Should You File as a Professional Gambler / Poker Player or Remain a Recreational Gambler?

So, you are finally a consistent winner at your local poker room, casino, or race track. Congratulations - you are in the minority. You decide to report your gambling income. Congratulations again - all income is subject to income tax and gambling is no exception (and yes, you are definitely in the minority now). But when you look at details of reporting gambling income you go from interested, to confused, to furious. Sorry, tax treatment of gamblers is grossly unfair. Furthermore, it is an emerging area with guidelines being created as we speak.

One of the fundamental issues is that IRS requires that you track winning and losing bets separately. This is obviously a recordkeeping nightmare, especially for games like poker where there may be many bets in a course of a single hand. The unofficial consensus for poker players is to keep track of winning and losing sessions. There is debate on how to define a session, but for our purposes here it suffices to say that you should not look for creative definitions of session to get around the fundamental issues - the IRS will almost certainly not buy it and as you'll see, you have enough to sell them on without trying to get creative here. So, you track each winning and losing session separately. At the end of the year, you total all your winning sessions: this is your gambling winnings. You total all your loosing sessions: this is your gambling losses. Now, for tax purposes you cannot just subtract losses from winnings and report your net as additional income. You have to report your gambling winnings as income and then deduct your loses as an itemized deduction.

Those of you familiar with taxes will immediately see the slew of extra costs this creates. Your AGI gets inflated by incredible amounts, especially if you play higher limits. This causes you to lose lots of deductions. You are forced to itemize your taxes, which can amount to you loosing the standard deduction if you weren't itemizing already. It goes on and on. Plus your chance of getting audited goes up since your itemized deductions become a high percentage of your AGI. The consequence of this way of reporting is that you will pay more, possibly lots more, taxes even if you lose money gambling! (Yes, you have to report everything the same way even if your gambling loses are higher than your winnings - and no, you absolutely cannot deduct gambling losses from your non-gambling income or carry those loses over to another year when you hope to have extra gambling winnings.) All this (and there is more) seems like a substantial incentive to not claim your gambling activity at all, but of course that isn't an option.

This is where the concept of a professional gambler comes in. If you operate a gambling business you can report your gambling income on Schedule C as any other business. You can then net your wins and losses on Schedule C. You can also subtract any legitimate business expenses, such as travel and meals as any business can, something recreational gamblers cannot do. You then report your resulting net income without an adverse affect on your AGI (unlike other businesses, net loses still cannot be deducted or carried over for professional gamblers.) But there is a problem and a price. The price is that you have to pay self-employment tax on the net income of your gambling business, something recreational gamblers do not pay. Self-employment tax is large enough that many people are better off filing as a recreational gambler despite losing other deductions. Now to the problem.

The problem is that IRS will consider it very unlikely that you really are a professional gambler. The courts rejected the concept until a landmark decision of 1987 which set a precedent of someone being a professional gambler. Court decisions and opinions since then clarified, and in our opinion, broadened the criteria to make it more accessible. However, to not give false hope you need to understand that: it is hard to legitimately claim professional status, your choice is very likely to be challenged by the IRS, there are no clear guidelines that will guarantee that you will successful defend your status against the IRS. I will try to add resources and explanations later on, but basically unless you: maintain perfect records of gambling activity, invest a significant amount of time in gambling, gamble with the intention of making a profit and not for pleasure, actually turn a profit for 3 out of 5 years you are very likely to find your status rejected. Having another significant source of income may also put you on shaky ground. Note that these criteria are far from clear guidelines. There are a number of additional criteria, and there are corner cases when some criteria might not be needed.

The difficulty I had making this decision for myself is along with the complexity of determining whether you are allowed to file as a professional and what your chances of successfully defending the position are, it is difficult to determine the actual financial benefit/cost of doing so. Calculating all the tax consequences to compare with the cost of self-employment tax is quite complex. Even doing your taxes twice (one for each scenario) doesn't give a true picture (and is very time consuming) because some benefits are merely deferred, not lost. For example, if filing as a recreation gambler puts you above the threshold of writing off loses on a rental property it is not correct that you savings are equal to tax value of this deduction. This deduction is not lost, it is merely deferred and your cost is just the cost of not being able to use the savings for another year. I created this calculator to help quantify the actual value of the decision for myself and decided to make it available to others who I know face similar questions. Because this calculator was first built for my specific situation it does not handle all possible tax deductions. It does tell you how it arrives at the numbers so you can determine what was included and what was omitted. With time I hope to expand it with additional criteria.

Goto the Professional Gambler Tax Calculator