In the State of Minnesota, many gamblers are interested in taking the extra steps to be treated as professional gamblers. In contrast to the treatment the gambler receives from the IRS, a non- professional gambler in Minnesota is subject to the Alternative Minimum Tax and, as a result, is not allowed his or her gambling losses as an offset to gambling winnings. The same is not true for the professional gambler. The State of Minnesota will allow a professional gambler to deduct their gambling losses from gambling winnings and therefore pay less in taxes.
The key is whether the state believes the gambler is engaged in a trade or business. A taxpayer is engaged in a trade or business if he or she is involved in an activity with continuity and regularity and the primary purpose of that activity is to generate income and profit. A sporadic activity, a hobby, or an amusement diversion does not qualify. Groetzinger v. United States, 480 U.S. 23 (1987). The issue of whether a particular taxpayer is engaged in a trade or business can only be resolved after an examination of the facts in each case.
The United States Supreme Court in Groetzinger v. Commissioner determined that a taxpayer's gambling activity constituted a trade or business under the federal tax code, even if the gambler/taxpayer does not make a profit.
The main factors considered by the Supreme Court in Groetzinger were the regularity of the taxpayer's gambling, the effort he exerted, the skill that he applied, and his intent to produce a livelihood via gambling.
The IRS set forth a number of nonexclusive factors to be considered when determining whether a taxpayer's activity constitutes a trade or business for tax purposes. See Treas. Reg. § 1.183-2(b). These factors include:
1. the manner in which the taxpayer carries on the activity (e.g., keeping records in a businesslike way); 2. the expertise of the taxpayer or his advisors; 3. the time and effort expended by the taxpayer in carrying on the activity; 4. the expectation that assets used in the activity may appreciate in value; 5. the success of the taxpayer in carrying on other similar or dissimilar activities; 6. the taxpayer's history of income or losses with respect to the activity; 7. the amount of occasional profits, if any, which are earned; 8. the financial status of the taxpayer; and 9. elements of personal pleasure or recreation.
For more information about applying these factors, please review our other posts, past and future, under the Profit Motive category.