If you take home casino winnings, or money from private card games, federal tax laws require you to report it as income. For the majority of gamblers this is considered hobby income, which means that not all gambling expenses can be deducted. But, when you qualify as a professional gambler you get to deduct all of your gambling expenses and losses, just like other business professionals. Here’s what you need to know:
1 – Are My Winnings Business Income?
One or two winning pots taken home from the casino or poker games with your friends does not make you a professional gambler. A professional gambler is operating a business, not just out to win a game or two. In an audit, the professional gambler will be required to prove that his or her gambling activities qualify as a business.
The IRS has classified gambling as a hobby because most people gamble for fun. This is why gambling winnings are generally included along with other miscellaneous income. This is bad because even though every penny of gambling income must be claimed, the hobby gambler does not get to deduct all of the expenses involved in producing that income. A professional gambler, however, can take full advantage of business tax laws which permit self-employed people to deduct all qualifying losses and expenses.
Tracking wins, losses and expenses is the same for both the hobby and professional gambler, and it must be done according to IRS rules if you want to survive a tax audit. Fail to do so and those expenses and losses could be disqualified. To escape the hobby classification a gambler must be prepared to prove that they are engaged in making “actual and honest” efforts to produce a profit. The desire to win big is not enough.
2 – Can I Prove That Gambling is My Business?
Documenting your gambling in a business-like manner is a critical part of proving to the IRS that you are not a recreational gambler. Professional gamblers need to keep a log of all gambling activities. This should include the date and location of every event, your starting bank, closing bank, and net win or loss.
All expenses involved in getting to each gambling event, along with hotel costs, entry fees, meals, tips and private coaching must also be documented if you want to survive an audit. If the casino “comps” your expenses they are not deductible; only expenses paid by you personally are deductible.
3 – Do I Have To Pay Self-Employment Tax on My Winnings?
There is no self-employment tax on hobby gambling income; however there is self-employment tax on most business profits.
Self-employment taxes fund your personal Medicare and Social Security accounts. When you are employed by someone else, your employer pays half of those taxes and you pay the other half. The self-employed person pays it all. However, many times the bulk of this tax can be avoided by funding a private retirement account set up for your business.
In other words, whether or not you pay self-employment taxes actually depends on how much you know about current small business tax laws. Working with a qualified tax accountant, one recommended by other gamblers, is the best way to reduce your self-employment tax.
If you think you qualify as a professional gambler you should not be preparing your own tax return. Because an audit is highly possible in this industry, you will want the guidance of a qualified tax accountant when dealing with the IRS.