Almost a month and a half has passed since the Department of Justice seized the U.S. internet domains of three major offshore online gambling companies. To date, only one of the three “Poker Companies,” PokerStars, has been returning to U.S. customers funds frozen upon the seizures. Earlier today, we learned that the first Full Tilt account belonging to the site’s co-founder was unfrozen by the DOJ. Absent from that news, however, was an update on when, if at all, Full Tilt customer’s funds will be returned. There has been little to no rumblings from the other company, Absolute Poker, since it reached an agreement with the DOJ.
Suppose at some point either Full Tilt or Absolute Poker declares it will *not* return player funds. Although the news would be extremely unfortunate for many, the Internal Revenue Code may lessen the blow incurred via the casualty loss.
Section 165(c)(3) allows a taxpayer to take a deduction for a loss arising from a “fire, storm, shipwreck, or other casualty” incurred with respect to property that is not used in a trade or business. Losses incurred with respect to property used in a trade or business, such as in the trade or business of gambling, are deductible under (c)(1) or (2), do not require a casualty, and may be reported on Schedule C. (Note that there may be significant tax reasons, beyond the scope of this post, why a loss to property used in a trade or business caused by a casualty should be treated as such.)
So what is a casualty? Neither the Internal Revenue Code nor the regulations define “casualty,” so it’s up to the IRS and the courts to decide. “Casualty” has been defined by the IRS as “the damage, destruction, or loss from property resulting from an identifiable event that is sudden, unexpected, or unusual.” A straightforward example of a casualty is a home permanently destroyed by the tornado recently ripping through the small town of Joplin, Missouri. My deepest sympathies to all those impacted.
As far as I know, the issue of whether permanently frozen online poker funds may qualify as a casualty loss under the Internal Revenue Code would be one of first impression. My position would be they do qualify, because of the sudden and unexpected action from the DOJ directly resulting in frozen customer funds. Regarding the “unexpected” component, it’s important to note the U.S. Tax Court has said foreseeability of a casualty does not necessarily prevent taxpayers from deducting the resulting loss. It must be emphasized, however, the casualty loss cannot be claimed until after some announcement is made confirming permanence of customer fund seizure. This hasn’t happened, yet.
To claim a casualty loss, a taxpayer must attach a Form 4684 to the tax return for the year the loss occurred. The recreational gambler completes the personal use property section of Form 4684, and claims the resulting casualty loss as an itemized deduction on line 20 of Schedule A. Note that there is a $100 deductible for casualty losses, and a casualty loss is deductible only to the extent it exceeds 10% of the taxpayer’s adjusted gross income.
As stated earlier, a professional gambler may simply claim the loss on a Schedule C. An alternative may be to claim a casualty loss under the business property section of Form 4684. Ascertaining those tax consequences could get very messy if one considers that course of action, and one certainly should consult a tax professional.
At this point, this discussion is entirely academic. However, with each passing day, the general consensus for the likelihood of players seeing their funds again gradually lessens. At least taxpayers know a deduction may arise in the event the dreaded news becomes a reality.