In flipping through your cable TV channels, no doubt you have noticed on many of the sports channels more and more coverage of tournament poker. Tournament poker is a hosted poker event that can last from days to weeks. Unlike a regular poker game, a participant cannot exit the game and cash out his chips at will – instead, one plays until he or she loses or is the sole remaining player. To play, a participant pays an entrance fee, which is used to pay administrative expenses and create a prize pot. Prizes are divided among the last players to be eliminated, with more money being paid to those that last the longest.
Internal Revenue Code Section 165(d) provides that wagering losses can be deducted in a year only to the extent of wagering winnings. Professional gamblers can report their wagering income and expenses on Schedule C. Nonprofessionals must report all of their gambling winnings and report their losses as itemized deductions.
In 2000, Gloria Tschetschot had winnings of $11,000 from playing in poker tournaments. Unfortunately, she had also losses from tournament play of $29,993. To try and get around the wagering loss limits of Section 165(d), which would have limited her loss deductions to the $11,000 in winnings, Gloria claimed that tournament poker is more akin to a professional sport like tennis instead of a wagering activity. The IRS disagreed and the issue ended up in Tax Court.
The Tax Court noted that regular poker is a wagering activity. It further noted that simply because a sport or activity is played or conducted in a tournament setting does not transform the underlying activity into something different. Tournament poker play, much like live-action poker, necessitates the use of the word "bet" or "wager." The players are still placing bets, hoping to win.
In distinguishing the treatment of tournament golf or tennis players from tournament poker players, the Tax Court simply noted that Congress had decided to treat wagering activities different from other sporting activities, and it would respect that treatment.
Thus, Gloria's tournament poker play was held to be a wagering activity, subject to the loss limitation provisions of Section 165(d).
Tschetschot, et ux., TC Memo 2007-38 (February 20, 2007)