For the purpose of claiming the Foreign Earned Income Exclusion, the income must be earned in a foreign territory. According to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, earned income includes salaries, wages, commissions, bonuses, tips, and professional fees. It also covers related payments such as vacation pay, sick leave, severance pay, and certain reimbursements and allowances. Conversely, unearned income encompasses annuities, alimony, capital gains, dividends, interest, unemployment benefits, Social Security benefits, and gambling winnings. This raises the question: if gambling is your primary source of income, are your winnings still considered unearned?

Defining “professional gambler” is complex, as each situation is unique. U.S. Tax Courts lack a universal guideline to determine professional gambler status. In IRS Letter Ruling 8235006, dated May 21, 1982, a taxpayer engaged in full-time gambling activities, including card games and sports wagering, followed a daily routine of studying games, playing cards, and placing bets. However, the ruling stated that the taxpayer was not a professional gambler because these activities were not considered a trade or business under Code Section 162(a). This section allows deductions for ordinary and necessary expenses only when carrying on a trade or business.

In the case of Pansy v. Panages, a taxpayer gambled regularly after her regular work hours. The tax court ruled that her gambling was not a trade or business, as it wasn’t her primary means of support. The taxpayer owned a flower shop and a wholesale business that occupied most of her time. The court cited Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), stating that for gambling to be considered a trade or business, it must be “pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and not a mere hobby“. Consequently, the taxpayer couldn’t deduct her gambling losses on Schedule C but might have been able to itemize them on Schedule A.

These cases illustrate the difficulty in defining a professional gambler. Generally, you are considered a professional gambler if you engage in full-time gambling regularly with the primary intention of earning a living. Weekend gambling trips to Las Vegas do not qualify someone as a professional gambler.

A professional gambler reports their earnings on Schedule C as earned income. As someone engaged in the trade or business of gambling, they can deduct losses and business expenses up to the amount of their winnings. Examples of deductible gambling-related expenses include travel, meals and entertainment, interest, telephone and internet costs, vehicle expenses, and other fees.

Professional gamblers living outside the United States may be eligible for the Foreign Earned Income Exclusion if they meet either the physical presence test or the bona fide residence test. However, they will be subject to self-employment taxes unless their country of residence has a totalization agreement with the United States.