One of the most vexing things for the layman is the difference between a hobby loss and a business loss. Because the US taxes all income earned worldwide, it makes no difference whether you earn money in a hobby or in a business: it’s taxable. (Of course, the deductions available differ for businesses, but that’s another story.)
There have been numerous Tax Court cases regarding hobby losses. Most of the time, these “hobby losses” are just that—taxpayers are attempting to deduct their losses in their (for example) basketweaving business. One such case is Morrisey v. Commissioner (T.C. Summary 2005-86), where the Tax Court ruled that the petitioner conducted his drag racing for a profit, not as a hobby.
Today, though, we look at a case where the petitioner desired that his activity was a hobby, not a business. Joseph Hachem, of Melbourne, Australia, won the main event at the World Series of Poker this past July in Las Vegas. He won $7.5 million. The IRS immediately took $2.25 million, leaving the Aussie with $5.25 million. (There is no tax treaty between the United States and Australia. Under the US Tax Code, if a non-US citizen wins certain gambling prizes, 30% of the winnings must be withheld.)
And then it was the Australian Tax Office’s turn at Mr. Hachem. Australian tax law is different from that of the United States; gambling is not taxable down under for the non-professional. But professional gamblers are taxed on their winnings. So was Mr. Hachem, who has since become a professional poker player, a professional gambler or was he still a mortgage broker? If he were a professional, he would lose about 35% of his winnings, or just over 3.5 million Australian Dollars.
The Australian Tax Office ruled today that Mr. Hachem was still a mortgage broker when he won the World Series. So he’ll get to keep his $5.25 million (7,171,000 Australian Dollars). As his attorney, Peter Donovan, said, “…[The] fact that you excel at a particular hobby should not be fatal for tax purposes.”