Want to File Your Taxes as a Professional Gambler?

To file your taxes as a professional gambler, you first must meet the criteria as set down by the Supreme Court in its landmark decision in the case Commissioner v. Groetzinger back in 1987. The Court's criteria can be summarized as follows:

1. Gambling activity must be done full time with regularity and continuity. Sporadic activity does not qualify.

2. Gambling activity must be done with the expectation of making income to support yourself. Note that a professional gambler may have another source of earned income, but a significant source must come from gambling.

3. You must show a profit in three out of five consecutive years. This rule is applied by the IRS to distinguish businesses from hobbies or recreational activities.

4. You must act like a business. The IRS requires businesses to accurately maintain a set of books (an inexpensive personal computer checkbook or personal finance program should be sufficient). Additional items that can help support your position that you qualify are listed below:

(a) business telephone listing

(b) business cards, letterhead and envelopes

(c) office address or post office box

(d) business license or permit

(e) fictitious business name statement

If you meet these criteria, you can consider yourself a professional gambler and report your gambling activity on a Schedule C, Profit or Loss From Business, and deduct gambling-related expenses. There is a limit to the amount of expenses that you can deduct. The IRS considers these expenses to be gambling losses, and the rule that gambling losses cannot exceed gambling winnings still applies. If this is true for you, you must show a net profit of zero. You cannot claim a net loss. This has been the subject of a number of Tax Court cases in which professional gamblers have challenged this rule. These professional gamblers argued that since other types of businesses can claim a net loss, those in the business of gambling (professional gamblers) should also be allowed to claim a net loss. Their arguments invariably were based on the "equal protection under the law" doctrine, but were to no avail. In every case to date, the Tax Court ruled in favor of the IRS.

If you file as a professional on Schedule C, you are subject to the self-employment tax (social security), and depending on your gross profit (winnings minus losses), you may actually pay more taxes than if you filed as a recreational gambler. But if you live long enough or become disabled, you will be able to receive social security benefits. You may not be making contributions to an IRA plan or a SEPIRA, but at least you will have social security benefits.

What are the tax benefits of treating your gambling activity as a business? It enables you to net gambling winnings and losses to determine your adjusted gross income. The manner in which the recreational or sporadic gambler must report is that winnings must be reported as other income on Page 1 of the Form 1040 and included in your adjusted gross income, and losses must be deducted as an itemized deduction on Schedule A. The effect of this is twofold. First, the adjusted gross income for the professional will be significantly lower, which is very important, since many deductions as well as credits are subject to some sort of adjusted gross income test to determine eligibility. For example, the infamous earned income credit is available only to taxpayers who earn less than a certain amount; thus, a credit, which can be thousands of dollars, may be available to the professional gambler if he treats his gambling as a business. Another example is the 7.5 percent threshold for the deductibility of itemized medical expenses. This means that the amount of medical expenses that is deductible is that which is greater than 7.5 percent of your adjusted gross income; thus, the lower the adjusted gross income, the greater the medical expense deduction allowed. This is also true for other miscellaneous deductions on Schedule A, which include tax preparation, investment expenses, and so on. For other miscellaneous deductions, the threshold is 2 percent of adjusted gross income.

The largest benefit is the ability to deduct your gambling-related expenses on Schedule C, which can be quite substantial. What expenses can you deduct? Those that are necessary and ordinary, just like any other business. These include:

© accounting, legal, and tax preparation fees

© automotive expenses for business mileage

© charitable contributions, business-related

© depreciation on business property

© dues and subscriptions, business-related

© insurance on business property

© interest expense on business debt

© license and permit fees

© 50 percent of meals away from home while conducting business

© office supplies, such as letterhead, business cards

© passport fee for business trips out of the country

© professional books, journals, and seminars

© safe-deposit box rental fees

© telephone expense, business-related

© tips when customary, such as valet parking and bellpersons

© travel and lodging while away from home conducting business

Now that you know the pros and cons of filing as a professional, get out that pencil and a bottle of aspirin and fill out your tax return; April 15 is not that far away. (If this is too much work, you can always call us.)

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, please mail/e-mail them to us. We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) 829-7271. For more information, see our ad in this issue.