As April approaches, poker forums begin to clog with questions regarding taxes. For people who back other players or who are themselves backed, the questions can be even more complex. In this article, we offer an overview of what poker players, at a minimum, need to know about their tax liabilities.
Please note that this article shouldn’t be construed as professional advice, and that, before you do anything regarding taxes, you should consult a CPA or other tax professional.
If you have never filed income taxes before or are not somewhat familiar with how income taxes work in the U.S., you might find it helpful to review either how stuff works or wikipedia’s version of income taxes. If you know what form 1040 is, know what a W-2 is, and what withholdings are, then you can probably skip that intro.
What poker income is taxable?
If you are required to file taxes (probably 99% of U.S. citizens reading this are), basically all the money you make in poker is taxable. It doesn’t matter if it’s online or live. Live results for tournament wins in excess of $5,000 will be reported to the IRS by the casino putting on the tournament, so the IRS knows about it whether you put it on your taxes or not, but that’s the only difference. Online wins would be more difficult for the IRS to know about if you don’t report them, but in that case you are evading taxes and will be subject to fines, penalties, and even jail.
The myth of withdrawals
There is a myth many online poker players still seem to believe in; that you are supposed to pay taxes on withdrawals. But deposits and withdrawals are not what the IRS is interested in or concerned about. The actual wins and losses are the records you need to keep. This myth probably came about by someone trying to evade their tax burden, thinking that the IRS will have a hard time proving you made money online unless you withdraw it to your bank. While this may be true, it is quite a risk and certainly not advisable.
So if you play a poker tournament on December 31, 2009 and win $300, that $300 is taxable when you file your 2009 income taxes. It does not matter if you leave the money in your account, or even if you lose that money on Jan 1 playing a $300 tournament. The $300 must be reported as income for 2009.
How do I file my income as a poker player?
There is no generic answer. The real answer is to hire an accountant to advise you. However, it’s good to have some knowledge yourself so that you can know what questions to ask your accountant, and what type of questions to expect him to ask you. If he doesn’t seem to be asking you the right questions in order to get your information accurately, then he may not be the right accountant for you.
It’s much like going to the doctor these days. If you have a headache, dizziness, and memory loss, you are going to look up those symptoms on the internet before visiting the doctor so that you know the right questions to ask her or know what questions she should be asking you in order to form a diagnosis. If she just says you don’t have a temperature so you’re healthy, you know she isn’t really providing you with good service and that you need to find a different doctor. The same goes for your accountant. The better armed you are with knowledge, the better he can help you.
The role of the accountant/tax preparer
Their role is to help you make sure you are within the letter of the law as far as the tax code goes, but they are also there to help you find the best ways to use the tax codes to allow yourself the most deductions and pay the least tax possible. The tax codes in the U.S. are ridiculous. At last check it was a 25 volume set encompassing over 67,000 pages. Nobody can know all the nuances, not even an IRS agent. But a good accountant can know of ways you can legally pay less tax than the next guy without having to sweat the IRS, sort of a manipulation of the tax codes to suit you. So a good accountant may often wind up paying for himself and then some by the money he saves you.
Where can you find a good accountant? Well, it’s tough to say, but at least you can have some idea of what questions he should be asking you before finishing your taxes. Ask him what his experience is with gambling income, particularly if poker is most of your living. It may be difficult to find the right accountant for a professional gambler as it has not been a common need in the past.
So where do I report my poker income?
Again, refer to your accountant, who will know more about your specific situation, but in general there are two main ways to file taxes as a gambler.
You need to first figure out if you are a professional or a hobbyist. As a rule of thumb, if you have a job that is the major part of your income then you are more likely a hobbyist. If poker is your main source of income then you are more likely a professional. If you are still a student, you may have more of a choice of how to file. None of this is set in stone, but more of a general guideline.
Filing as a hobbyist/amateur
There are three major issues with filing as a hobbyist
1) You can’t just net the total net profit. You have to report winning sessions separate from losing sessions and you must itemize deductions for those losing sessions. The money made from winning sessions goes onto one line of form 1040 (generally line 21), then you use a spin-off form (Schedule A, itemized deductions) to deduct the losses (Line 40 of 2008 form). This is the same line used for standard deduction, which you aren’t entitled to if you itemize. If you don’t own a home this fact probably costs you money by missing out on the standard deduction. If you own a home then you likely are using itemized deductions anyway so it doesn’t affect you negatively.
2) Your adjusted gross income (AGI) becomes inflated. This is because AGI is calculated at the end of side one of the 1040, after you add in your winning sessions, but before you subtract your losing sessions on schedule A. This makes it seem like you made a lot more money than you actually did, and often means you miss out on certain economic stimulus programs, medicals deductions etc. that have income limitations or stipulations attached to them. Many income limitations for federal programs are based on AGI which will be much higher than the money you actually made if you are a high volume poker player.
3) You cannot deduct for business expenses related to playing poker like a professional can.
While these three issues may all point to the professional having the better of the deal, the negatives associated with the hobbyist way of filing is sometimes more than made up for by the fact that you do not need to pay the self employment tax that the professional must pay.
Filing as a professional
As a professional your accountant will typically file a Schedule C, business income. For professionals, wins and losses can normally be meshed to come up with an overall amount won for the year. Session records still need to be kept, but winning and losing sessions don’t need to be reported separately. After figuring out how much you netted for the year, your accountant will deduct certain business expenses, and only after all that is done will the amount be reported on the 1040 form. This will result in a much lower AGI, and no need for a Schedule A unless you have other itemized deductions like owning a home, so that leaves you eligible for more of the economic stimulus programs and also for the standard deduction amount. Sounds like a good deal and results in a much less “income tax” paid by the professional than the hobbyist. However the professional is hit with “self-employment tax”, which is added to the income tax amount and reported on the 1040. This often results in a higher overall bill for the professional than the hobbyist.
What kind of business deductions can I take?
Ask your accountant. The more he seems to ask about your poker business, the more deductions he is likely to be able to find. Often parts or all of the expenses for books, training sites, internet, computer, space in the home used for work, travel expenses etc. can be deducted. There are literally hundreds of possibilities and this is where an accountant can really earn his salary for you and be worth more than you pay him. If he is willing to take a long time asking you questions about your poker business, it is in your best interest to tell him as much as you can. Ask him about anything you spent any money on throughout the year. Also, remember to keep receipts.
If you wind up paying a high amount of taxes at the end of the year, the government generally requires you to file estimated quarterly statements. There are exceptions but in general anyone who can reasonably expect to pay $1,000 or more in taxes should be filing these estimated quarterlies. There isn’t much paperwork associated with them; basically it’s just a form telling the government how much money you are sending them. The government requires this basically because they don’t want to wait till April 15 the next year for the money. Quarterly statements estimate what you expect to pay for the upcoming year and you send a quarter of that amount in every 3 months. For instance if you pay $4000 in tax liability one year and can reasonably expect to pay somewhere in that range again the next year, you would generally be required to file quarterly statements and send $1000 in every 3 months. When you go to file your next year’s taxes, you will deduct the amount you sent in on the quarterlies from the amount you must send in at that time. If you sent in too much, you’ll be entitled to get a refund. Again, this is very general so speak to your accountant about your particular situation.
Session records to keep
Keep a record of each session played including date, place, table, and amount won/lost. As far as what constitutes a session, this is about as clear as the government’s definition of “illegal internet gambling” on UIGEA. In other words it’s not clear.
One thing is your record of sessions won’t generally be seen by the IRS unless you are audited. If you use a reasonable method it will likely be accepted. Poker accountant Russ Fox (listen to interview here) suggests for cash players that a reasonable definition of a session is from the time you sit down to play until the time you get up, whether it’s online or live. See his article on sessions here.
For tournaments however, it’s more of a grey area. Russ Fox suggests that every tournament is an individual session, even online. This means the win from a $12 SNG must be reported as one session and the loss from an $11 MTT a different session, even when you are multi-tabling and there is some overlap in the timing played.
One thing the IRS is very clear on is that these session records must be kept contemporaneously. In other words, you can’t go back and figure them out later. You are technically supposed to write them down at the time they incur. If you keep them online in excel you should have them printed out. Also it may be possible to use some of the tracking software to keep these records and then you write down the results, but you should know that the language of the code is that they be kept contemporaneously. The IRS does not accept computer files, everything must be hand written or at least printed out.
Perhaps the more amazing thing is that these records are likely never to be seen by anyone except you. You aren’t required to send them in, and likely will only need them in the case of a tax audit. As far as how long you need to keep these records, again tax codes aren’t the clearest so consult your accountant, but generally the answers you’ll find in research is anywhere from 3 to 7 years. See “how long am I required to keep records of my tax deductions” here.
Am I at risk of going to jail?
According to Tax This, An Insider’s Guide to Standing up to the IRS, Scott Estill, says “The IRS has the very difficult task of trying to uphold the federal tax laws by encouraging the highest degree of voluntary compliance with the tax laws and regulations. Their mission is to ‘provide America’s tax payers top-quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all’”
In other words you aren’t going to be sent to jail over a reasonable interpretation of what constitutes a session, or a reasonable interpretation of a deduction. The IRS is mostly interested in money. So as long as you aren’t evading taxes by “forgetting” to report that 20k win in WCOOP, you are probably at no risk of being sent to jail. However, if you are audited and have made certain deductions that they determine are disallowed, or your tax increases due to their definition of a session, you will have to pay the difference plus interest, and usually a penalty as well.
Also, if an IRS agent comes to audit you, the agent may well have as little experience in auditing a professional poker player as you have experience being audited. And even he doesn’t know all of the tax code nuances. Also you may find the IRS is more willing to estimate and negotiate a settlement than you may think if you are armed with a defense that could put up an honest fight. Unless we’re talking about millions of dollars, they are more likely to negotiate with you and move on to the next guy if you seem to have your records in order. So if you arm yourself with a tax attorney in the event you get audited, likely you won’t have too much to sweat.
The one caveat is we’re talking about mistakes of interpretation or honestly mistaken omission. We’re not talking about forgetting that you made $50k on Pokerstars last year. If you have a $30k a year job and two Porsches in the driveway you’ll have to explain that, and likely won’t find the IRS as forgiving.
Does the proposed regulation of online gambling affect my taxes?
There is sometimes confusion when we hear the recent talk of regulation of online poker. The “tax” they talk about there is basically a fee that will be charged to the sites, which could be a licensing fee or a fee per deposit. But it has nothing to do with income tax.
As a separate issue it’s possible the government may ask the regulated sites to provide them with information about individuals and how much they win, but this wouldn’t change the tax you are liable for at all, it would only change the fact that the income is being reported to the government by the site and make it more difficult for tax evaders to skip out on their share of the tax burden.
Is staking also reported?
It’s income, so yes it should be. Once again, your accountant should be able to help you with this. Most likely he’ll advise to file a schedule C for this, particularly if you are doing any decent amount of staking volume. He may advise to do separate schedule C for playing and staking. Or if you are filing as a hobbyist for playing, he might advise a schedule C as a staking business. In this way, it is possible a hobbyist can deduct some expenses that he couldn’t earlier.
What about setting up a corporation?
This depends on many different factors of your poker income, business, life, etc. Consult your accountant.
State income taxes
As far as states go, the codes vary widely. In many cases they will be pretty straight forward. The most important nuance, however, is that in several states, gambling losses are not deductible. That means if you are living in one of those states and file as a hobbyist, you could be in for a very large state income tax bill. Consult your accountant for further information on this. Some of the states to be concerned about are listed in Russ Fox’s blog March 1.
So what happens when I win a live tournament?
For the most part, there is no difference whether you win money live or online. Both are income, both are taxable the same way. The only difference is if you win money in a live tournament in excess of $5,000 (actually must be $5,000 more than the entry fee) then the casino will issue you a W-2G form, which is the form for gambling winnings. This form is issued by the casino and contains your social security number on it, and a copy is sent to the government. However, the casino does not actually withhold any money from you. They are simply following regulations by reporting that you won that amount in a poker tournament.
The real difference is that the government knows to expect that you will claim this amount as income, whereas when you win an online tournament nobody is reporting that information to them so they do not know to expect it. For instance, say you only played 2 tournaments all year, one online and one live and after the buy in is deducted you profited $10,000 in each. Along with your tax forms you would submit a copy of the W-2G which shows the $10,000 profit from live but you would claim $20,000 total as gambling income on line 21 (assuming you are filing recreationally). While you could omit the online result and the IRS might not find out about it, you are evading taxes which is a criminal offense and are taking a major risk. You could not, however, omit both and get away with it as the IRS will realize they have a W-2G under your name sent to them by the casino and yet you make no claim of it on your taxes. They would know very quickly.
Running BAPs and taxes
The standard was set originally on PTP at taking 25% tax from live BAPs for taxes. Likely it comes from page 3 of instructions for W2G:
You must withhold federal income tax from the winnings if the winnings minus the wager exceed $5,000. Withhold 25% of the proceeds. This is regular gambling withholding.
This is the instructions to casinos telling them how to handle gambling wins. It means that the casino must keep 25% of the money and send that money to the IRS instead of giving it to you when you win more than $5000. However this is overridden by later instructions on page 4 that are specific to poker:
4. Poker Tournaments
File Form W-2G for each person to whom you pay more than $5,000 in winnings, reduced by the amount of the wager or buy-in, from each poker tournament you
have sponsored. Winnings and losses of the participant from other poker tournaments you have sponsored during the year are not taken into account in arriving at the $5,000 amount.
Withholding and backup withholding. If you file Form W-2G for the person to whom you pay more than $5,000 in net winnings from a poker tournament, and provide a copy of Form W-2G to such person, regular gambling withholding does apply to such winnings
This basically overrides the general gambling policy of 25% withholding and means that as long as you provide your social security number then the casino does not actually need to keep the 25% to send to the IRS. Instead they withhold nothing, and just file the W-2G form. It then becomes the player’s issue as to his end of year tax liability. The actual amount you need to pay at the end of the year will vary greatly depending on many factors such as how much other money you make, whether you file as a pro or not, if you own a house, yearly medical costs, a dozens of other factors.
A lot of people ask about this and think it is a magical answer for backers. Most casinos won’t issue these forms and it’s easy to see why. According to the instructions for w2g/5754 published by the IRS, 5754 should be filed by the casino “when the person receiving gambling winnings subject to reporting or withholding is not the actual winner or is a member of a group of two or more people sharing the winnings, such as by sharing the same winning ticket.”
Obviously this is open to interpretation, and certainly it’s possible that the staking we do on PTP may not be interpreted to fall under this category. Also, you would clearly need the Social Security #s of the people when you collect the winnings, not at some time afterwards. And it seems likely that the casino would have to verify this info, in other words these backers would need to be present to provide identification at the time. So it’s probably understandable why Harrah’s/others won’t file these.
BAPs and taxes: What’s fair for backers?
Realistically anyone doing any substantial backing should be filing taxes at the end of the year on his profit as a backing business. If he makes money from a player and that player takes taxes from the winnings, the backer would wind up being double taxed unless that player is providing some sort of legal documented proof that the tax had been paid that the backer could send in with his tax forms. As to what would constitutes that proof, I wasn’t able to find any appropriate form the IRS issues for this type of activity (not sure a 1099 would work), though one may exist. A signed letter isn’t going to do it, nor is a link to a web site or your BAP ad. The IRS does not deal with computer files or links; they’d want to see the appropriate form. Either way, it’s probably less hassle for the player to keep the appropriate records that he sent the money to the backers pre-taxed than it would be to prove he paid the tax on the backer’s behalf.
Withholding of 25% seems pretty absurd for a player especially if he is running multiple live BAPs. As a for instance, say a player runs a live BAP and profits 100k, and withholds 25k for taxes. The rest of the year he loses 90k in the rest of his BAPs. He can show the IRS documented proof that he won 100k and lost 90k, so his tax liability end of the year will be based upon that 10k profit, so in essence he has collected 250% for taxes.
The real truth is with backers changing and the horses tax liabilities being subject to so many variables, there is no way to keep an appropriate amount for taxes, as you will never know what amount that is till the end of the year.
The only fair way really is to send money to backers in a pre-tax form. In truth, horses do this all the time when they win on the internet. Winning live is no different. Again, the only difference is that the casino files a W-2G form for the total amount won.
How do I protect myself as a player when I get a W-2G?
The casino says you won 20k in a tournament, but in truth you were backed and sent 10k to backers. This is where you absolutely must have an accountant. He will be able to make sure your ass is covered. He will advise you what you need from each backer. Likely you will need personal information from them including name, address, and social security number. When dealing with foreign backers, again it’s messy and your accountant will advise you best. Theoretically we should be doing this for every BAP or stake we run, be it live or online, though clearly that is pretty impractical.
As long as backers are willing to provide this info and to help with the cost of the accountant’s time, there is really no need to ever withhold taxes from a win whether it is online or live. If they can’t, or if it is too inconvenient for them, then it seems appropriate that you withhold tax from their share of the winnings.
The world of poker and the world of taxes don’t mix well. The world of staking and the world of taxes is ten times worse. When you are dealing with record keeping, wins, makeup payments etc. it seems nearly impossible to get everything correct. Again, this is why you hire an accountant to advise you and keep you abreast of what records you need to keep for your particular situation.