Tax Memorandum Ian Smith is a part-time talk show host earning wages of $100,000

Question

Tax Memorandum

Ian Smith is a part-time talk show host earning wages of $100,000 annually. Mr. Smith is also a professional poker player, whose gambling activities rise to the level of a trade or business. In over 50 days of gambling in 2010, Mr. Smith generated $102,000 in slot poker winnings and concurrently lost $116,000 at the poker tables. Mr. Smith kept meticulous records of his gains, losses, and expenses. Besides the $102,000 in gambling winnings and $116,000 in wagering losses, Mr. Smith also incurred $3,000 in gambling business expenses that included supplies, travel and telephone costs. These expenses were ordinary and necessary expenses that directly related to his gambling business.

What is the tax treatment of Mr. Smith's gambling activities? Please support your answer with relevant Substantial Authority and state how and where the income, if taxable, will be reported on the taxpayer's tax return.

Explanation / Answer

As per Section 115BB of the Income Tax Act the current rate of Income Tax on poker winnings or winnings from any such card games etc. is 30%. However there is education and higher education cess payable on the taxable amount and hence the total effective amount of tax payable is 30.90%. There is no expenditure is allowed in respect of income of slot pocker winnings. As per Section 194B of the Income Tax Act, on any winnings above Rs. 10,000/- it is the responsibility of persons organising or managing the event to deduct 30.90% tax before releasing the winnings. Therefore Mr. Smith incurred $ 3000 in gambling business expenditure is not allowed as expenditure .

Since taxable income is $102,000 reported on his return of Income.

Therefore Mr. Smith Tax Liability is $ 31,518.

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