can not offset other income. The biggest benefit of being classified as a professional gambler for these tax years is that the gambling losses are reported on a Schedule C and directly reduce gambling income before itemized deductions.
How does a recreational gambler report income and losses?
“So, it doesn’t look like I will be considered a professional gambler according to the IRS. Is there anything that I can write off from my gambling losses?” The answer to this question is again frustratingly, maybe. To start, a recreational gambler will still report all gambling winnings on their tax return, but it will not be reported on a Schedule C. Instead it will be reported on Schedule 1, line 8 (b). This means that none of the additional costs, such as hotel, travel, and meals will be deductible for tax purposes. The potential exists that the losses associated with the gambling winnings could create a deduction, but there is another hurdle before we get there. The Tax Cuts and Jobs Act (TCJA) removed exemptions and instead increased the standard deduction. Since then, many people don’t have enough qualified expenses to itemize their deductions on Schedule A. Some of the most common itemized deductions include medical expenses, state income taxes, real estate taxes, and mortgage interest. Gambling losses for the recreation gambler also end up on the Schedule A. This means that all itemized deductions must be greater than the standard deduction for them to provide the taxpayer any benefit. Additionally, losses from gambling are limited to gambling winnings. This means that gambling losses will never provide a recreational gambler a net benefit. The best they will do is reduce gambling winnings to $0. Let’s look at two scenarios:
Scenario 1:
The taxpayer is married and filing a joint return with their spouse. They have gambling winnings of $10,000, gambling losses of $12,000, and qualified itemized deductions of $10,000.
| Gambling winnings | + $10,000 |
| Itemized deductions over the standard amount | – $0 |
| Total impact to income: | + $10,000 |
In Scenario 1, the taxpayer does not have enough qualified itemized deductions to exceed the standard deduction of $27,700 for taxpayers filing married filing jointly, so they will be unable to deduct gambling losses.
Scenario 2:
The taxpayer is married and filing a joint return with their spouse. They have gambling winnings of $10,000, gambling losses of $12,000, and qualified itemized deductions of $27,700.
| Gambling winnings | + $10,000 |
| Itemized deductions over the standard amount | – $10,000 |
| Total impact to income: | $0 |
In Scenario 2, the taxpayer has enough qualified itemized deductions to justify taking itemized deductions rather than the standard deduction, but the amount gambling losses that can be claimed is still limited to the amount of gambling winnings.
This illustrates how gambling losses may or may not be deducted, depending if the taxpayer reaches the level of itemizing their deductions.
Remember that taxes can be a complicated annual chore, and social media doesn’t always have your best interest at heart. Always consult with a trusted professional before filing your taxes. If you would like us to help with that, schedule a consultation below.
Footnotes
1 Regs. Sec. 1.183-2(b)
2 Regs. Sec. 165(d)3 Revenue Procedure 2022-38
3 Revenue Procedure 2022-38