Professional Gamblers Could Win Big with New Tax Break

Gambling has always had a perceived “bad” reputation with society. With this reputation came unfair tax treatment for professional gamblers. A new Tax Court ruling is changing that and gamblers could reap the rewards.

On December 20, 2011, the Tax Court ruled in Mayo v. Commissioner, that a professional gambler in the trade or business of gambling could deduct non-wagering expenses in excess of gambling winnings. Historically, such costs in excess of gambling winnings have been disallowed.

The Mayo Tax Court ruling allows professional gamblers to treat non-wagering business expenses as business expenses rather than wagering losses as in the past. Non-wagering business expenses include, but are not limited to, transportation, meals and entertainment, admission, subscriptions, and other fees.

The key point in the new ruling is that gambling losses are first netted with gambling winnings before non-wagering business expenses are applied. This means that professional gamblers can now generate net operating losses which may be carried back or forward to other tax years.

Here’s a quick example:

Taxpayer is a professional gambler and has the following 2011 income and expenses related to his business:

Gambling Winnings: $50,000
Gambling Losses: $75,000
Non-wagering Business Expenses: $10,000

Taxpayer also reported $50,000 of net profit from this business in 2010.

Taxpayer would first net losses against winnings (not creating a loss) yielding a net profit of $0. Then non-wagering business expenses are applied, yielding a $10,000 net operating loss on Taxpayer’s 2011 return. Furthermore, this $10,000 NOL can be carried back to 2010 to reduce Taxpayer’s net profit to $40,000.

With the variance of yearly income or loss, the Mayo Tax Court ruling may present a huge tax benefit to many professional gamblers by allowing them to defer non-wagering business expenses to prior or future tax years.