Taxing Lessons Case Summaries

Case — Gambling Activity: Hobby or Trade/Business?

Thanks for sharing!
4 minute read

TL Case Summ


Did taxpayer engage in gambling activities with the intention of making a profit?


Taxpayer Says:  Losses were incurred as a gambling professional engaged in the business of playing slot machines and are deductible in full against winnings.

Internal Revenue Service Says: Gambling losses were not incurred in the course of a trade or business, and are deductible only as an itemized deduction.


From IRC Section 162(a): Ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business are generally deductible.

From IRC Section 165(d): Losses from wagering transactions may only be deducted to the extent of gains from wagering transactions.

From Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987): An activity must be conducted with continuity, regularity, and the primary purpose of earning a profit to be considered a trade or business under section 162.

From Federal Tax Regulation 1.183-2(b): Relevant factors to be taken into account in determining whether an activity is engaged in for profit include:

(1) The manner in which the taxpayer carried on the activity;

(2) The expertise of the taxpayer or his or her advisers;

(3) The time and effort expended by the taxpayer in carrying on the activity;

(4) The expectation that the assets used in the activity may appreciate in value;

(5) The success of the taxpayer in carrying on other similar or dissimilar activities;

(6) The taxpayer’s history of income or loss with respect to the activity;

(7) The amount of occasional profits, if any, which are earned;

(8) The financial status of the taxpayer; and

(9) Whether elements of personal pleasure or recreation are involved.


Gambling winnings are fully taxable whether gambling is a hobby or a business.

However, gambling losses incurred by non-business (hobby) gamblers do not directly reduce gambling income. Instead, losses are generally deductible (to the extent of winnings) only as an itemized deduction. This treatment may decrease or eliminate the deduction.

Professional gamblers can directly reduce gambling winnings by the amount of gambling losses and other expenses (but only to the extent of winnings).


Note: In applying the nine factors from Federal Tax Regulation 1.183-2 to this case, the court determined:

(1)   Manner in which the taxpayer carried on the activity – No separate books or records kept; no written business budget or plan.

(2)   Expertise of the taxpayer or advisers – Taxpayer gambled for more than ten years and consulted regularly with casino staff.

(3)   Time and effort expended in carrying on the activity – At least 40 hours per week spent gambling at casinos, often 12-15 hours at a time.

(4)   Expectation that the assets used in the activity may appreciate in value – Not relevant.

(5)   Success in carrying on other similar or dissimilar activities – Taxpayer owned and operated a successful trucking business.

(6)   Taxpayer’s history of income or loss with respect to the activity – No profit from gambling activity for the three years before and the year after the year at issue.

(7)   Amount of occasional profits, if any, which are earned – Frequent wins; occasional big wins.

(8)   Financial status – Taxpayer had another source of income that could not be offset by gambling losses.

(9)   Whether elements of personal pleasure or recreation are involved – Taxpayer testified credibly that gambling was stressful, tiring, and time consuming work.

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

For the or for the


Download (PDF, 26KB)


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 and

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.


Other posts you might enjoy

Decisions — Taxing choices Image source: Free Picture © Semen Barkovskiy Dreamstime Stock Photos   How many options can you consider before you find yourself longing for simplicity? Whatever your answer, part of the desire for less complexity comes from not wanting to make the wrong choice. That's especially true ...
Decisions — Where’s your refund? Image source: By U.S. National Archives and Records Administration, Public domain, via Wikimedia Commons Where's your refund? Possibly helping to reduce the federal budget deficit, if you failed to file a return to get an overpayment back within the applicable time period. That's because the gov...
Case — Fun and games Image source: (public domain image) THE QUESTION Does an organization that offers a recreational activity to achieve a charitable purpose qualify as a charitable organization? THE DISPUTE Taxpayer Says: It operates for charitable purposes because it provides relief for the p...
Case — Carry On THE QUESTION Can an IRA deduction that is disallowed due to active participant status in an employer plan be carried forward and deducted in a future year? THE DISPUTE Taxpayer Says: The 2008 IRA contribution was an “excess contribution” and should be allowable as a deduction in 2010. Intern...
Right answer!
Sorry, wrong answer :(
For the taxpayer. Taxpayer conducted the gambling activity with continuity and regularity, was engaged in the gambling activity with the actual and honest objective of making a profit and was in the trade or business of gambling. Gambling expenses are deductible under section 162(a) to the extent allowable under section 165(d).