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Revisiting an old tax law chestnut: hobby loss

One of the old chestnuts of tax law is the "hobby loss" rule.

When a taxpayer claims deduction for expenses on an endeavor that has been losing money, are those legitimate business expenses that should be deductible? Or are they expenses for a hobby and therefore not deductible?

It can be a fine line to distinguish between legitimate business expenses and hobby losses. We discussed this longstanding issue in our January 15 post in 2012.

In today's post, we will revisit the issue in a rather indirect way. We will discuss the gambling debts of the high-profile golfer John Daly in the context of "hobby loss."

Daly has acknowledged that he has lost tens of millions dollars from gambling over the years. He recently commented, however, that preparing annual tax returns helped him to quantify the scale of these losses.

For taxpayers who itemize their deductions, gambling losses can be included among the deductions – at least for casual gamblers.

But what about someone like Daly, who regularly wagered big money and also occasionally had gambling winnings?

Could he be considered a professional gambler for tax purposes?

The answer is probably not. The well-established legal test, established in a 1987 Supreme Court case, is that a professional activity is one “pursued full time, in good faith, and with regularity, to the production of income for a livelihood.”

Daley may have gambled with regularity. But despite his occasional winnings, he never really did so “to the production of income for a livelihood.”

His livelihood was golf. Gambling was a hobby loss.

Source: Forbes, "John Daly Relied on Tax Records To Figure $90 Million Gambling Losses," Kelly Phillips Erb, June 2, 2014

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