When gambling is conducted as a business, can losses offset other income?
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.
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
THE COURT’S DECISION
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.
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