In the United States, the tax law can be boiled down to two sentences: Everything is taxable unless Congress exempts it. Nothing is deductible unless Congress allows it. Gambling winnings are taxed–they are an accession to income. An American professional gambler clearly owes income tax.
However, in many countries like Australia only professional gamblers (those conducting a business) are taxed on their gambling winnings. This came up when Australian Joseph Hachem won the World Series of Poker. He successfully argued that at the time he won he was an amateur gambler and did not have to pay income tax on his winnings.
The law in Canada is not settled in this area. There is a court case from British Columbia that says that professional poker players do not have to pay tax on their winnings. But clarity is likely coming, as the Tax Court of Canada will hear the case of Jonathan Duhamel in March.
Mr. Duhamel won the 2010 World Series of Poker main event earning $8,944,310. Canada’s tax agency, Canada Revenue Agency (CRA), argues that Mr. Duhamel was operating a business; thus, he owes income tax on his net income. CRA argues that Mr. Duhamel hasn’t paid $1,219,114 (Canadian Dollars) in tax from 2010-2012. That’s $934,695 (USD), well worth fighting over.
The case will probably come down to whether or not the business aspect of Mr. Duhamel’s career outweighs the luck that caused him to win specific events. Per an article in The Canadian, CRA believes that because he considers himself a professional poker player, he behaves like a “serious businessman” while playing poker, he has no other primary source of income, and he performs his occupation for 40 to 50 hours per week, he is in business and owes income tax. Mr. Duhamel argues it’s just luck that causes him to win.
The good news for Canadian poker players is that clarity on income taxes is coming (probably next summer). The bad news is that to this observer it appears that CRA is starting with pocket Queens versus Mr. Duhamel’s eight-seven suited.