Losses sustained during the year on gambling transactions are allowed as an itemized deduction but only to the extent of the gains during the year from gambling. In the case of a husband and wife filing a joint return, the combined gambling losses of the spouses are allowed to the extent of the combined gambling gains.
The Supreme Court has ruled that a professional gambler is entitled to deduct gambling losses as a trade or business expense. The fact that the taxpayer did not offer goods or services to others did not preclude characterization of the activities as a trade or business activity, rather, the appropriate business test was the taxpayer must be involved in the activity with continuity and regularity as well as the taxpayer’s primary purpose for engaging in the activity must be for income or profit.
If gambling is conducted as a business, any gambling losses are deductible as business losses, but only to the extent of wagering gains. However, the deduction of a professional gambler’s non-wagering business expenses, such as transportation, meals and lodging, are not limited by wagering gains.
Losses of nonprofessional gamblers are non-business losses and are deductible (to the extent of gains) only if itemized on Schedule A of Form 1040. They are not subject to the 2 percent floor on miscellaneous itemized deductions.