You are a new tax staff at H CPA Firm. You have been asked to draft a tax memorandum for one of the firms new clients, Ms. Rachel Ross. Ms. Ross has a number of unique tax issues this year. The partner at H CPA, your boss, has requested a detailed memorandum outlining the relevant facts, proper tax treatment and applicable tax law.

Ms. Ross is unavailable to answer any clarifying questions regarding the facts described below. If assumptions are required in reaching your conclusion, please highlight those in the memorandum to the partner.

Facts

In late 2018, Ms. Ross found herself unemployed and pondering her purpose. With the encouragement of a few friends, Ms. Ross decided to celebrate the start of 2019 in Las Vegas (perhaps a short vacation would help her sort out next steps). While she had never been a gambler, Ms. Ross did quite well at the poker table, accumulating winnings of $5,500 over a three-day weekend. Perhaps she should be a professional poker player! Ms. Ross decided to stay in Las Vegas, she said goodbye to her friends and found a short-term apartment rental ($300 per week) just down the street from the casinos. Ms. Ross spent $1,000 on books, videos, and on-line courses on how to play poker to win. Ms. Ross also hired a Vegas street mime to help her perfect her poker face (cost $1,000). She started entering poker tournaments and went to the casinos daily to refine her poker skills.

Ms. Ross views herself as a professional poker player; she would like to treat her poker activities as a business for tax purposes, although she has no idea of the ramifications of that choice. She tracked her net winnings/losses on a daily basis and in the 45 days that she was living in Las Vegas (excluding her initial $5,500 of winnings from the New Years weekend gambling with her friends) she had the following winnings/losses:

# of Days	Net Winnings/(Losses) per day	Total
5	(1,000)	(5,000)
3	(5,000)	(15,000)
4	(600)	(2,400)
4	Broke even (0)	(0)
10	2,000	20,000
12	500	6,000
6	1,000	6,000
1	700,000	700,000
45 days total		709,600

In addition, she paid $12,000 in entry fees for a few major poker tournaments. Having won a major poker tournament (the $700,000 of winnings in one day, noted above), Ms. Ross decided it was time to return to Illinois.

Back in Illinois, Ms. Ross wanted to invest her poker winnings. In early March 2019, she purchased two duplexes (i.e. 4 residential rental units) for $400,000. She also purchased $200,000 in bitcoin.

For the duplexes, Ms. Ross spent a month preparing the units for rent (i.e., cleaning, painting, maintenance, improvements). She incurred $1,000 in supply costs (paint, cleaning supplies, etc.) and $5,000 in costs related to fixtures (lighting, doors, window treatments, etc.). On April 1st she rented the first two units. Each tenant signed a one-year lease (April 1, 2019 March 31, 2020) with monthly rent payments of $1,000. On May 1st she rented the second two units. Each tenant signed a one-year lease (May 1, 2019 April 30, 2020) with monthly rent payments of $1,500. After the units were rented, Ms. Ross logged 80 hours and $4,000 in supplies for routine maintenance on the units. Ms. Ross also paid $15,000 in 2019 for insurance on the rental units.

Ms. Ross bitcoin has doubled in value to $400,000. However, she did not trade or sell any of her bitcoin during 2019.

Questions you should address:

1. How should Ms. Ross gambling activity be taxed? As a business or a recreational activity?

2. How much taxable income does Ms. Ross have related to her rental real estate business? And is that business eligible for a QBI deduction?

3. How much, if any, taxable income does Ms. Ross have related to her ownership of bitcoin?