Today, I'd like to talk to you about gambling and some issues that are currently facing professional gamblers. In this video we cover buy-in and rake fees for card players, tokes/tips, and the takeout for horse betting.
Video Transcript - Professional Gamblers Improve Your Odds With the IRS
It's time to get down to the brass tacks. My name is Mel Sams. I'm the managing associate at Sams CPA. Today, I'd like to talk to you about gambling and some issues that are currently facing professional gamblers. Now, our previous gambling videos have been some of the most popular videos we have done to date, so I want to make sure I give special extra time to some of the specific issues that professional gamblers are facing.
Right now, with tax reform and the changes to professional gamblers and how they can deduct expenses, I think this is very timely. So I'm going to talk about a couple of very specific elements to professional gambling. The first element would be for a professional poker player or professional card player. When you enter a tournament, you have to pay a buy-in fee, and you also have to pay rake fees sometimes, to participate, or before participating, in that tournament. Now, there has been some tax court rulings on whether or not these fees are considered a deductible expense against your income as a professional gambler.
Now, the first tax court case where this was addressed held that yes, the buy-in or the rake fees that you pay to a professional tournament promoter or in a professional card tournament were considered operating expenses of a professional gambler and could be deducted against the gambling income. However, a second tax court decision came along and ruled that these were expenses only applicable to professional gamblers, so if you're recreational, and you pay the buy-in and enter into a tournament, according to this second tax court case, you are not able to deduct that buy-in against your gambling winnings from that tournament. Now, with the new limitations on deducting gambling expenses, you might argue that these items have kind of become resolved, because we, again, cannot generate a net operating loss anymore. However, keep that in mind. As a professional, those fees are considered an operating expense of your business.
Now, the next item, which is a lot more gray, are the tokes. Tokes are tips, essentially, that you might pay to a dealer, whether in a tournament, whether at freestyle play in a casino. Now, the tax court right now has not addressed whether these are considered a deductible expense to the gambler or whether they are considered a gift, and something that's not deductible to you. Again, it has been found that the dealer is not receiving these items as winnings from a wager, but rather as a tip in the course of their normal job. What that means for you is, for all you professional card players and other table game players, when you tip the dealer, when you pay that took to the dealer, you have to make a decision about what to do with that. In my humble opinion, it's definitely a cost of doing business, but that's just my opinion.
The third item, specific item, would be to takeout with respect to horse racing. Now, the takeout is the portion of the overall wager that goes back to the house, the track, as they pay out the winning horse racing teams, and the jockeys, they pay expenses, they cover their own costs. So the takeout is that portion of your bet that goes to the house. Now, another tax court case occurred, where a professional gambler, professional horse racing gambler, contended that the portion of his bet that went to the house was a deductible expense to him as the gambler. Now, unfortunately, the tax court rules in favor of the IRS, in which they said that this was a cost borne by the house, not by the gambler themselves. So the track has that, as income, has the deductions related to it, but the gambler themselves did not. So in this case, that gambler's winnings were not offset by his or her proportion share of the takeout on that particular race.
These are just some things, specific things, to be aware of as a professional gambler. I would encourage you, keep contemporaneous records of your activities. Good records and recordkeeping are 80% of the battle. When your records are in good order, it's a lot easier to substantiate and to make some arguments in your favor, so that's just something to think about, something to keep in mind.
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