Income Tax Treatment of Gambling Income and Self-Employment

In general, gambling losses can only be deducted up to the amount of gambling winnings in a given tax year. Each session must be recorded separately and each win applied to gross income, with each loss deducted as a miscellaneous expense. Since the advent of internet gaming, gross incomes can become grossly inflated, leading to unintended and undesirable consequences, such as preclusion in eligibility for student loans and participation in retirement savings programs such as an IRA or Roth IRA. If such is the case for a taxpayer a viable alternative May Be to treat one’s gambling as a small business, where gross wins are reduced by the total amount of losses in the year and the net amount is reported as income, rather than reporting the aggregate of winning sessions as gross income and taking the miscellaneous itemized deduction equal to the amount of total losses.

Income from gambling as a small business is included in Schedule C of IRS form 1040 and is subject to the self-employment tax.

In determining whether one qualifies to treat his income from gabling as a business venture rather than a mere hobby the IRS uses the criteria set forth in Section 1.183-2 (a). In short these criteria are :

• Whether you carry on the activity in a businesslike manner • Whether the time and effort you put into thte activity indicate you intend to make it profitable • Whether you depend on income from the activity for your livelihood • Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business) • Whether you change your methods of operation in an attempt to improve profitability • Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business • Whether you were successful in making a profit in similar activities in the past • Whether the activity makes a profit in some years, and how much profit it makes • Elements of personal pleasure or recreation