In a summary opinion, the Tax Court has found that an individual can qualify as a professional gambler despite pursuing the activity part-time. While the decision doesn’t have precedential value, it should help inform us in determining who qualifies as a professional trader.
The tax law distinguishes between casual gamblers and those who pursue the activity as a business, just as it distinguishes between investors and traders — those who are in the business of buying and selling stocks or other securities. The courts use somewhat similar criteria in identifying professionals in both cases as the activities are somewhat similar, particularly in that they qualify as businesses despite having no customers.
At one time the IRS took the position there was no such thing as a gambling business precisely because the activity doesn’t involve selling goods or services to customers. The Supreme Court rejected the notion, in part because traders had long been recognized as having a business.
While the general outlines of what it takes to qualify as a professional gambler or trader have been reasonably clear for some time, in one area some within the IRS persist in a wrongheaded belief: they assert that you can’t be considered a professional gambler or trader unless you pursue the activity on a full-time basis.
Unjustified
Our book on capital gains
The tax law has always recognized that you can have a business without pursuing it full-time, and there is no reason to believe gambling or trading is any different. Courts deciding these issues have occasionally mentioned whether or not the taxpayer’s activity was full-time, but never as more than one of a number of factors that might be considered in determining whether the taxpayer was serious enough about the activity to have it treated as a business. What’s more, there are a number of cases involving part-time trading or gambling in which the courts carried on a lengthy analysis before ruling on whether the activity qualified as a business. Those courts were wasting their time and energy if they could have ruled on the sole basis that the activity was part-time.
This new case (PDF) raised the issue squarely, as the taxpayers plainly met other criteria for being considered professional gamblers. The court easily dismissed the IRS’s argument:
Respondent argues that petitioner did not pursue his gambling activity full time. In effect, respondent is arguing that gambling must be the only or predominant source of income. We could find no statute or case precedent that sets forth such requirement.
While this decision was rendered in a summary opinion, which cannot be used as precedent, we would urge the IRS to take note. The position that a gambling or trading activity must be full-time to qualify as a business is entirely unjustified.
Related
- We discuss the distinction between traders and investors in our book, Capital Gains, Minimal Taxes.
- See also our free online Tax Guide for Traders.
