IRS v. “Professional” Video Poker Players
The U.S. Tax Court recently released a ruling against a Nevada couple, claiming the substantiation they provided was insufficient to deem them as professional gamblers.
Background
A Nevada couple held jobs as an accountant and an appliance technician. On the side, they exclusively played video poker. They were not considered advantage players, but did have extensive video poker knowledge.
In 2019, the couple’s gambling losses exceeded their gambling winnings. They noticed they would owe additional tax if they reported their gross winnings and losses, so they chose to omit all gambling activity from their return.
After the return was processed, they were automatically assessed additional tax, as a result of gambling winnings reported on Form W-2G. Understanding they would owe tax if they filed as recreational gamblers (due to itemized deduction restrictions), the couple amended the return to file as professional gamblers.
The Result
The IRS challenged their position as professional gamblers and the U.S. Tax Court ruled in favor of the IRS. The Court found they did not meet the criteria to file as professional gamblers and noted the couple:
Did not keep contemporaneous (or any) record of their play
Relied solely upon casino-provided statements to prove their winnings and losses
Did not maintain a separate bank account for their bankroll
Filed as recreational gamblers in previous and subsequent years
Only claimed professional gambler status after IRS notice was issued
While the above factors are not exclusive, they were the focus of this court case and give an idea of the guidelenes to qualify as a professional gambler.
Key Takeaways
You cannot file as a professional gambler unless you treat your gambling activities like a business. To ensure you are keeping up with the standard, you should keep detailed records of all gambling activity, maintain a separate bank account and credit card for business expenses, document your long-term strategies and conduct all activities in a business-like manner.
Keep session records. This applies to both recreational and professional gamblers. Had the taxpayers in this case kept session records, they may have been able to reduce their tax burden based on their net session results. Instead, they were forced to report their gross gambling winnings (as reported to the IRS), which ultimately increased the total tax due.
Do not rely on casino-produced win/loss statements. While these statements may provide a “baseline” for your reportable winnings (on Form W-2G), they should not be relied upon exclusively. The Tax Court noted that these reports may be incomplete, as they do not account for unrated play. Win/loss statements can be provided as substantiation, but it is far more compelling to submit them in conjunction with your contemporaneous records.
You cannot “choose” how you are taxed. The taxpayers tried to file as professional gamblers to reduce their tax liability, but did not have the records to support it. While there is no explicit IRS definition of a professional gambler, there are guidelines that cannot be ignored when making the determination.