If you take home casino winnings or money from private card games, federal tax laws require you to report it as income. For most players, this is considered hobby income, which means that not all gaming expenses can be deducted. But, when you qualify as a professional player, you can deduct all your gambling expenses and losses, just like other business professionals. This is what you need to know:
1 – Are my earnings business income?
One or two winning jackpots that you take home from the casino or from poker games with your friends do not make you a professional player. A professional gamer is running a business, not just to win a game or two. In an audit, the professional gamer will be required to demonstrate that his gambling activities qualify as a business.
The IRS has classified gambling as a hobby because most people play for fun. That is why gambling winnings are generally included alongside other miscellaneous income. This is bad because even though every penny of the income from the game must be claimed, the amateur player cannot deduct all the expenses involved in producing that income. However, a professional gamer can take full advantage of business tax laws that allow the self-employed to deduct all qualified expenses and losses.
Tracking of winnings, losses and expenses is the same for both the amateur and professional player, and must be done in accordance with IRS rules if you want to survive a tax audit. Failure to do so could cause those expenses and losses to be disqualified. To escape the hobby classification, a player must be prepared to show that they are committed to making “real and honest” efforts to produce a profit. The desire to win big is not enough.
2 – Can I prove that gambling is my business?
Documenting your gambling in a professional manner is a critical part of proving to the IRS that you are not a recreational player. Professional players must keep a record of all gambling activities. This should include the date and location of each event, your starting bank, closing bank, and net profit or loss.
All expenses involved in getting to each game event, along with hotel costs, entrance fees, meals, tips, and private training must also be documented if you want to survive an audit. If the casino “comps” your expenses are not deductible; only expenses paid by you personally are deductible.
3 – Do I have to pay self-employment taxes on my earnings?
There is no self-employment tax on gambling income; however, there is a self-employment tax on most business earnings.
Self-employment taxes fund your personal Medicare and Social Security accounts. When you are employed by someone else, your employer pays half of those taxes and you pay the other half. The self-employed person pays for everything. However, many times most of this tax can be avoided by financing a private retirement account set up for your business.
In other words, whether or not you pay self-employment taxes really depends on how much you know about the current tax laws for small businesses. Working with a qualified tax accountant, one recommended by other players, is the best way to reduce your self-employment tax.
If you think you qualify as a professional gamer, you shouldn’t be preparing your own tax return. Because an audit is highly possible in this industry, you will want the guidance of a qualified tax accountant when dealing with the IRS.