As Ed Miller and others pointed out on this thread, anyone who is considering filing as a professional gambler should discuss this with their tax professional. Here are some
general answers to your questions:
- To file as a professional, the IRS believes (and has argued this position in court) that you must be a
full-time gambler. If you are working at a job, and you also file a Schedule C as a professional gambler, there's a strong likelihood that the IRS will challenge you.
- You must include all of your income on your US tax return, be it from illegal sources, overseas income, etc. One client tried to convince me that because his gambling was on overseas sites and that he hadn't repatriated the money, it wasn't taxable. Wrong.
- Even a professional gambler who has a losing year can't use a tax-loss carryforward for his business (gambling). Courts have ruled that the Tax Code prohibits this.
- Keep a logbook for your live play. If you don't, and you're audited, you
will lose all your gambling loss deductions that have no other back-up.
- Whoever said that the IRS can't share information with other law enforcement agencies is plain wrong. If you voluntarily disclose that you're (for example) a drug runner, the IRS absolutely can tell the FBI or the DEA. The prohibition is when you involuntarily disclose such information to the IRS. Be careful for what you put down as your profession on your tax return. There's a famous case of a bookmaker putting down his occupation as "bookmaker." The IRS told the FBI, and he ended up in jail and lost his appeal.
If you want to read more about the rules for online gamblers, I wrote a series about this on my tax blog at
http://www.taxabletalk.com/posts/1123805977.shtml
-- Russ Fox, EA
The Tax Code is anything but fair to gamblers.