Another Tax Question...

[Zele]

Please, no replies on the morality of paying taxes or exhorations to cheat on taxes.

My question:
If I have won money online, and those winnings stay in my online account until next year, do I pay US tax on them this year or the year that I withdraw the money?

[cardcounter0]

Every one will tell me I'm wrong, but here is the answer.

If you had a winning lottery ticket, and you wait until next year to claim it, You don't have income until that next year. Proven several times in Court.

There is a concept called 'constructive receipt'. It basically means until you have full control over money, (Like cash in hand, or a check you can cash at your bank, or money in a bank account under your full control, etc.) then you don't have income. When you are in control of the funds, it is income.

Since in an online poker account, you have to 'request' a cash-out, then the poker site 'reviews' your request, then it is 'approved', and then you get a wire or check -- you don't have 'constructive reciept' of your winnings until that money hits your netteller account, or is electronically transfered to your bank account, or you get their check in your hand.

Just like if a stock goes up, I don't have income until I sell it. (or cash my lottery ticket, or sell my bond, or my car, or my house.)

[Kurn, son of Mogh]

There exists no paper trail until you cash out.

[Zele]

Thanks for the replies, guys. Much clearer now.

[Wake up CALL]

[ QUOTE ]

Every one will tell me I'm wrong, but here is the answer.



[/ QUOTE ]

That is because you are wrong. Your arguement has been countered on here several times yet you still spout the drivel for other unsuspecting posters. Get you head out and read the IRS guidelines.

[fnurt]

http://forumserver.twoplustwo.com/showthreaded.php?Cat=&Number=901093&page=&view=&sb =5&o=&vc=1

http://forumserver.twoplustwo.com/showflat.php?Cat=&Number=871741&page=&view=&sb=5&o =&vc=1

I really don't understand why you keep running around giving people this bad advice, after a lawyer has explained otherwise. I realize you feel that things -should- be the way you want them to be, but you're just being so irresponsible to the people asking the questions.

[cardcounter0]

Talk to a CPA.

[cardcounter0]

Talk to a CPA. The concept of constructive receipt is a part of GAAP and been proven in Court countless times.

[cardcounter0]

Under Internal Revenue Service rules, a person is deemed to have received funds when there is control over the disposition of money, when the present value of money is specifically set aside for use by the person, or when the funds are available to the person. Funds are not constructively received if something of value must be relinquished to obtain them, if the right to receipt is legally contested, if the obligor is financially insolvent or cannot make payment, or if a valid contract requires that payment be postponed.

Constructive receipt is the tax law doctrine that says that income is taxed to you before it's actually received if it is credited to you, set aside for you, or made available to you so that you can draw on it at any time. However, there is no constructive receipt of income if your control of it is subject to substantial limitations or restrictions. [Treas. Reg. 1.451-2(a)]

Constructive receipt generally occurs when a taxpayer receives "an unqualified vested right to receive immediate payment," Childs, supra, quoting Martin v. Commissioner, 96 T.C. 814 (1991).

>>>>>>
Note: In the case of online poker, you must 'request' a cash out, the cash out is then 'reviewed', the cash out request is then 'approved', and then the funds are transferred.

Look at your user agreement. They will withhold 'your' funds if they detect cheating, collusion, credit card fraud, chip dumping, playing with a bot, etc. The money is not yours, you do not have 'constructive receipt' until AFTER your cash out request is approved.

From the regulation: "However, there is no constructive receipt of income if your control of it is subject to substantial limitations or restrictions."

The poker site imposes restrictions on your money. It must meet its approval process. The Courts have upheld such arrangements as triggering a 'safe harbor' and that constructive receipt has not occured.

>>>>>>>>

A lawyer should know about this, since if they receive money in a settlement for a client into their accounts, they could trigger constructive receipt since they are an agent of their client, even if the money is later put into some kind of annuity and the client actually never gets a lump sum payment -- all the taxes on the money could be due, if the lawyer had control of it in his trust account.

[fnurt]

I know what constructive receipt is. It was like week 1 of law school. But no court has ever decided the issue of how the doctrine of constructive receipt applies to online poker winnings. Any CPA, or lawyer, will tell you that there are a lot of nuances.

If a client calls me up with a question, and I can tell him how courts have decided his issue, I will do so. If no court has ever decided his issue, but I know in theory how it should turn out from reading law books, I will tell him this is how it ought to be in theory, but it might cost him an expensive lawsuit to set the precedent. That's how the real world operates.

I can't disagree with anything you've said about what "constructive receipt" means, but you seem to be 100% convinced that if you were before the Tax Court, they would rule in your favor. As a lawyer, I am saying that I am not 100% convinced, and you should be more cautious about giving this advice to people as though it were gospel.

[B-Man]

If you rely on any tax advice from cardcounter, you are crazy.

[cardcounter0]

True. The courts have probably never ruled on 'constructive receipt' as it applies to paying carpenters that use blue and green poka-dot hammers either.

They have probably never ruled on 'constructive receipt' as it applies to buying pigs that have been painted blue.

They have probably never specifically ruled on 'constructive receipt' on a lot of things.

In fact, in almost any case, there are probably facts and conditions that make it slightly different than any other case.

So I guess any legal advice is worthless on any subject since ultimately a Judge can rule pretty much however he wants to on anything, since their are nuances that make every case unique.

Consult a CPA.

[fnurt]

[ QUOTE ]
True. The courts have probably never ruled on 'constructive receipt' as it applies to paying carpenters that use blue and green poka-dot hammers either.

They have probably never ruled on 'constructive receipt' as it applies to buying pigs that have been painted blue.

They have probably never specifically ruled on 'constructive receipt' on a lot of things.

In fact, in almost any case, there are probably facts and conditions that make it slightly different than any other case.

So I guess any legal advice is worthless on any subject since ultimately a Judge can rule pretty much however he wants to on anything, since their are nuances that make every case unique.

Consult a CPA.

[/ QUOTE ]

I know the law can be frustrating. But that doesn't mean legal advice is worthless. Let me try and explain another way.

The courts have ruled on what happens if you hold a winning lottery ticket (it's not income until you cash it in).

The courts have ruled on what happens if you win poker chips at the casino (the net result of the session is income as soon as you get up from the table, even if you hold onto the chips).

However, the courts have not ruled on what happens if you win money playing poker online. Even though your arguments about constructive receipt are well-taken, I could very easily see a court deciding that winning at online poker is no different than winning at casino poker.

This is a particularly likely result if the taxpayer in question happens to have shifted a huge amount of income from one year to the next by leaving it in his online account. Courts don't like it when they think you're trying to get away with something.

I would point out that constructive receipt is a legal doctrine, not an accounting one. CPAs may or may not be familiar with the legal precedents in this area and believe me, an accountant can give you advice just as nuanced as any lawyer.

[Wahoo91]

I could very easily see a court deciding that winning at online poker is no different than winning at casino poker.

I agree that the argument of not having constructive receipt in the case of online poker winnings is very very weak. Taxpayers clearly have control of their online poker accounts, and can withdraw that money at any time, in the same way that a person has control of a bank account. In fact, I would use the definitions outlined above to argue that it is clear that constructive receipt has occurred.

- Wahoo91, CPA, licensed in the state of Virginia

[cardcounter0]

Umm, yeah. Better read the fine print about cashing out.

>>>>>

From a previous post of yours:

"Also, Tax, what are the penalties for non-reporting gambling income if discovered in an IRS audit? Is it simply taxes owed, plus penalties, plus interest? What would the penalty be for, as an example $2,500 of gambling winnings?

Do online poker site bonuses count as income? I assume it does..."

>>>>>

So a CPA wondering if there are penalities for under-reporting income? Wondering if free money given to you as a bonus is income? I hope you'll understand if I pass on the chance for you to do my taxes.
/images/graemlins/confused.gif

[Wake up CALL]

[ QUOTE ]
True. The courts have probably never ruled on 'constructive receipt' as it applies to paying carpenters that use blue and green poka-dot hammers either.

They have probably never ruled on 'constructive receipt' as it applies to buying pigs that have been painted blue.

They have probably never specifically ruled on 'constructive receipt' on a lot of things.

In fact, in almost any case, there are probably facts and conditions that make it slightly different than any other case.

So I guess any legal advice is worthless on any subject since ultimately a Judge can rule pretty much however he wants to on anything, since their are nuances that make every case unique.

Consult a CPA.

[/ QUOTE ]

Well Mr. Genius, the tax courts have ruled that casino chips are taxable the instant they are in your hands, or on the felt in front of you. The casino restrictions are no more onerous that an online casino withdrawal so it appears obvious that you are still full of hot air and unable to admit when you are wrong.

Also you told us to "ask a CPA" and then when one responds who disagrees with you, what do you do, you blow him off beacause again you have no clue and seem to have a fixation on being correct particularly when incorrect. You must be a woman! /images/graemlins/smile.gif

[cardcounter0]

"the tax courts have ruled that casino chips are taxable the instant they are in your hands, or on the felt in front of you."

Not always, but I will accept B&M casino chips in your hand as constuctive receipt. The reason I say this is the cage you can cash them is always close, you can give the chips to someone else, they can cash them, even times that I have been trespassed from a property, I was still escorted to the cage to cash my chips, many other places will honor casino chips, etc.

But there is a difference between casino chips in front of you and blips in a poker account.

"The casino restrictions are no more onerous that an online casino withdrawal so it appears obvious that you are still full of hot air and unable to admit when you are wrong."

Really? You mean if I'm caught colluding on a poker site, they will still instantly cash my account? If they suspect credit card fraud or money laundering, I will still get my money from an online site instantly? There have never been cases of people having their online accounts frozen? (If you have constructive receipt, which implies you have complete control of your money, not the poker site, how can they freeze your account?) Can I tell the online site to let someone else cash my chips for me? Why do they have a several day approval process for a cash out request if the money is already totally unfettered mine?
/images/graemlins/confused.gif

[Martin Aigner]

Wow, lots of discussions on this topic. But what makes me wonder: Who cares? I mean, if you cash out today, fine, if you cash out next year, fine too, isn´t it? How would internal revenue ever get notice of it? This seems to be more a matter of conscience than of a legal problem. Then again, what do I know?

Jeez, I´m so happy that I don´t have to pay any income taxes (or any other taxes) on my poker winnings. /images/graemlins/smile.gif

Best regards

Martin Aigner

[Wahoo91]

I hope you'll understand if I pass on the chance for you to do my taxes.

LOL, I would pass on that as well. Not all CPA's are tax accountants.

However, I do understand constructive receipt.

[fnurt]

I think if you won a bunch of money on a poker site on December 29, the ruling might very well be that it isn't income until the following tax year. This is along the lines of the lottery ticket case you posted in the other thread.

If the situation is that you won a bunch of money and then left it in your online account for 6-12 months, I doubt a court would buy the argument that you never had constructive receipt of it. Cashing out is not 100% within your control, but you still have the ability to control the timing of withdrawals for the most part, and typically a taxpayer isn't given the option to shift income from one year to the next this freely.