A brand new, full decision of the U.S. Tax Court recognizes that losses incurred by gamblers can lead to a net operating loss. In so finding, the Court rejected a portion of its 1951 opinion concerning a gambler’s ability to deduct associated business expenses where the court held that such expenses were to be treated the same as gambling losses – deductible only to the extent of gambling winnings. The decision was to be anticipated – the IRS had already revealed its litigating position on the issue in late 2008.
The Internal Revenue Code does not define what a “gain” or “loss” is, and the courts haven’t provided a great detail of clarity on the matter either. According to I.R.C. §165, “losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” So, if what a gambler receives from a wager is less than what was wagered, the “wagering loss” is the difference. Further complicating the matter is that wagering losses are not the same as “business expenses” under I.R.C. §162(a) or a net operating loss (NOL) from a business under I.R.C. §172. In addition, NOLs have another benefit to a taxpayer – they can be carried forward or back to offset gains in those years.
The historic rule has been that gambling losses only offset gains from gambling and only in the same tax year. That has been the rule at least since the Tax Court decided a case in 1951. But that rule only applies to gambling losses. It doesn’t necessarily limit the deduction for business expenses of professional gamblers that is available under I.R.C. §162(a).