Gambling: Hobby or Self Employed?

[ETax847]

Prospective client has made $20-40k in gambling income for the last 3 years.  Prior to me, he has been claiming this income as self-employment income on his Sch C.  He says he devotes 2-4 hrs a day to gambling on top of his regular W-2 job.  Has anyone dealt with anyone who claims to be a "professional gambler"?

[BulldogTom]

Never had anyone claim this.   Call me skeptical.   However, if you run through the 9 factors and the client shows via facts and circumstances that they are indeed in the business of gambling, go for it.   Wondering if gamblers need to be registered or have a license in your state to carry on that profession?   Can you get a business license in your local area to carry on that business.   Do you need a business license in each of the locations that you carry on that business of gambling (like a contractor does when they work in various locations)?  Lots of questions, not any answers from me.   Sorry.

Tom
Longview, TX

[Patrick Michael]

If he has a W-2 job and devotes 2 to 4 hours a day I would be skeptical that he meets the requirements to be a professional gambler.

Determining whether an individual is engaged in the trade or business of gambling is based on the facts and circumstances. In Comm’r v. Groetzinger, 480 U.S. 23 (1987), the Supreme Court concluded that “if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.” Courts have considered the following factors in assessing whether a taxpayer has the necessary profit motive (no single factor of which is controlling):

Manner in which the taxpayer carries on the activity

Expertise of the taxpayer or his advisors

Time and effort expended by the taxpayer in carrying on the activity

Expectation that assets used in the activity may appreciate in value

Taxpayer’s success in carrying on similar activities

Taxpayer’s history of income or losses with respect to the activity

Amount of occasional profits, if any, that are earned

Taxpayer’s financial status

Elements of personal pleasure or recreation.

[Lion EA]

https://www.journalofaccountancy.com/issues/2016/oct/taxes-for-gamblers.html

https://www.cpapracticeadvisor.com/2015/07/16/taxpayer-fails-to-hit-jackpot-as-professional-gambler/19245/

https://www.cpajournal.com/2019/12/24/taxation-of-gambling-income/

Also, look up this Advice Memorandum because it has links to several court cases:

IRS Advice Memorandum, Professional Gambler's Wagering Losses and Business Expenses

AM 2008-013 December 10, 2008

Code Sec. 165 Code Sec. 162

Internal Revenue Service: Chief Counsel: Advice Memoranda: Professional gambler: Wagering losses: Business expenses.–

Office of Chief Counsel

Internal Revenue Service

Memorandum

Number: AM2008-013

Release Date: 12/19/2008

CC:ITA:B01 - JGMEEKS

POSTN-139898-08

UILC: 165.08-00, 162.00-00

date: December 10, 2008

to: Sara M. Coe

Deputy Division Counsel

(Small Business/Self-Employed)

from: George J. Blaine

Associate Chief Counsel

(Income Tax & Accounting)

subject: Professional Gambler's Wagering Losses and Business Expenses

This Generic Legal Advice responds to your request for assistance about a recurring issue in litigation. This advice may not be used or cited as precedent.

[ETax847]

It's definitely interesting given that he devotes 2-4 hours a day in research for his sports bets.  He is trying to make the argument it is no different than a part time job.  He keeps records detailing his bets, has a separate bank account for this activity and has a profit motive.

[Pacun]

On 12/19/2022 at 11:43 AM, ETax847 said:

It's definitely interesting given that he devotes 2-4 hours a day in research for his sports bets.  He is trying to make the argument it is no different than a part time job.  He keeps records detailing his bets, has a separate bank account for this activity and has a profit motive.

If he insists that he is in business, it is because his schedule C has a bunch of deductions, correct? Wil an audit read "no changes" if audited? Is he getting earned income credit by using his winnings on schedule C?

[Terry D EA]

<<<<<Is he getting earned income credit by using his winnings on schedule C?>>>>> I'm a bit confused. He has a regular job and earns 20-40K gambling. No mention of dependent children in the original OP or filing status. Enlighten me, how does the EITC come into play here? The main question is whether he meets the requirements to be a professional gambler. I agree with the other replies

[Max W]

On 12/19/2022 at 8:43 AM, ETax847 said:

It's definitely interesting given that he devotes 2-4 hours a day in research for his sports bets.  He is trying to make the argument it is no different than a part time job.  He keeps records detailing his bets, has a separate bank account for this activity and has a profit motive.

That's interesting as he admits his gambling acitivity is equivalent to a part time job.  A part time job doesn't cut it.  It has to be on a full time basis and be necessary for a livelyhood.

In Groetzinger, 480 U.S. 23 (1987), the Supreme Court established the professional gambler standard: "If one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.

 

[DANRVAN]

On 12/19/2022 at 8:11 AM, ETax847 said:

for the last 3 years.  Prior to me

I wonder if just by coincidence he is looking for a new tax preparer?

As others have mentioned there is a high bar for raising a gambling activity to the level of a trade or business; and allowing deductions that would otherwise go on schedule A instead of C.

[Lee B]

There is no safe harbor,burden of proof is totally on the taxpayer.

[Pacun]

On 12/21/2022 at 12:50 PM, Terry D EA said:

<<<<<Is he getting earned income credit by using his winnings on schedule C?>>>>> I'm a bit confused. He has a regular job and earns 20-40K gambling. No mention of dependent children in the original OP or filing status. Enlighten me, how does the EITC come into play here? The main question is whether he meets the requirements to be a professional gambler. I agree with the other replies

I wish I could enlighten you but I am asking questions, hence my ? (question mark) at the end of each sentence.

[Pacun]

Since hobby expenses are not currently allowed, it makes sense that the taxpayer insists on Schedule C. As his preparer, I would be inclined to report it as a hobby. 

[joanmcq]

I don’t think it would be hobby expenses but gambling losses.