With the advent of Poker Tournaments on television and Internet Poker sites, there has been an outbreak of Texas Hold'em Tournaments around the country. The winner often gets a choice between $10,000 in cash or a buy-in at the World Series of Poker. Either way the $10,000 is taxable. But does the winner become a "Professional Gambler" for tax purposes?
Logically (which has nothing to do with taxation) the winner should be treated the same as someone who is a sucessful at handicapping horses or greyhounds (or camels in Australia), i.e., Line 21 income with losses on Schedule A.
I'm not aware of any special rules focused on gambling. I assume it would be the same analysis used in any situation to determine whether something is miscellaneous income or income from self-employment.
I quote a response to this question posted about 5 years ago in response to the OP (me) who wondered if little old ladies who went to the Indian casino regularly, won big once, but could not deduct losses because they can't itemize could be considered professional gamblers I see a few of these every year when I do Tax Counseling for the Elderly
--- Begin quote --- "Kaye Thomas" wrote: Re: Professional Gambler Sun, 20 Jan 2002 07:43:38 -0000
That's sort of in the ballpark. Here's the story.
The U.S. Supreme Court decided a case called Deputy v. duPont in 1940, finding that certain transactions in stock (in unique circumstances I won't get into) were not related to a trade or business. Concurring with that decision, Justice Frankfurter said they could have made the decision earlier by adopting a simple rule, that you don't have a trade or business unless you hold yourself out to others as engaged in the selling of goods or services. Although this was merely a concurring decision, the IRS decided to run with this idea. In one case they argued on this basis that a stock trader did not have a trade or business, but lost (Fuld v. Commissioner, 2d Cir 1943). Then they began to make this argument against people who claimed gambling was a trade or business. These were tough cases because under the law at the time you couldn't deduct gambling losses against gambling winnings unless you established a trade or business, so the IRS would hit you with a tax on *gross* winnings even if you had a net loss. Anyway, they won in some circuits and lost in others, so the Supreme Court decided to resolve the issue in Groetzinger v. Commissioner,
480 US 23 (1987). The Court explicitly rejected Frankfurter's notion and found that gambling can be a trade or business. Key language from the opinion:
"We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify."
That isn't exactly a precise formula for determining whether you're a professional gambler, but it gives some idea what they're getting at. I have an emphatic opinion that you don't have to be a full-time gambler (or a full-time stock trader) to have a trade or business. There are a number of cases where people who had other jobs established that their "moonlighting" activity was a trade or business. The key, in my view, is you have to do it in a manner that indicates it was a business, not a hobby or an amusement.
I discuss all this as it relates to stock traders in my book on capital gains. Also, for those who might be considering trading for a living, I'll mention that so far I've had four clients who managed to lose more than $1 million at this business.
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