Professional gambling tax status?
When you tally up your gambling winnings tax forms W-2G each year - do you see that the IRS is taking away too much from your hard won gaming profits? As an active professional gambler do you find that you have too little time to do the necessary tax planning to avoid paying those excessive taxes?
Here at ProfessionalGamblerStatus.com™ we will bring together in one place the information necessary to help you survive unnecessarily high short-term capital gain taxes, self-employment taxes and state and federal income taxes. To accomplish this, often a separate gaming entity is the answer, but just as often we avoid it as not being cost effective in a particular situation.
We are located in the State of Connecticut, but our clients come to us from all over the United States. They come from approximately thirty-five different States, but we're always looking for that someone from the next State!
Professional Gambler Status until recently has been rarely seen on federal income tax returns, because frankly there were very few people who earned their living traveling from casino to casino.
But with the surge of online gaming, the number of IRS filed tax returns showing Professional Gambler Status is expected to increase dramatically over the coming years.
If you have a non-tax gaming problem... so would these guys.
Online gambling (via lottery tickets) is legal and expected to expand
In a 13-page opinion the U.S. Department of Justice has decided to allow online sales of lottery tickets in New York and Illinois - saying that because this does not relate to a "sporting event or contest" that it does not violate the 1961 Wire Act, that otherwise would bans such wagers made via telecommunication systems that cross state and national borders.
Minnesota, New York, North Dakota and New Hampshire already have had online subscriptions to a limited number of their lottery games for State residents.
Online Poker may be the next to get a pass here, since it has been online already at PokerStars, Full Tilt Poker and Cereus Poker Network. The Unlawful Internet Gambling Enforcement Act of 2006 prohibits the use of the internet for accepting payments, but now the door has been opened to readdress online poker.
The risk for trouble is much greater when players can directly wager with credit card from their own living room, rather than paying cash. Online gambling will expand the lottery's market to vulnerable populations such as the home-bound and disabled.
Question from a gambler considering "going professional":
If I have substantial winnings I would want to avoid being considered a professional gambler so that I would avoid the 15.3% self employment tax, right?
First let's look at self-employment taxes:
As a casual gambler there's no self-employment tax.
As a professional gambler your net winnings are subject to self-employment tax. Net winnings are the amount remaining after all offsetting gambling wagers (losses) and after other allowable expenses such as travel, meals, and so on. But remember that certain deductions for self-employed health insurance and self-employed 401(k) do not reduce your self-employment tax.
Now let's look at Federal and State income taxes:
As a casual gambler some if not all of your wagers (losses) are going to be deductible for IRS purposes using Schedule A for itemized deductions rather than taking the automatic standard deduction, but you'll pay the penalty of having a higher "AGI." There are basically no other tax deductions for the casual gambler. And then for your State income taxes, while they may tax the gross winnings, those gambling wagers (losses) may or may not be deductible at all depending on State law.
As a professional gambler all of your wagers (losses) are offset against winnings and if there's still a net win, don't forget that all of your allowable expenses come off before the net is taxed by IRS. You are also allowed a deduction for self-employed health insurance and self-employed 401(k). For the most part, with few exceptions, the States generally will allow most every loss and every expense deduction that is allowable for IRS.
Question from a gambler considering retaining a tax advisor:
I would like to find a local CPA where I live who has experience with professional gambling. How would I go about finding out what accountants have that specialized experience?
Besides internet searches, you can go to your State CPA Society and get a list of registered firms in the State. When calling them do not ask "can you do work for a professional gambler?" or ask "do you have experience with professional gambling?" since virtually every CPA can honestly answer YES to those questions.
Rather, ask "have you personally prepared any tax returns for people with gambling winnings?" and then ask "have you personally prepared any tax returns for people using professional gambler status?" Listening carefully to their initial responses will ferret out the tax advisor you might want to use.
Question from a gambler considering using Schedule C for his gambling business:
Is it possible for an individual, who has a regular job, to set up a separate profit- making business for consistently betting on horses via the internet (or telephone) at legal U.S. racetracks, such that all applicable expenses (including information and handicapping intelligence costs) can be deducted from the gross winnings on Schedule C?
IMO, yes it is absolutely possible and I hear from people who do it all the time. But it is ALSO very possible that the gov't will challenge this and say the taxpayer is earning a living with his "regular job" and that the gambling operations, while extensive, are a mere hobby or casual activity.
Hence the concept of forming a separate taxpayer, a separate entity, that is a 100% pure play gambling business. Unless the corporate veil, so-to-speak, is pierced; then this entity is not casually doing gambling while earning a living with other activities... the ONLY activity is gambling and therefore that is how the entity "earns its living"
Of course the gambling must be active, done with continuity and be extensive as well, to reach professional gambler status.
And be aware in no event are gambling losses ever deductible below a zero net loss for the year. Whereas gambling expenses may sometimes bring the net from losses & expenses below zero.
Recent news: Filed on August 1, 2005 A taxpayer who apparently spent all his time gambling (we was otherwise retired) tried going it alone against the IRS and the IRS Tax Court and had his head handed to him on a plate by the judge, losing every argument made to defend his position that his gambling losses should be offset against his $44,833 in gross gambling winnings.
This poor fellow was penny wise and pound foolish thinking he could explain the law to the IRS lawyers and the judge! The lesson learned in this matter (Jimmie Clemons v IRS Commissioner) is if you are looking to take a position of Professional Gambler Status then retain a tax pro. Stick to what you know best: The Gaming. Let the tax pro handle the taxes for you!
Why use Professional Gambler Status for tax return purposes?:
For IRS tax purposes there are non-professional or recreational gamblers and then there are professional gamblers (US Supreme Court Commissioner v Groetzinger 1987). The differences can be devastating to the unwary. Illustration by example: Let's assume a gambler has winnings where he received form W-2G's and 1099's for "comps" totaling $400,000 for the year. Let's further assume that at other times during the year he lost $420,000. Bottom line is he is down $20,000 + his travel and other out-of-pocket expenses for the year.
To keep this somewhat realistic, let's say the taxpayer has some interest & dividend income, is collecting Social Security and has a little part-time job earning $10,000 of which $4,500 is put into a Roth IRA.
Then oversimplifying this a bit for clarity in this example:
Filing as a recreational gambler the $400,000 is reported on form 1040, line 21 "other income" and then $400,000* is deducted on Schedule A, line 28 "gambling losses."
* That's not a typo, only $400,000 is deductible, not the full $420,000 in losses.
Filing as a professional gambler the $400,000 is reported on Schedule C, line 1 "gross receipts" and then $400,000 is deducted on Schedule C, line 39 as "other costs" or line 48 as "other expenses."
The professional gambler's Schedule C therefore shows a net of zero with zero coming forward to form 1040, line 12. Basically it is a wash with no negative tax repercussions.
But the recreational gambler has numerous changes starting with a higher Adjusted Gross Income (AGI) and higher itemized deductions, all of which cost him money:
- His social security rather than being non-taxable is now 85% taxable because his AGI is over the threshold. This adds $18,000 to his taxable income.
- His $10,000 standard deduction is wiped out and replaced with the itemized deduction, this in effect increases his taxable income by $10,000.
- Various tax credits, earned income credit, child credits, education credits, and so on are eliminated because his AGI is over the thresholds.
- His ability to have a deductible IRA, Roth IRA, or Roth conversion is prohibited because his AGI is over the thresholds.
- His $3,650 for each exemption / dependent listed on the tax return is eliminated because his AGI is over the thresholds.
The active gambler who files his taxes as a non-professional gets a raw deal. But if qualified to file as a professional gambler the income tax burden can be reduced by thousands of dollars.
Even better: if the professional gambler is modestly profitable for the year, while this means he is subject to an extra 15.3% self-employment tax (SECA) on top of his regular income taxes - it also opens the door to the earned income credit (EIC) which occasionally can actually exceed the SECA tax, and thereby offsetting it completely.
Having some self-employment income also can allow the professional gambler to deduct health insurance in full without itemizing and without the 7.5% AGI limitation. Also up to a $5,000 IRA contribution can be made or up to a $22,500 self-employed 401(k) plan contribution can be deducted.
Optionally, the forming a separately filing entity (such as a partnership, LLC or s-corporation) can help lock in professional gambler status and further protect all of these tax benefits.
Why use a separate entity for filing as a Professional Gambler?:
There are actually many benefits to filing under the umbrella of a Professional Gambling Entity, but the main one discussed here is to help thwart the #1 tool the IRS has to deny your Professional Gambler Status - that you did not do your gambling full-time and to the exclusion of all other income producing activities (or even all other social activities for that matter).
The theory here is to have a separately filing taxpayer, an entity, properly formed for the sole purpose of gambling. The only activity of the entity is that of a professional gambler, and there are no other activities that can be pointed to to suggest that the entity had interests other than that of being a for-profit gambling operation.
The entity is a "pure play" as a gambling operation and if the level of play achieved during the year is significant, regular, and continuous in the eyes of the law, then Professional Gambler Status is more readily assured.
Another benefit is that some of the net gambling profits that pass through certain entities can be sheltered from the 15.3% self-employment tax.
Tax Return preparation and recordkeeping:
Gambling Losses generally may only be deducted up to the amount of your gambling winnings.
Non-professional gamblers report gross winnings as income on Form 1040 and then deduct what was lost as a miscellaneous itemized deductions on Schedule A (which is not subject to the two percent of AGI reduction).
If you spent $2,200 purchasing lottery tickets during the year and you had $500 in winning tickets, you would enter $500 income on Form 1040 and also enter $500 as a miscellaneous itemized deduction on Schedule A, deducting just $500 of the $2,200 you spent on lottery tickets. The good news is that you do not reduce gambling losses by the regular two percent of adjusted gross income as you must for many other miscellaneous itemized deductions.
Professional gamblers deduct gambling losses directly from their gambling income "above the line" instead of deducting them as an itemized deduction on Schedule A.
All gamblers, both professional and nonprofessional need to keep appropriate records to document their gambling losses. Professional gamblers also need to document their gambling related expenses.
- The records might include a journal listing:
- The date
- The location where the gaming took place
- The names any people who also attended with you
- The total amounts that you wagered
- The total amounts of your winnings
- Your losses
- The type of gaming played
You must also provide additional evidence of both what you won and what you lost. You can might show your winnings and losses via:
- Form W-2G, Certain Gambling Winnings
- Form 5754, Statement by Persons Receiving Gambling Winnings
- Wagering tickets
- Bank withdrawals
- Canceled checks & any related paperwork or invoice
- Credit Card Paperwork
- Casino Credit Reports
- Online Line Gaming Reports
- Statements of actual winnings or payment slips provided by the gambling establishment
- Statements of actual comps provided by the gambling establishment
- Letters of actual net losses or winnings provided by the gambling establishment
These specific gambling activities should have this documentation as well:
- Bingo: Record the number of games and ticket costs.
- Lottery: Keep records of ticket purchases, payment slips, and unredeemed tickets.
- Slot machines: Note the date, time, machine played, and machine number (use a Casino Card to track your play).
- pari-mutuel betting:
- Horse or dog races: Keep records of Races Played, Actual Wagers, Losing Tickets and your Racing Program.
- Jai Alai: Keep records of Games Wagered, Actual Wagers, Losing Tickets and your Program.
- Make sure there are no shoe prints on the losing tickets, once you drop a pari-mutuel ticket and someone steps on it, it is generally "void" for tax deduction purposes.
Do you have Professional Gambler Status?
How does one make certain that he or she would be considered a professional gambler in the eyes of the IRS? You can't be absolutely sure, but if you gamble regularly, frequently, with continuity and with the intent of earning and with the intent of earning your living from the winnings, then you are off to a good start.
As a professional gambler, you can deduct your expenses such as traveling, tokes to dealers, etc. You're actually allowed to deduct these even if the income received and reported is from an illegal gambling operation (but you may not deduct illegal payments you made for gambling expenses). You can also deduct the amount of your losses, but the losses can't exceed the net of your gross winnings minus expenses. (Note that it is arguable that the losses can't exceed your gross winnings without regard to your expenses)
Unresolved is whether the losses from an illegal gambling operation are deductible against gaming winnings (illegal winnings or legal winning). Generally illegal payment made, bribes, graft, etc. are not deductible.
Your net profits as a professional gambler are also subject to self-employment taxes. This SECA tax is in addition to the income taxes that you will owe.
Also see "Why use a separate entity for filing as a Professional Gambler?" above.
IRS Tax Court Summary Opinion January 4, 2005:
This case upholds the accepted rules for professional gambler status as laid out by the US Supreme Court in Commissioner v Groetzinger, supra at 33 - that if a taxpayer "devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness * * * demand that his activity be regarded as a trade or business."
This ruling is the same ruling that allows daytraders to deduct their expenses "above the line" rather than as an itemized deduction.
summary of major similarities and differences:
- security traders, filing with trader status, deduct expenses on Schedule C.
- gamblers, filing with professional gambler status, deduct expenses on Schedule C, consequently, a professional gambler does not have to itemize deductions to deduct gaming expenses.
- security traders without trader status (i.e. investor status) deduct expenses on Schedule A subject to a reduction of 2% of Adjusted Gross Income (AGI).
- gamblers without professional gambler status (a/k/a non-professional gamblers or casual gamblers) deduct expenses on Schedule A, subject to a reduction of 2% of Adjusted Gross Income (AGI).
- security traders, filing with trader status, deduct trading losses either on Schedule D, limited to offsetting capital gains plus an additional $3,000 or on form 4797 where there are no limitations as to the amount deducted.
- gamblers, filing with professional gambler status, deduct gaming losses on Schedule C, limited to reported winnings, net of expenses. i.e. the bottom line may not go below zero. Consequently, a professional gambler does not have to itemize deductions to deduct gaming losses.
(Note #2 that It is arguable that the losses can't exceed your gross winnings without regard to your expenses via a literal reading of IRS Code §165(d) and IRS Regulation §1.165-10 )
(Note #3 some tax advisors 1. proclaim that losses in excess of winnings are deductible against other non-gambling income. The Courts have consistently knocked this theory down, assessing negligence penalties against those who attempt to get away with it.)
- security traders without trader status (i.e. investor status) deduct trading losses on Schedule D, limited to offsetting capital gains plus an additional $3,000.
- gamblers without professional gambler status (a/k/a non-professional gamblers or casual gamblers) deduct gaming losses on Schedule A, limited to reported gaming winnings but these are not subject to a reduction of 2% of Adjusted Gross Income (AGI) as are operating expenses.
- security traders with or without trader status, generally are not subject to self-employment taxes on their trading gains. or
- gamblers without professional gambler status are not subject to self-employment taxes on their gaming winnings. or
- gamblers with professional gambler status are subject to self-employment taxes on their net gaming winnings. or
1. What various books and advisors have had to say on this matter:
Ann-Margaret Johnson, CPA author of How to Turn Your Poker Playing Into A Business 2005 chapter 4: "... the IRS will not allow you to deduct more expenses than income..." Chapter 12 "... if your gambling falls into the definition of a business, you can only deduct expenses up to your losses(sic). The IRS is not allowing gamblers to take more than their winnings off their tax return." "A person that is a professional gambler cannot incorporate themselves. There are many court cases where professional athletes have wanted to do this. The IRS feels that you are a personal service that you cannot have anyone else perform..."
Jean Scott and Marissa Chien, EA, authors of Tax Help for the Frugal Gambler 2004 chapter 4: "... the court has ruled once again (Praytor v. Commissioner) that losses, even as a professional, still cannot exceed gains. Section 165(d) of the tax code takes precedence." Tax Help for Gamblers 2007
Roger & Yolanda Roche, E.A.'s, authors of The Tax Guide for Gamblers 2004 chapter 3: "In the case where the net income is less than zero... just enter [a] zero... Recent case law supports the position that any business expense connected to gambling such as the cost of race track admissions, meals, lodgings, etc. are subject to the gambling loss limitation for the professional. In other words, your losses plus your expenses cannot exceed your winnings."
Walter L. Lewis, CPA author of The Gambler's Guide to Taxes 2003 chapter 4: "the professional gambler is not required to report losses as an itemized deduction. Instead, losses and gains are reported on Schedule C. The net gain or loss is then reported on Form 1040 prior to arriving at adjusted gross income."
Sheldon D. Pollack, University of Delaware, author of Gross Revenue From Gambling: Some Unintended Consequences 1997 "Achieving the cherished trade or business status for gambling activity would mean not only that a gambler's 'inevitable annual net gambling loss' (or 'IANGL') would be deductible against income from other sources, but also that all the costs associated with conducting the trade or business of gambling (e.g., airfare to Las Vegas, hotel rooms, tickets to Wayne Newton concerts, etc.) also would be deductible on the gambler's Schedule C."
The AICPA, The Purpose of Taxation - Tax and the Facts under Tax Facts "Gambling winnings greater than $600 are taxable income and expenses associated with gambling can be deducted from gambling winnings - if you are a professional gambler - in arriving at taxable income. (Gambling losses can not be deducted from income when calculating taxable income!)"
AICPA update: Gambling: The Tax Court overturned a key portion of its 1951 decision in Offutt, 16 T.C. 1214 (1951) concerning the deductibility of trade or business expenses by a professional gambler [Mayo, 136 T.C. 81 (2011)]. Under Offutt, ordinary and necessary business expenses of a gambling activity were treated the same as gambling losses and were therefore limited by Sec. 165(d) to gambling winnings. However, in Mayo, the court ruled that a professional gambler may deduct his or her ordinary and necessary business expenses on Schedule C even if they exceed the gambler’s net gambling winnings and produce a loss for the activity. The court noted that various rulings had used a narrow definition of the phrase “gains from wagering transactions” and said a similar reading should be used for the phrase “losses from wagering transactions” in Sec. 165(d). The court also said it felt it needed to address the issue even though the IRS had previously announced its intention to no longer follow Offutt [IRS Chief Counsel Memo. AM 2008-013 (12/19/08)] since history invited the possibility of administrative inconsistency on this issue.
Walter L. Lewis, CPA author of How to Keep More of What You Win 1997 chapter 5: "The professional gambler is not required to report losses as an itemized deduction. Instead, losses and gains are reported on Schedule C. The net gain or loss is then reported on Form 1040 prior to arriving at adjusted gross income."
Colin M. Cody, CPA (yours truly) believes that most of the above opinions are incorrect or are incomplete. Pursuant to Boyd v. U.S., 762 F.2d 1369 (9th Cir. 1985) Internal Revenue Code §165(d) Wagering Losses - Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. Therefore, Cody asserts, losses emanating from wagering transactions may not exceed the amount of gains. Trivia: note that per TAM 200417004 winnings from activities where no wager was made are not allowable to be offset by wagering losses.
Further, pursuant to Internal Revenue Code §162(a) In General - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. But only so far as the gambling is a legal activity pursuant to §162(c)(2) Other Illegal Payments - No deduction shall be allowed ... for any ... illegal payment under any law of the United States ..., which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business.
Update: Mr. Cody's views, as stated above, have all been "upheld" nice and concisely in Tax Court recently. On February 20, 2007 a decision was rendered against Gloria Tschetschot (alt link) in the matter Tschetschot v. Commissioner of Internal Revenue. (alt link) Here the Internal Revenue and the Tax Court allowed the §162 expenses to be deducted in full, thereby bringing the net, net taxable results of her gambling activities to a negative amount, which in turn offset her wages in another profession. Of interest is footnote #7 of the Opinion where the Court opined that while allowing the operating expenses to offset non-gambling winnings in the current year, that any resulting net operating loss (NOL) from operating expenses, would not be allowable as a carryover (or presumably a carryback) of said NOL. The point was not argued at trial because the taxpayer had no NOL and therefore the point was moot. Colin M. Cody, CPA, believes that the Court erred in making this statement as it is illogical to presume that deductible trade or business expenses would be precluded from the NOL provisions when there is nothing in law stating such.
The Court did limit her §165(d) gambling losses to not exceed the amount of her reported winnings, which means that her net gain/loss from the actual gambling transactions (wagers) was zero. Interestingly, the Internal Revenue and the Tax Court allowed professional gambler status, apparently based solely on the taxpayer entering 9 poker tournament series during the year. This was in spite of her significant salary earned in another profession.
The erroneous commentary above about professionals being unable to incorporate "themselves" is patently false. The author failed to cite even one case to support her claim. Suffice it to say that any tax return preparer with some experience eventually sees 1099s and income being paid to professionals' corporations and LLCs of all sorts: Actors, Entertainers, Physicians, Lawyers, Architects, Accountants. The IRS even provides tax forms 1042 and 5754 for gamblers that set up as corporations or LLCs (see IRS instructions). Further, the standard tax form W-2G does not ask for an individual's "social security number," rather it calls for the "winner's taxpayer identification no." Corporations, LLCs and other Businesses have TIN's not SSN's.
Gambling Law US
G is an architect who also engages in substantial gambling activities including betting on horse races, dog races, jai-alai, and college sports. In 2002, he sustains some $43,000 in losses at gambling and has $12,300 in gambling income. Although he would like to take a trade or business deduction for his gambling losses, or deduct them under the theory that they relate to the production or collection of income, another section of the Code specifically limits the amount of deductible gambling losses to the amount of his gambling winnings, and therefore G will be denied the benefit of these deductions. 3
/Footnote/ 3 See, e.g., Gajewski v. Comr., 723 F.2d 1062 (2d Cir. 1984), in which a gambler unsuccessfully argued that he was engaged full time in the trade or business of gambling. The court held that the losses were, under §165(d), deductible only to the extent of the taxpayer's gambling winnings. This effectively precluded the taxpayer from using §162 or even §212(1) (deduction for the production or collection of income).
A subsequent Supreme Court decision, Groetzinger v. Comr., 480 U.S. 23 (1987), held that a gambler could be engaged in the trade or business of gambling, which presumably opens the possibility of deducting under §162, if the taxpayer can prove that he is engaged in the trade or business of gambling.
Australian Tax Law is different than in the USA:
It has long been established that gambling winnings in Australia are completely free of tax. The only scope for gambling winnings to be considered assessable is if the gambler is considered to be in the "business" of gambling. The word "business" is not defined in the taxation legislation. Whether one's gambling activities constitute a "business" or not is to be determined on a case-by-case basis by the Taxation Office and is subject to appeal to various Tribunals and Courts. This very issue was examined in detail by the Federal Court of Australia in three separate cases in 1989: Evans v FC of T 89 ATC 4540; (1989) 20 ATR 922, Babka v FC of T 89 ATC 4963; (1989) 20 ATR 1251, and Brajkovich v FC of T 89 ATC 5227; (1989) 20 ATR 1570. In the first two cases, the gamblers won substantial amounts of money and the Taxation Office was trying to levy tax on those winnings, arguing that the gamblers were in the "business" of gambling. On both occasions the Court refused to characterize the taxpayers activities as a "business," even though they exhibited some elements which could be characterized as business-like. In the final case, the taxpayer lost substantial amounts and was trying to claim a deduction as a "business" expense, trying to argue that he was in the business of gambling. Once again, the Court refused to characterize the activities as a "business."
As a result of these cases, the Commissioner of Taxation issued an income tax ruling about this very issue, IT 2655. Although this ruling specifically dealt with racing not casino gambling, the ruling held that: "...it will be rare for a taxpayer with no connection with racing other than betting to be carrying on a business of betting or gambling."
As a practical matter there are two other reasons which make it unlikely that the Tax Office would ever try to levy tax on a casino player's winnings. Firstly, there is the difficulty of establishing the amount won, and secondly if the Tax Office were ever to levy such tax, it would open the floodgates for high rolling losing gamblers to claim that they are in the business of gambling and therefore to claim a deduction for their losses.
Australian Interactive Gambling Act 2001
As is Great Britain...
Graham v Green 9TC (1925) and Down v Compston (1937)