Professional or Recreational Gambler? How the IRS Decides

For a serious player, one question comes before any deduction or plan: is your gambling a business or a pastime? The answer changes where winnings and losses land on your return, whether self-employment tax applies, and which records matter most.

Status is not an election. It follows the facts of how you play. Here is how the line is drawn.

The trade or business test

The leading case is Commissioner v. Groetzinger, 480 U.S. 23 (1987). The taxpayer went to the track six days a week, 48 weeks a year, put in 60 to 80 hours a week, and had no other job. The Supreme Court held that his gambling was a trade or business.

The Court’s standard still applies. You must be involved in the activity “with continuity and regularity,” and your primary purpose must be “for income or profit.” As the Court put it, “A sporadic activity, a hobby, or an amusement diversion does not qualify.” The answer depends on the facts of each case. The IRS uses the same two tests to describe who files Schedule C (IRS, About Schedule C (Form 1040)).

The nine factors courts weigh

To test profit motive, courts deciding gambling cases often look to the nine factors in Treas. Reg. §1.183-2(b), the regulation used to separate for-profit activities from hobbies. In one example, the Tax Court weighed all nine and found the taxpayer to be a casual gambler, not a professional, so his nonwagering expenses were not deductible (Boneparte v. Commissioner, T.C. Memo. 2017-193). The factors:

1. How you carry on the activity, including businesslike operation and complete, accurate books and records
2. Your expertise, or that of your advisors
3. The time and effort you put in
4. Whether assets used in the activity are expected to appreciate
5. Your success in other activities
6. Your history of income or losses from the activity
7. The amount of any occasional profits
8. Your financial status
9. Elements of personal pleasure or recreation

No single factor decides the question, and the result is not reached by counting factors. Enjoying the game does not by itself defeat a profit motive the other facts support, and early losses are not necessarily a sign that there is none (Treas. Reg. §1.183-2(b)).

How each status is reported

Professional gamblers:

• Report winnings, wagering losses, and business expenses on Schedule C (Form 1040) (IRS, About Schedule C (Form 1040)).
• Generally owe self-employment tax on net earnings, figured on Schedule SE: 12.4% for Social Security (up to an annual limit) and 2.9% for Medicare, with half of the tax deductible (IRC §1402(a); IRS Topic No. 554).
• Deduct losses and expenses on Schedule C without needing to itemize, subject to the §165(d) limit below.

Recreational gamblers:

• Report all winnings on Schedule 1 (Form 1040), including winnings never reported on a Form W-2G (IRS Topic No. 419).
• Deduct losses only as an itemized deduction on Schedule A, and only up to the winnings reported. If you take the standard deduction, losses give no federal benefit (IRS Topic No. 419).
• Cannot net winnings against losses and report only the difference (IRS Publication 529).
• Generally cannot deduct travel and other costs of playing, which are personal expenses (IRC §262).

Because winnings count in full toward adjusted gross income, a big year may affect income-based items elsewhere on the return, even when losses offset much of it.

How §165(d) treats losses and expenses

IRC §165(d) limits wagering loss deductions for professional and recreational players alike, and its recent history explains why older advice may no longer hold:

• Before 2018, the Tax Court held that §165(d) did not limit a professional’s non-wagering business expenses, so those expenses could create a deductible loss (Mayo v. Commissioner, 136 T.C. 81 (2011); IRS Notice 2015-21).
• The 2017 tax law pulled any deduction incurred in carrying on a wagering transaction into the limit for 2018 through 2025 (Public Law 115-97, §11050).
• The 2025 tax law made that rule permanent and, for taxable years beginning after December 31, 2025, allows only 90% of wagering losses, still capped at wagering gains for the year (Public Law 119-21, §70114).

For a professional, wagering losses and expenses such as travel and lodging now share one cap. A losing year generally produces no net loss to use against wages, investment income, or other business income. We cover the 90% rule and break-even years in The 2026 Gambling Loss Limit: Planning for the 90% Rule.

Professional status is not automatically better

Business status is often a trade-off, not an upgrade:

• Self-employment tax. Net profit on Schedule C carries self-employment tax on top of income tax. Recreational gambling income does not.
• No loss against other income. A losing year generally stays inside the §165(d) cap.
• Cleaner reporting. Results go on Schedule C instead of gross winnings plus itemized losses, and qualifying expenses count within the limit.
• More to prove. Business status calls for records that show how you actually operate.

Records that support either status

Good records do two jobs: they prove your numbers, and they show how you operate. IRS guidance calls for an accurate diary or similar record showing at least (Rev. Proc. 77-29; IRS Publication 529):

• The date and type of each wager or wagering activity
• The name and address or location of the establishment
• The names of other people present with you
• The amounts won or lost

Back the log up with documents:

• Session logs kept as you play, not rebuilt at tax time.
• A clear bank trail. Wagering tickets, canceled checks, credit records, bank withdrawals, and payout statements help prove results (IRS Publication 529). A dedicated bankroll account is not required, but it makes the trail easier to follow.
• Matched information returns. Payers file Form W-2G with the IRS for certain winnings (IRS Instructions for Form W-2G), and sweepstakes prizes that involve no wager may arrive on Form 1099-MISC (IRS Instructions for Forms 1099-MISC and 1099-NEC). Each form should tie to your log and your return.
• Business records for professionals. Results by game or venue, time records, and expense receipts speak directly to the §1.183-2(b) factors.

Our professional gambler recordkeeping page covers building a log that holds up.

A note on California

California does not always follow federal gambling rules. Per the Franchise Tax Board’s 2025 Instructions for Schedule CA (540):

• California does not tax California Lottery winnings, and California Lottery losses are not deductible for California. Lottery winnings from other states remain taxable.
• California did not conform to the federal rule that limits all wagering-related deductions, not just losses, to winnings.
• California generally does not conform to the 2025 federal tax law.

Your California result may differ, so confirm current California treatment before you file.

How TreeStar can help

The TreeStar team can help with tax preparation and tax planning for professional gamblers, starting with the status your facts support. We help set up a recordkeeping routine that ties your log to your W-2Gs and statements, and if a notice or exam arrives, we provide IRS representation. If you are unsure which side of the line you are on, we are glad to review it with you.

This article is general information, not advice for your situation. Rules change; confirm current law before acting.