Assuming that you report your gaming activity each year when you file your taxes, play at least a few times a week (vacations are allowed), and have more winning years than losing years, should you file as a professional or as a recreational (amateur) player? If you are fairly new to poker and do not know the difference, read on.
In 1987, the Supreme Court issued a decision upholding a taxpayer’s claim that his gambling constituted a business. The Court affirmed the findings of the Court of Appeals and the U.S. Tax Court by ruling that the proper test to determine if an activity is a “trade or business” is that the taxpayer must be involved in the activity with regularity and continuity with the primary purpose or expectation of making a profit. To illustrate the scope of this decision, the following quotes from the Court’s opinion are presented:
“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 (if there is much of that in the income tax law) demand that his activity be regarded as a trade or business just as any other readily accepted activity, such as being a retail store proprietor or, to come closer categorically, a casino operator or an active trader on the exchanges.”
“A sporadic activity, a hobby, or an amusement diversion does not qualify.”
To summarize, we can now state that qualifying taxpayers can consider their gambling activity to be a business for tax purposes. This means that you report your gambling activities on a Schedule C instead of under “Other income” on Page 1 of Form 1040, and your losses under “Other miscellaneous deductions” on Schedule A.
So, which way should you go? If you file as a professional, you get to deduct your gambling-related expenses, such as travel to and from the cardroom and out of town, the cost of lodging and 50 percent of meals (and possibly even more if you use the per diem method) while out of town, safe-deposit box rental fees, the costs of books on gaming, and any other necessary and ordinary expense that any business is allowed. You can deduct only the amount of your losses plus expenses that do not exceed the amount of your winnings. However, you do have to pay self-employment taxes, which are about 8 percent of your profit. If you have little or no gambling-related expenses, you may be better off filling as a recreational player because of the self-employment taxes. However, you still might want to file as a professional and pay the self-employment taxes, which are really Social Security taxes. By doing so, you are putting some money away for your old age. Additionally, you are eligible for a SEP IRA (that is, a Self-Employed Individual Retirement Plan), which allows you to contribute up to $40,000 to a qualified plan to shelter you from taxes. In other words, 25 percent of your taxable income, up to a maximum of $40,000, is not taxed if contributed to a qualified plan. These figures are for the tax year 2002 and have gone up almost every year lately.
Although we have been involved in one case in which the IRS forced a gambler to report his gaming activity on a Schedule C, we know of no IRS code section or regulation that specifies when you have to file as a recreational player and when you have to file as a professional. We have been involved in a number of cases in which the IRS tried to recast a taxpayer’s return that was filed as a professional to one filed as an amateur. In every case, we were able to get the IRS to accept the return as filed (as a professional). One case was appealed to the Tax Court, which allows one more attempt to resolve a case with an appeals officer, and we prevailed.
In conclusion, we recommend the method that enables you to pay the least amount of tax, which, if you win regularly, should be the professional method, especially if you take advantage of the SEP IRA.
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 (804-0439 in Las Vegas). R.B.S. will prepare your return without your having to leave the comfort of your home, no matter where you live.
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