Before we get to the main question, let's review why we care. Section 165(d) limits losses from wagering losses to the amount of wagering gains (regardless of trade or business status). However, if a gambler is in the trade or business of gambling, he or she can generally make the offset of losses against gains. If the gambler is not in the trade or business, the loss deduction is an itemized deduction and is subject to general limitations on itemized deductions.
One could argue that statistically speaking one cannot be in the trade or business of playing slot machines because there is no realistic expectation of profit when it comes to playing slot machines due to the built-in house edge. This is the tack taken by the IRS in a recent Tax Court case when it sought to deny trade or business status to a slot machine gambler.
The Tax Court took seriously the gambler's claims that she ran her slots activities like a business. The Court applied nine factors to the analysis, taken from the Section 183 regulations, to determine if the taxpayer had the requisite intent to profit. These factors are(1) the manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the 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 loss 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) whether elements of personal pleasure or recreation are involved.
In applying these factors, the Court noted that the taxpayer played slots regularly (every day), she was an "expert" on slot play, she expended substantial time and effort, she expected to make a profit, and also had success in her other business ventures. She also had a specific system to her play, and adjusted her play when the system did not produce profits. On the negative side, the Court noted that she never produced profits on an annual basis (even though she did hit some big jackpots).
In the end, the Court sided with the taxpayer and found a trade or business. However, don't bother reading the opinion for a description of successful slots playing techniques - as noted above, the taxpayer never did have a winning year.
Linda M. Myers v. Commissioner, T.C. Summ. Op. 2007-194