The excess of gambling losses over gambling gains isn't deductible even by a person in the business of gambling and even though gambling is legal where the losses are sustained. Therefore, a professional gambler’s losses are limited to his winnings. (Skeeles, Anna v. U.S., (1951, Ct Cl), Offutt, Roy, (1951) 16 TC 1214)

Caution: The amendment of Sec 165(d) by the TCJA overrides the results of this court case for years 2018-2025. IRS has issued an action on decision (AOD 2011-06, 12/20/2011) announcing its acquiescence with the Tax Court's decision in Mayo, (2011) 136 TC, that the business expenses of a taxpayer engaged in the trade or business of gambling are not subject to Code Sec. 165(d). While, as the Tax Court also held in Mayo, Code Sec. 165(d) limits the deduction for gambling losses of a taxpayer engaged in the trade or business of gambling to the taxpayer's gains from wagering transactions, the Court made it clear, and IRS now agrees, that Code Sec. 165(d) does not limit deductions for expenses incurred to engage in the trade or business of gambling. Those business expenses are deductible under Code Sec. 162.

CCA Memo 202111012 clarifies the IRS’ current position: “In the TCJA, Congress amended the language of Sec. 165(d), effectively negating the Mayo decision. Under the amendment, for taxable years 2018 through 2025, individual professional gamblers are prohibited from claiming business expenses arising from wagering transactions in excess of gambling gains. *** Nothing in the committee report states an intention to apply the amendment to losses incurred by businesses in the trade or business of gambling.”

The Tax Court has held that tournament poker was a wagering activity subject to the Code Sec. 165(d) loss limits. Thus, the taxpayer, a professional tournament poker player, could only deduct her tournament losses to the extent of her tournament income. (George E. and Gloria Tschetschot, TC Memo 2007-38)

Gloria claimed a net loss of $29,933 from her “professional gambler” activity in 2000 on her Schedule C, Profit or Loss from Business. IRS said that Code Sec. 165(d) limited Gloria's losses to her winnings. Gloria contended that her professional tournament poker playing activity was more properly classified as “entertainment and professional sports” than professional gambling and, as a result, her net loss should not be limited by the Code Sec. 165(d) limit on losses from wagering activities.

The Tax Court said that while it was clear that there are differences between tournament poker and other types of poker, none rise to the level of meaningful, substantive differences that would warrant different tax treatment under the Code. It held that betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic.

In another case involving a tournament poker player, the Tax Court determined that, as a gambling professional, the player was entitled to deduct from his gross gambling income amounts he paid to enter poker tournaments he did not win and buy-in fees, which were a direct cost of his tournament participation. The same individual was allowed to deduct as a business expense tournament-related hotel costs substantiated with hotel invoices, but was not allowed to include extras such as charges for in-room movies, spa services and alcoholic beverages from the in-room mini-bar, which the court said were nondeductible personal expenditures that did not have a business purpose. (E. Alabsi, TC Summary Opinion 2017-5) CAUTION: Under the amendment to Sec 165(d) made by the TCJA, the hotel expenses allowed by the Court in this case would not be separately deductible for years 20182025.

The Supreme Court has held that a full-time gambler is engaged in a trade or business for purposes of Code Sec. 162(a). A taxpayer does not have to offer goods or services to the public in order to qualify his activity as being a trade or business. Where the taxpayer devotes his fulltime activity to gambling and it is his intended source of livelihood, basic concepts of fairness 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, a casino operator or an active trader on the exchanges. (Com. v. Groetzinger, Robert, (1987, S Ct) 59 AFTR 2d 87-532)

A taxpayer who devoted approximately 35 hours per week to horse racing, attended various tracks 175 days out of the 200-day season, gambled at Atlantic City and consistently bought lottery tickets was engaged in the trade or business of gambling. He could deduct the losses incurred from income items (including taxable unemployment compensation and an annual installment from a state lottery win) in computing his adjusted gross income. Taxpayer's activities— attending the track, studying racing forms, interviewing horse owners and riders, placing bets, plus keeping a daily log—showed that he was not pursuing a mere hobby. Employment as a machine operator for two weeks in January did not preclude his status as a “full-time” gambler during the remainder of the year. There is no requirement that an endeavor must begin Jan. 1 to be considered full-time. (Rusnak, Charles, (1987) TC Memo 1987-249)

The Tax Court stated that the aggregate amount of time spent in a gambling activity wasn't as determinative as the fact that the taxpayer had little continuity or regularity to his gambling. Thus, even though he argued that he averaged 20 hours per week gambling, a taxpayer wasn't engaged in the trade or business of gambling where his visits to a casino throughout the year were sporadic, sometimes 3 times a month, sometimes 17 times a month. The semi-retired taxpayer received substantial income from sources other than gambling and did not rely on gambling for his livelihood. (Erbs, Eldron U., (2001) TC Summary Opinion 2001-85)