Rules concerning income tax and gambling vary internationally.
United States
In the United States, gambling wins are taxable.
The Internal Revenue Code contains a specific provision regulating income-tax deductions of gambling losses. Under Section 165(d) of the Internal Revenue Code, losses from “wagering transactions” may be deducted to the extent of gains from gambling activities. Essentially, in order to qualify for a deduction of losses from wagering, the taxpayer can only deduct up to the amount of gains accrued from wagering. In Commissioner v. Groetzinger, the Supreme Court Justice Blackmun alludes to Section 165(d) which was a legislative attempt to close the door on suspected abuse of gambling loss deductions.
Wagering Transaction
The Internal Revenue Service has ruled that a “wagering transaction” consists of three elements. First, the transaction must involve a prize. Second, the element of chance must be present. Finally, the taxpayer must give some consideration.
Section 165(d) and Professional Gamblers
In Bathalter v. Commissioner, a full-time horse-race gambler had gains of $91,000 and losses of $87,000. The taxpayer deducted the expenses under Section 162. The service argued that Section 165(d) precluded the taxpayer from engaging in gambling as a "trade or business." The Tax Court held that the taxpayer's gambling was a business activity and allowed the deductions. In essence, the court held that Section 165(d) only applies when a taxpayer is at a loss instead of a net gain and “serves to prevent the from using that loss to offset other income.” However, if the taxpayer has a net gain, as the horse-race gambler did, then the taxpayer may deduct the expenses under Section 162, and Section 165(d) does not apply.
Section 165(d) and Recreational Gamblers
In addition, in Valenti v. Commissioner, the court reiterated that Section 165(d) applies to professional gamblers as well as recreational gamblers. The court stated, "... it has been held both by this Court and various courts of appeals that wagering losses cannot be deducted, except to the extent of the taxpayer's gains from wagering activities, and it has been so held even where such activities were conducted as a trade or business as opposed to a hobby." Therefore, for example, if a recreational gambler visits a casino one Saturday and accumulates $600 of losses and $200 of gains, that recreational gambler may deduct $200 of the wagering losses (because she can only deduct an amount up to the amount of wagering gains she accrued).
United Kingdom
In the United Kingdom, wins (unless in the course of a trade) are not taxable and losses are not deductible.
Germany
In Germany, wins are taxable since July 2012 by 5% of the winnings (profit).
Canada
In Canada gambling income is not generally taxable. If the gambling activity can be considered as a hobby, the income is not taxable.
If the gambling is carried out in businesslike behaviour, then the income is taxable and losses deductible. Making approximately $50 million in sports lottery bets and earning a profit of $5 million was not considered businesslike behaviour in Leblanc v. The Queen. However, in the case of Luprypa v. The Queen the gambling income was ruled to be taxable. The case involved a skilled pool player that profited approximately $1000 per week playing staked pool games against bar patrons.
Poker differs from many other forms of gambling as skilled players may increase their chances of winning significantly. In the case Cohen v. The Queen judge ruled that the gambling activities were not conducted in sufficiently businesslike manner and thus the losses were not deductible.
See also
References
- IRC Section 165(d).
- 480 U.S. 23, 32 (1987).
- Technical Advice Memorandum 200417004.
- ^ T.C. Memo 1987-530.
- IRC Section 162.
- T.C. Memo 1994-483.
- Rotfleisch, David. "Taxation Of Gambling And Poker Winnings – A Toronto Tax Lawyer Guide". mondaq.com. Retrieved 24 February 2020.
- Rotfleisch, David. "Taxation Of Gambling And Poker Winnings – A Toronto Tax Lawyer Guide". mondaq.com. Retrieved 24 February 2020.
- Rotfleisch, David. "Taxation Of Gambling And Poker Winnings – A Toronto Tax Lawyer Guide". mondaq.com. Retrieved 24 February 2020.