Case — Deductibility of Gambling Losses

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TL Case Summ

THE QUESTION

When gambling is conducted as a business, can losses offset other income?

THE DISPUTE

Taxpayer Says: As a professional gambler, losses in excess of winnings are deductible as a trade or business expense, and can reduce other income.

Internal Revenue Service Says: Gambling losses cannot be deducted in excess of gambling winnings.

THE LAW

From Internal Revenue Code Section 162(a): Generally allows a deduction for ordinary and necessary expenses sustained in carrying on a trade or business.

From Internal Revenue Code Section 165(d): Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

THE CAUSE OF THE DISPUTE

Generally, when your business expenses are greater than your business earnings, the loss is deductible against other income. That is, you can report a business loss as a negative number on your tax return, reducing income you receive from other sources.

However, Internal Revenue Code section 165(d) limits losses from gambling to the amount won. Since the net result is zero, no loss is available to offset your other income.

Disputes arise due to the apparent conflict between these two code sections.

In this case, the taxpayer, a professional gambler, reported a loss of $27,952 from his gambling business, and used that loss to reduce income from wages and interest. He believes the limitation on gambling losses does not apply to a business, and that the general rule of deductibility of business expenses should be followed.

The IRS says the limitation applies irrespective of whether wagering income and losses are in a business or nonbusiness setting.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 9KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. The explicit language of section 165(d) trumps the general language of section 162(a) and limits wagering losses to the amount of wagering gains.
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