Tax Reform for Individuals: Changes in Deducting Gambling Losses

Professional gamblers and hobby gamblers are now on the same playing field in the eyes of the IRS. Under the Tax Cuts and Jobs Act (TCJA), changes were made to how expenses and losses are deducted against gambling winnings. Previously under the old law, allowable losses and expenses were different for professional gamblers and those who gamble as a hobby. Below we cover how they were handled under the previous law, what has changed, and how gamblers will be impacted from a tax perspective.

Previous Law

Under prior law, individuals who gambled as a hobby and not as a trade or business could deduct gambling losses only to the extent of gambling winnings. Nongambling expenses, such as travel to and from a casino, were not deductible against gambling winnings.

Individuals who gambled as a trade or business, considered professional gamblers, could also deduct gambling losses only to the extent of gambling winnings. The difference was that nongambling expenses, such as travel to and from a casino, were deductible as an ordinary business income expense, creating the potential for a loss.

New Law

The new law treats professional gamblers and hobby gamblers the same from a tax perspective. Gambling losses are still deductible only to the extent of gambling winnings, but gambling expenses, such as travel to and from a casino, are deductible only to the extent of gambling winnings for both types of gamblers.

Impact on Individuals

While the changes seem minor, they have the potential to offset a substantial amount of income for individual taxpayers. If a taxpayer still has gambling income after offsetting those winnings with gambling losses, they can continue to offset any of that income with expenses incurred in relation to those winnings. Before the TCJA, those who gamble professionally could generate a loss by including these expenses as an ordinary business expense, but now these individuals are on the same playing field as those who gamble as a hobby and are unable to generate a loss. These changes are in effect until December 31, 2025.

Contact an Anders advisor with questions on how these changes will affect you. Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business.