Question of the Day - 15 August 2019

The answer to your first question is yes, with qualifications (of course). 

Here's the applicable text, slightly abridged from the new fourth edition of Tax Help for Gamblers by Jean Scott, Marissa Chien, and Russell Fox. 

"You must spend 'substantial' time conducting your gambling business; however, how many hours are enough would be evaluated on a case-by-case basis. Gambling income does not have to be your sole source of support, but a couple of trips a year to Las Vegas most likely won’t be convincing. However, being business-like in your record-keeping is a must in any case. For example, having a separate bank account for your playing bankroll and expenses will strengthen your case for being a pro.

"It’s easier to meet the standards if one is a full-time professional gambler with no other jobs or sources of income. But how about the retiree who collects Social Security or a pension and plays live poker full-time? Or someone who plays video poker 40 hours a week and works another full-time job, too? These issues are not as clear.

"In one court case, Castagnetta v. Commissioner (2006), Castagnetta was a part-time truck driver and claimed on his taxes to be a professional gambler. He kept detailed records and did extensive research in his area of gambling (horse racing). What won it for him was his methodical and business-like approach and the fact that he put in more than 40 hours a week on it.

"Linda Myers convinced the Tax Court that she was in the business of gambling, even though she ran a trucking business at the same time. They accepted that she conducted her gambling in a business-like manner, just as she did her trucking business; she’d been gambling for 10 years and considered herself an expert.

"In another case, Jose Calvao used some of the same arguments as Myers. He spent a substantial amount of time preparing for his trips to the casino, read many books on the subject, and developed a strategy for his gambling. However, although he said he kept daily records, he didn't produce them, merely submitting a summary record reconstructed at a later date. The court said this evidence was 'unreliable,' because it wasn't 'contemporaneously maintained,' and disallowed Calvao's pro-gambler claim. 

"The bottom line: It might be possible for you to file as a professional gambler even if you don’t meet every standard. However, you’ll have to show that the profession of gambling is your primary one on as many levels as possible — time, earnings, expertise, etc. And then, if you’re audited, you’re still at the mercy of a capricious tax department."

But here's the real answer to your question and it's not good. The 2018 tax reform law didn't eliminate business expenses, such as the cost of travel to and staying at casinos while a professional plies his or her trade, but it did rescind a pro's previous ability to deduct those expenses if their total, combined with his or her losses, was less than zero compared to the wins. In other words, professionals can still deduct business expenses related to gambling, but these expenses added to gambling losses can no longer total any more than the win figure. (This limitation will expire after 2025 unless extended by Congress.)

So, with a win of $85,000 for a tax year, a loss of $80,000, and $15,000 in expenses, a professional gambler is allowed a business-expense deduction of only $5,000, up to the amount of the win. (The main drawback of claiming professional status is if you have a net win for the year, you have to pay the 15.3% self-employment tax, in addition to the ordinary income tax. Recreational gamblers don’t have to pay this SE tax, because the gambling win isn’t categorized as “earned” income.)

So professionals now run into the basic federal income tax rule that has always plagued the recreational gambler: There is no way you can claim a net gambling loss for any one tax year, no matter how much you’ve actually lost.