Online Casino Tax Deduction Question

[jpnadere]

Let me start off by saying I know this has been asked hundreds of times, and the answers seem to change with each discussion. This year, I decided to hop on the online social casino trend, and I did fairly well considering. I redeemed a little over $180,000, however, I made a little over $90,000 in purchases. The biggest issue I am finding, and even my own CPA is uncertain about, is whether or not the IRS considers this as gambling, therefore, allowing for the purchases to be claimed as a deduction. After speaking with my CPA, and doing mounds of research, I am 80% convinced this would be considered gambling and any purchases could be deducted up to the amount I won. The biggest counterargument I have seen is that these purchases could not be deducted as the "casinos" operate under a very grey area and that the SC is gifted to you when you purchase gold coins. I understand this reasoning, but I feel as though the methods these sites use to operate and the IRS tax code should not be considered the same. Additionally, while not explicitly stated, you must pay to enter the SC promotion and play these games. I will do my best to outline my reasons, and would love it if someone, preferably a tax expert or regular social casino player could chime in.

1. Per IRC 165(d): Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. For purposes of the preceding sentence, in the case of taxable years beginning after December 31, 2017, and before January 1, 2026, the term "losses from wagering transactions" includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.

The word I am focusing on in this code is wagering. The IRS considers a wager as something with a prize, chance, and consideration. The biggest factor here is the consideration which from what I understand is the actual money spent on the pull of the lever. These social casinos use games of change, which need a wager placed to be given an unpredicted outcome of winning more SC which is cash. Most of these sites have a disclaimer that reads "NO PURCHASE IS NECESSARY to enter free game promotion." The "free game promotion" would be considered gold coins, and not the sweep coins. The IRS does not allow deductions on "no purchase necessary to win" based on an NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM :CASE-MIS No.: TAM-145576-03, CC: ITA: B01. The memorandum is from 2003 and refers to entering a sweepstakes through means of the radio and calling in for the word of the day. This I understand, the tax paper was stating the postage fees could be deducted, which they could not be. However, things have changed drastically since 2003, and this is not a case of winning a sweepstakes from Better Homes & Garden.

If anyone has any ideas, recommendations, or personal experience, I would greatly appreciate any help. Thanks!

[Opus 17]

I would say, if it looks like a duck and quacks like a duck, it's probably a duck.   This is gambling, in my opinion.  I think the TAM you cite would indicate that money you win from the free "starter" package of tokens is not gambling, but if you are buying more tokens with after-tax money, and you are awarded cash for playing with those tokens, it sounds like gambling.

More importantly, for $90,000 deduction, you need a CPA who will take a position and back you up if you are audited.  If CPA #1 doesn't want to take a position, you may need to go to #2 or #3.  If no CPA will back you up that this is gambling, then either it isn't, and you don't deduct the cost of the tokens, or you stick to the position that it is gambling, and represent yourself if you are audited.  

[jpnadere]

Thank you for the response. I agree with your viewpoint as well. I typically do my own taxes and purchase the audit protection (I'm not sure if that even does anything). It's very frustrating that there is so little information on this topic, and that we have no way of getting the guidance of the IRS until they release a new tax code ruling. You're either wrong and you get screwed by the IRS or you're wrong and pay far more taxes than you need to. I know there are people who have been playing on these sites for far longer than me, and I can almost guarantee their losses, if any have been deducted against their winnings. 

[Mike9241]

I agree with @Opus 17 

the TAM

ISSUE:
Whether winnings from a "no purchase necessary" marketing sweepstakes are gains
from a wagering transaction pursuant to § 165(d)?
2
TAM-145576-03
CONCLUSION:
The taxpayer’s winnings are not gains from a wagering transaction for purposes of
§ 165(d) because the taxpayer did not furnish consideration for the chance to win the
prize.

this is really no different than winning a prize on a game show. 

in your situation it seems you must furnish consideration to win and if you lose an amount is lost.

[jpnadere]

Thanks for the insight Mike. I am considering deducting the losses from only one of the sites I played on which would be around $30,000. That, along with my mortgage interest would put me right around a $50,000 deduction. I would rather pay more in taxes than I need to, than to have the IRS at my door (figuratively speaking).