If a professional gambler relocated to New York and continued placing full-time, systematic bets on horse races as his sole livelihood, would that activity count as a trade or business for New York income tax purposes?

Plain-English summary

Petitioner lived in Pennsylvania but was considering moving to New York. Before doing so, he wanted to know how New York would tax his unusual full-time occupation: placing pari-mutuel bets on thoroughbred horse races. He asked the Department to confirm, in advance, whether his gambling activities would count as the conduct of a "trade or business" for New York State income tax purposes, and how his losses would be treated if so.

The facts were striking. Petitioner bet on horse races 364 days a year, placing over one million individual bets annually through licensed advance-deposit wagering companies, all from his computer servers in Pennsylvania. In 2010 he placed $42,814,683 in bets, generated $45,393,124 in winnings, and netted $1,008,345 in income after expenses. He used his training as a mathematician, together with a colleague's algorithm, to build a statistical model that predicted horses' odds of winning and identified mispriced bets against the odds posted by racetracks. He devoted about 20 hours a week to this work, kept detailed logs of bets, winnings, and losses, and had no other trade or business - this was his sole source of livelihood.

The Department concluded that these facts were sufficient to demonstrate a gambling "trade or business" within the meaning of IRC § 162(a). New York taxable income starts from federal adjusted gross income (Tax Law §§ 611, 612), and federal law allows deductions for the ordinary and necessary expenses of carrying on a trade or business. Applying the U.S. Supreme Court's test from Commissioner v. Groetzinger - continuity and regularity of the activity, undertaken primarily for income or profit - the Department found Petitioner's near-daily, expert, income-driven wagering pattern satisfied that standard, so the same activity carried on in New York would qualify as a trade or business there too.

That conclusion did not mean Petitioner's gambling losses were fully deductible, however. IRC § 165(d) caps wagering-loss deductions at the amount of wagering gains, a limit the Department noted applies equally to professional and casual gamblers alike. And because the trade-or-business finding turned partly on the exclusive, full-time nature of Petitioner's gambling, the Department declined to predict whether the same activity would still qualify as a trade or business if Petitioner also took on full-time outside employment that necessarily cut into his gambling hours.

What this means for you

Professional or high-volume gamblers considering a move to New York

If gambling is your primary livelihood and you pursue it with real continuity, regularity, and a profit motive - as opposed to a hobby or occasional diversion - New York will likely treat it as a trade or business for income tax purposes, following the same federal "trade or business" analysis (IRC § 162(a), Commissioner v. Groetzinger) that applies for federal income tax. That characterization can matter for how ordinary and necessary expenses of the activity are treated, but it does not lift the separate cap on wagering-loss deductions.

Anyone deducting gambling losses

Regardless of whether you are a professional or recreational gambler, IRC § 165(d) - which New York follows through its adoption of federal adjusted gross income - allows wagering losses to be deducted only up to the amount of wagering gains for the year. There is no special exception for gamblers who treat wagering as a full-time business.

Taxpayers who might add outside employment

The Department expressly reserved judgment on what happens if a gambler with a trade-or-business-level operation also takes on other full-time work. Because the "trade or business" finding here depended in part on gambling being conducted at a near full-time level, materially reducing the time devoted to it (for example, to accommodate a new job) could change the analysis - this ruling does not resolve that scenario.

Common questions

Q: Does simply gambling regularly make someone's wagering a "trade or business"?
A: Not automatically. Following Commissioner v. Groetzinger, the Department looked at the taxpayer's actual pattern of activity - continuity, regularity, expertise, time devoted, and profit motive - rather than treating any regular gambler as automatically in a trade or business. "A sporadic activity, a hobby, or an amusement diversion does not qualify."

Q: What specific facts convinced the Department this was a trade or business?
A: Petitioner bet nearly every day of the year, placed over a million bets annually, used a mathematician's statistical model to identify favorable odds, devoted about 20 hours a week to the activity, had no other trade or business, and earned over $1,000,000 in net income from it in 2010.

Q: If gambling is a trade or business, can all gambling losses be deducted against other income?
A: No. IRC § 165(d) limits the deduction of wagering losses to the amount of wagering gains in the same transactions, regardless of whether the gambler is a professional or a casual bettor - a point the Department emphasized was settled by consistent federal case law.

Q: What if Petitioner later takes a full-time outside job while continuing to gamble?
A: The Department could not answer that with certainty. Because the trade-or-business conclusion rested partly on the near full-time nature of the gambling activity, taking on additional full-time employment that reduced the time devoted to gambling might change the characterization.

Q: Does this ruling mean anyone can rely on this exact outcome?
A: No. This is a New York Advisory Opinion binding only as to this specific petitioner and these specific facts; it is informative but not binding precedent for other gamblers with different fact patterns.

Citations and references

• Tax Law § 611 - New York taxable income of a resident individual
• Tax Law § 612 - New York adjusted gross income conforms to federal adjusted gross income
• 26 U.S.C. §§ 61(a)(2), 62(a)(1) - federal gross income and adjusted gross income definitions
• 26 U.S.C. § 162(a) - deduction for ordinary and necessary trade or business expenses
• 26 U.S.C. § 165(d) - wagering losses deductible only to the extent of wagering gains
• Treas. Reg. § 1.183-2 - factors relevant to whether an activity is engaged in for profit
• Commissioner v. Groetzinger, 480 U.S. 23 (1987) - continuity/regularity and profit-motive test for gambling as a trade or business
• Higgins v. Commissioner, 312 U.S. 212 (1941) - trade-or-business determination requires examination of the facts of each case
• Boyd v. United States, 762 F.2d 1369 (9th Cir. 1985); Nitzburg v. Commissioner, 580 F.2d 357 (9th Cir. 1978); Kent v. United States, 185 F.3d 867 (9th Cir. 1999); Valenti v. Commissioner, 68 TCM 838 (Tax Court 1994) - § 165(d)'s wagering-loss cap applies to professional and non-professional gamblers alike

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2012.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a12_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-12(2)I
Income Tax
February 27, 2012

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I110615A

The Department of Taxation and Finance received a petition for Advisory Opinion from
name and address redacted. Petitioner asks whether his gambling activities would be considered
the conduct of a trade or business for New York State income tax purposes. Although Petitioner
currently resides in Pennsylvania, he is considering the relocation to New York and wishes to
ascertain with some certainty the tax treatment of his gambling activities.
We conclude that the facts presented by Petitioner are sufficient to demonstrate the
undertaking of a gambling “trade or business” within the meaning of section 162(a) of the
Internal Revenue Code. Pursuant to section 165(d) of the Internal Revenue Code, Petitioner may
deduct the losses from his wagering transactions only to the extent of the gains from such
transactions. Without facts which are unknown at this time, we are unable to answer with
certainty whether Petitioner’s gambling activities would continue to be considered a “trade or
business” in the event Petitioner secured additional full-time outside employment.
Facts
Petitioner regularly and continuously participates in the placing of pari-mutuel bets on
thoroughbred horse races throughout the United States for the sole purpose of generating a profit
as his sole source of livelihood. Petitioner places his bets into United States pari-mutuel pools
through licensed advance-deposit wagering companies. All bets are placed by Petitioner from
his computer servers in Pennsylvania.
Petitioner places bets on thoroughbred horse races 364 days per year for a total of over
one million individual bets during the year. Petitioner kept a detailed log of his bets, his
winnings and his losses. During 2010, Petitioner placed bets of $42,814,683, which generated
winnings of $45,393,124 and net income of $1,008,345 after deduction for the cost of bets and
other expenses incurred in the operation of the gambling business. Petitioner may in the future
decide to obtain a full-time job while continuing to operate his gambling business. The gambling
business would continue at the same level. Petitioner expects that the income earned from any
such job would be far outweighed by the net income earned from his gambling business, and that
his gambling business would continue to be the primary source of his livelihood. Petitioner has
not historically engaged in any other trade or business.
Petitioner uses his skills as a mathematician to determine the horses on which his bets are
placed. Together with a colleague, Petitioner created a statistical model that predicts the
likelihood of certain horses winning a race. The colleague is paid an agreed upon amount by

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Income Tax
February 27, 2012

Petitioner for the right to use within the statistical model an algorithm created by the other
individual. Using the odds generated by the statistical model, Petitioner compares his predicted
odds to the odds posted by the racing tacks to find mispricings in the markets and places bets
accordingly. This methodology requires intense analysis of each horse in each race and
voluminous betting on a daily basis. Petitioner devotes approximately 20 hours per week to his
gambling activities and need not appear at any racetrack to conduct his activities.
Analysis
The first issue raised is whether Petitioner’s gambling activities, were they to be
undertaken in New York, would rise to the level of a “trade or business” for New York State
income tax purposes.
The New York taxable income of a resident individual is his New York adjusted gross
income less certain deductions and expenses. New York adjusted gross income is federal
adjusted gross income with certain New York modifications. (Tax Law §§611, 612). Federal
adjusted gross income is defined in the Internal Revenue Code as gross income minus certain
deductions. Gross income is defined as gross income derived from business, and allowable
deductions include all ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business. 26 U.S.C §§162(a), 62(a)(1), 61(a)(2).
The issue of whether a gambler who makes wagers solely for his own account, and
engages in other employment, is engaged in a trade or business within the meaning of sections
62(a)(1) or 162(a) of the Internal Revenue Code is not new. In Commissioner v. Groetzinger,
480 U.S. 23 (1987), the Supreme Court acknowledged that this issue has “been around” for a
long time and has not met with consistent treatment in the Tax Court itself or in the Federal
Courts of Appeals. Id. at 32. While recognizing the lack of a helpful consistent standard to
determine the issue, the Court held that resolution of the issue must “require an examination of
the facts in each case.” Id at 36, citing Higgins v. Commissioner, 312 U.S. 212, 217 (1941). In
Groetzinger, the Court identified those salient facts to be as follows: the taxpayer must be
involved in the activity with continuity and regularity, and the taxpayer’s primary purpose for
engaging in the activity must be for income or profit. The Court concluded that if one’s
gambling activity is pursued with continuity and regularity and the primary purpose for engaging
in the activity is for income or profit, it is a trade or business. “A sporadic activity, a hobby, or
an amusement diversion does not qualify.” Id. at 35.
Treasury regulations provide additional guidance on what constitutes activity engaged in
for profit. Regulation §1.183-2 identifies the following relevant factors: the manner in which the
taxpayer carries on the activity, the expertise of the taxpayer or his advisors, the time and effort
expended by the taxpayer in carrying on the activity, the expectation that assets used in activity
may appreciate in value, the success of the taxpayer in carrying on other similar or dissimilar
activities, the taxpayer’s history of income or losses with respect to the activity, the amount of
occasional profits, if any, which are earned, the financial status of the taxpayer and the elements
of personal pleasure or recreation.

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Income Tax
February 27, 2012

Petitioner undertakes his gambling activities with consistent, almost-daily effort.
Petitioner uses his skills as a mathematician to determine the horses on which his bets are placed.
Together with a colleague, Petitioner utilized his expertise to create a statistical model that
predicts the likelihood of certain horses winning a race. Petitioner places bets on thoroughbred
horse races 364 days per year and places over one million individual bets during the year.
Petitioner has not historically engaged in any other profession or business. Petitioner has had
success in his gambling activities, earning a net income in excess of $1,000,000 in 2010.
Petitioner undertakes his gambling activities out of his home (rather than at a racetrack or casino)
where there are likely to be fewer elements of recreation or personal pleasure. Were Petitioner to
undertake these identical activities in New York, he would satisfy the requirements for being
engaged in a ‘trade or business’ for New York State income tax purposes.
Petitioner has also inquired about the nature of the deduction of his gambling losses,
suggesting that he would be entitled to deduct from his gambling winnings all of his gambling
losses and bets and all other ordinary and necessary expenses incurred in carrying on his
gambling activities, including but not limited to the amounts paid to his colleague for the use of
the colleague’s algorithm in Petitioner’s statistical betting model. We do not agree that
Petitioner’s deductions are unlimited. Section 165(d) of the Internal Revenue Code provides that
“losses from wagering transactions shall be allowed only to the extent of the gains from such
transactions.”
Section 165(d) does not distinguish between gambling losses incurred by an occasional
gambler and those incurred by a person who engages in gambling as a livelihood. See Boyd v.
United States, 762 F.2d 1369 (9th Cir. 1985), Nitzburg v. Commissioner, 580 F.2d 357 (9th Cir.
1978). See also Kent v. United States, 185 F.3d 867 (9th Cir. 1999) cert. denied 528 U.S. 1116
(2000); Valenti v. Commissioner, 68 TCM 838 (Tax Court, 1994). These courts have all
consistently held that the prohibition of section 165(d) applies to both professional and nonprofessional gamblers. The Court in Groetzinger likewise acknowledged that the confinement of
gambling loss deductions to the amount of gambling gains closed the door to suspected abuse,
while at the same time noting that “Congress has been realistic enough to recognize that such
losses do exist and do have some effect on income, which is the primary focus of the federal
income tax law.” 480 U.S. at 32. Petitioner’s losses from his wagering transactions shall be
permitted only to the extent of the gains from such transactions.
Finally, Petitioner inquires whether the conclusion regarding the trade or business
analysis would change were Petitioner to secure full-time outside employment. While we are
unable to answer a hypothetical question with certainty, we note that the analysis set forth above
does, in part, turn on the exclusive nature of the gambling activities. If a non-gambling full-time
job were to be undertaken by Petitioner, it is possible that the gambling activities would
by necessity be relegated to less than 20 hours per week, which may then impact the
characterization of these activities.
The facts presented by Petitioner are sufficient to demonstrate the undertaking of a
gambling “trade or business” within the meaning of section 162(a) of the Internal Revenue Code.

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Income Tax
February 27, 2012

Pursuant to section 165(d) of the Internal Revenue Code, Petitioner may deduct the losses from
his wagering transactions only to the extent of the gains from such transactions. Without facts
which are unknown at this time, we are unable to answer with certainty whether Petitioner’s
gambling activities would continue to be considered a “trade or business” in the event Petitioner
secured additional full-time outside employment.

DATED: February 27, 2012

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.