The tax laws in different countries vary in regards to the treatment of gambling winnings, particularly when it comes to the largely unregulated area of online gambling. Some countries distinguish between what might be considered casual gambling winnings and income gained through professional gambling. Although understandably these are two different things, it is difficult to draw a distinct line between them.
In Canada, tax law defines taxable winnings as “income from a source”. However, there is no clear determinant for establishing when, where and how “income from a source” should be understood.
In terms of the practical application of the law, most people in Canada will never owe tax on their online gambling winnings. Gambling winnings are considered “windfalls” and as such, by law, are exempt from tax.
The ambiguity becomes greater, however, for those who make a decent portion of their living through online gambling, which is often the case with professional poker players. If an individual is able to consistently make a profit from gambling and spend a considerable amount of time doing so, it could easily be claimed that they are running a business, and therefore the winnings are taxable. It has also been claimed that in order for winnings to be taxed there needs to be evidence that they were more than just the result of a lucky streak, but that the gambler has a workable system for minimising risk and optimising their profits.
Reasonable Taxation Expectations
In order to answer the question as to whether or not gambling can be considered a form of income or business, the Canadian Supreme Court has ruled that players must have a reasonable expectation of profit, or the pursuit of profit, to determine whether or not they can deduct losses from a business. If this expectation is met, then taxes must be paid, as losses are being claimed against.
By applying the theory of a player seeking a pursuit of profit, players can be seen as running a business, and any funds they wager are considered an investment. Should the investment end with a loss, then they can use this to offset taxes owed. However when gambling is undertaken as a personal endeavour, the pursuit of profit is harder to prove, and players may be exempt from taxes if they can prove that the gaming they enjoy is purely recreational and just for fun.
Cases in Point
We can learn a lot from players who have challenged the system and have tried to claim losses or avoid taxation.
A case that is of particular interest is that of the Le Blanc brothers who played sports lotteries in Quebec and Ontario, and regularly won large sums of money. The brothers also spent huge sums in their pursuit of winning and developed a program that analysed wagers and negotiated a discount on bulk ticket prices. Understandably, the Canada Revenue Agency treated the Le Blanc brothers’ gambling activities as a business, as it was operating with the sole intention of generating a profit.
In contrast, the case of Steven Cohen went the other way when, in 2011, Cohen wanted to claim his losses from playing Poker. Cohen said he was a full time Poker player, and was thus engaged in the Poker business, participating in tournaments on a regular basis and racking up an impressive 2,500 hours in playing time. The court however ruled that Cohen was not a business entity, saying that there was certainly an element of personal consumption in his gambling habits, and thus a tax deduction on losses was wholly denied.
Guiseppe Tarascio was also denied a tax deduction after he tried to clam his gambling habit had seen him net losses of up to $100,000. The court disallowed Tarascio’s deductions as they said that his gambling was not a business and that he loved the thrill of it, thus negating any proof of him turning a hobby into a business endeavour.
An Open Ended Question
In Canada there is no set framework for analysing the taxability of gambling income or losses, so you can enjoy your favourite casino games online with complete peace of mind. It’s highly doubtful that there are many players who are eligible for taxation, but if you do feel you are heading towards pro status and that gambling is becoming your business, its best to seek professional guidance and see whether or not you qualify for deductions, or if there are any other tax-related implications.