Poker and Taxes....This is why there is so much confusion

[CPA]

I have read several posts on this forum and am taken back by all of the misinformation provided about Poker and Income taxes. This is a very confusing issue, and this is why:

For the average person, gambling income must be reported as income, and losses from gambling must be taken as an itemized deduction. Since many people don't itemize, you do not get the deduction. This is a particularly harsh result.

A common perception on this board is that you must be a professional gambler to offset your gambling income and losses. This is generally done by filing Schedule C (Schedule for your Form 1040).

So why the confusion ?

For one, the concept of carrying on a trade or business as a gambling "professional" is only defined in the courts, not the Internal Revenue Code.

The Supreme Court concluded, in holding that the taxpayer was engaged in the business of gambling, that "to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose in engaging in the activity must be for income or profit." (Groetzinger v. Commissioner).

What does this mean?

I think many people conclude that since you have a day job, you cannot be a poker professional for tax purposes. This line of thinking may be incorrect.

Depending on your facts and circumstances, there is a reasonable position that many of you are a "poker professional for tax purposes." Some of the factors to make this determination include: time spent playing and researching, detailed records kept, etc. (Note: There are several factors)

This distinction is important because, as mentioned earlier, losses can offset income. Furthermore, the debate as to "when does a session end" is null and void....it doesn't matter!!!!

Keep in mind I said "reasonable position" The court case mentioned above was for a full time gambler. No court case has ever ruled (and likely never will) about a professional part time gambler. But the fact is, the concepts explained in the ruling (i.e. if a taxpayer's primary purpose if for profit) is the same whether you are a full time or part time gambler.

The determination of whether you are a tax professional is up to you and your tax accountant. But keep in mind, playing good poker is a skill, and many people on these boards work hard on their game to make money.....This may very well make you a professional for tax purposes !!!!!

[sfwusc]

I agree. What state are you a CPA?

Tax side or audit?

SWUSC

[CPA]

State of Florida, Tax CPA.

[LinusKS]

CPA - I think you summed up the situation nicely, but I'm not sure "it doesn't matter" when you begin and end your sessions.

The IRS - idiotically - says that you're supposed to track your sessions individually (and even record the names and contact info of people who were at your sessions with you((!)).

I do agree the end result is the same no matter how you interpret "session," since at the end of the day it will still come out to wins-minus-losses.

I suspect, though - as a practical matter - the IRS is thankful anytime anyone reports and pays taxes on gambling winings, since they know full well the vast majority of gamblers never report anything.

Plus, they must know if everybody did report everything, it would be a negative number - since the net result of gambling winnings minus gambling losses minus house cut is a negative number.

[CPA]

"I do agree the end result is the same no matter how you interpret "session," since at the end of the day it will still come out to wins-minus-losses."


That is all I meant by "It doesn't matter." In fact, detailed records obviously do matter.

It is amazing how threads ask "when does a session start and end." This concept may be irrelevant to many players.

[kenberman]

[ QUOTE ]
It is amazing how threads ask "when does a session start and end." This concept may be irrelevant to many players.

[/ QUOTE ]

Could you explain why this concept may be irrelevant?

[slickpoppa]

My main problem witht the definition of sessions is that it wildly inflates your income and increases the chances of your tax return looking suspicious. For example, I wouldn't be surprised if the average player making 100,000 has an income of 500,000, minus 400,000 in deductions, which might look kind of suspicious to the IRS. Am I wrong to be concerned about such things?

[CPA]

[ QUOTE ]
[ QUOTE ]
It is amazing how threads ask "when does a session start and end." This concept may be irrelevant to many players.

[/ QUOTE ]

Could you explain why this concept may be irrelevant?

[/ QUOTE ]


Because if you are a professional for tax purposes, you generally would file a Schedule C. You would add up your total income and deduct your total losses for the year.

If you are a casual player and not a "tax professional", then your losses would have to be repoted on Schedule A, the itemized deductions. Many people either don't itemize or have these deductions phased out, so you do not get a benefit for all of your losses.

The "when does a session end" debate is basically trying to determine what portion of your losses go on Schedule A. If you are a professional and file a Schedule C, it doesn't matter when a session ends.

[kenberman]

thanks for the reply.
[ QUOTE ]
If you are a casual player and not a "tax professional", then your losses would have to be repoted on Schedule A, the itemized deductions. Many people either don't itemize or have these deductions phased out, so you do not get a benefit for all of your losses.

[/ QUOTE ]

I am both a casual player, and have itemized deductions (I believe Pokertracker tracks all the neccesary info?). So session start/end would be relevant for me, correct?

[cardspeak]

Thanks, CPA for the post.

I've been wondering about this issue, too. Saying it's "particularly harsh" to have to treat any session win as pure income and all one's session losses as only itemized deductions is an understatement. It's brutal. I wonder how this can be the position of the IRS. It strikes me as malicious. Certainly the IRS can't be that ignorant about how gambling actually works.

One's net win, before expenses, is the only real basis for calling it income. Why don't they just rule that every time you win a hand, that's income? Every time you lose a hand that's a potential itemized deduction that you, of course, have to defend with lots of records and which they can deny as inadequate for no particular reason. Since, in IRS land, one is guilty until proven innocent it would be a nightmare for the audited taxpayer. The only reason they don't require all winning hands be considered income is it's impractical, but the principle is the same.

How are players, especially on-line, dealing with this? The evidence of your transactions are all flowing through your bank. What is your true net win rate if you have to pay taxes as if you never lose?

Frankly, this whole issue pisses me off. Even the excellent input you provide, CPA, about how one could have a wider basis for claiming they are a poker professional, still puts one in the uncomfortable position of not knowing whether the IRS will buy it. If they don't, watch out. Given the bizarre position they take on what is income, I wouldn't expect understanding. They seem to be taking a breathtakingly obtuse position simply to bleed people.


Has anyone on this forum ever had to defend themselves with the IRS? What was your actual experience? I wonder if there aren't thousands of poker players who will be getting a very rude surprise sometime in the next 5 years when the IRS finally gets around to auditing them. I hope I'm not one of them.

[CPA]

[ QUOTE ]
thanks for the reply.
[ QUOTE ]
If you are a casual player and not a "tax professional", then your losses would have to be repoted on Schedule A, the itemized deductions. Many people either don't itemize or have these deductions phased out, so you do not get a benefit for all of your losses.

[/ QUOTE ]

I am both a casual player, and have itemized deductions (I believe Pokertracker tracks all the neccesary info?). So session start/end would be relevant for me, correct?

[/ QUOTE ]


Correct. Pokertracker gives you everything you need.

[pokerrookie]

So while I may pay extra taxes, is it correct that I can report my yearly winnings as if it truely was one single session? Just add it to my income and be done with it?

[Kellon]

I checked Sched. A the other day and it appeared to me that gambling losses are not phased out (limited) depending on your AGI, like many of the other deductions. I think the instructions stated specifically that the full amount of losses, up to the amount of reported winnings, were deductable. My recollection, anyway.

[CPA]

[ QUOTE ]
I checked Sched. A the other day and it appeared to me that gambling losses are not phased out (limited) depending on your AGI, like many of the other deductions. I think the instructions stated specifically that the full amount of losses, up to the amount of reported winnings, were deductable. My recollection, anyway.

[/ QUOTE ]

You are correct, high income taxpayers do not have to worry about gambling losses being phased out.

[broiler]

Your recollection is correct that gambling losses are specifically excepted from the phaseout rules. The main problem is that the increase in AGI from reporting your gambling winnings correctly can cause a large phaseout of your other itemized deductions.

For those with tax credits, the increase in AGI can also eliminate most tax credits when compared to people of the same income level. I would also caution that some colleges look at AGI over taxable income in their calculation of financial aid.

[2ndGoat]

[ QUOTE ]
[ QUOTE ]
I checked Sched. A the other day and it appeared to me that gambling losses are not phased out (limited) depending on your AGI, like many of the other deductions. I think the instructions stated specifically that the full amount of losses, up to the amount of reported winnings, were deductable. My recollection, anyway.

[/ QUOTE ]

You are correct, high income taxpayers do not have to worry about gambling losses being phased out.

[/ QUOTE ]

Does this include AMT considerations?

2nd

BTW thanks for kicking up this thread, CPA.

[junkmail3]

Let's assume a few things:

1. I am not a professional gambler.
2. I'm married.
3. I won $20000 in 2004.
4. I lost $15000 in 2004.

If I don't really have any other deductions, does this mean I get screwed big time?

Let's assume I have $1000 of deductions so I would just opt for the standard deduction. Now, because of poker, I lose that $9500 deduction, because I have to say that I lost $15000 gambling, esentially robbing me of $9500 in deductions.

Is this correct thinking? I'm just trying to get a sense of how screwed I'm getting.

[CPA]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I checked Sched. A the other day and it appeared to me that gambling losses are not phased out (limited) depending on your AGI, like many of the other deductions. I think the instructions stated specifically that the full amount of losses, up to the amount of reported winnings, were deductable. My recollection, anyway.

[/ QUOTE ]

You are correct, high income taxpayers do not have to worry about gambling losses being phased out.

[/ QUOTE ]

Does this include AMT considerations?

2nd

BTW thanks for kicking up this thread, CPA.

[/ QUOTE ]

Good question about AMT....but if we start talking AMT and exclusion items, people will lose interest in this thread in a hurry. If you have a specific question, PM me and maybe I can answer it.

[droolie]

I have a couple questions....

I filed my taxes already and included my net gambling winnings as income on my taxes. I did not claim any losses.

I know that this is not what the IRS wants. They want itemized session info with winning sessions on one side of the docket and losing sessions on the other side of the docket. This was impossible for me to supply as I did not anticipate winning as much money as I won when I started out. I got pokertracker about 50,000 hands into my poker playing career and have no records of my play prior to that purchase. I have also played on sites that pokertracker does not support from which I have no data of sessions.

Here is what I have though... I can access and clearly show every deposit and withdrawal to and from my bank account to every poker account and neteller account I have been associated with. I have many sessions in pokertracker but not all of them. I can clearly show that my net winnings are indeed what I reported them to be. This included all bonuses I received as a result of my play and all monies in my poker account at the end of the day on 12-31-04. If audited I'm prepared to show them all of this info and explain that poker is all just one long session. I think I have acted in good faith. What is the likely outcome? I always assumed I would have to get a lawyer and would prevail in court if it went that far. What is the worst case scenario if I'm audited? Would my situation improve if I started keeping a journal of all my sessions starting today (the day I realized my recordkeeping was not sufficient?) and could show them that I was making an effort to comply with their silly rules?

[CPA]

A couple of things for everybody to remember about IRS Auditors:

1. Some are smart, some are not so smart.
2. Most are nice and reasonable, some are out to stick it to you.

As such, it is really hard to answer the question "what will happen if I get audited." A reasonable auditor may accept what you are doing.

If you act in good faith, you will not be subject to penalties or go to jail or anything like that.

The one question I can answer is that your situation would improve if you kept detailed records.

[moondogg]

[ QUOTE ]
If you act in good faith, you will not be subject to penalties or go to jail or anything like that.


[/ QUOTE ]

True, you won't go to jail get stiffed with those massive penalties if you are not intentionally evading your taxes, but isn't there still some pretty hard penalities charged against inadvertantly "under-reported" income?

[CPA]

You are thinking of a substantial understatement of tax penalty. This is a 20% penalty if your tax liability is misstated by 10% (or something like that).

However, this penalty does not apply if your tax position is based on substantial authority.

I would guess that the supreme court case referenced above is substantial authority for this purpose.

[Dave H.]

Junkmail wrote:

[ QUOTE ]
Let's assume a few things:

1. I am not a professional gambler.
2. I'm married.
3. I won $20000 in 2004.
4. I lost $15000 in 2004.

If I don't really have any other deductions, does this mean I get screwed big time?

Let's assume I have $1000 of deductions so I would just opt for the standard deduction. Now, because of poker, I lose that $9500 deduction, because I have to say that I lost $15000 gambling, esentially robbing me of $9500 in deductions.

Is this correct thinking? I'm just trying to get a sense of how screwed I'm getting.



[/ QUOTE ]

Let's just add one more assumption if no one minds:
ASSUMING NO POKER, junkmail's income was $25,000.

So, WITHOUT POKER, his AGI would be $25,000. His exemptions (assuming 1 for himself and 1 for his wife) would be $3,100 each or $6200 total. That brings him down to $18,800 taxable income. Then he takes standard deduction of $9,500 bringing his taxable income down to $9,300

WITH POKER, his AGI becomes $25,000 + $20,000 = $40,000.
He still gets the $6,200 exemption bringing his taxable to $33,800. But now he can no longer use the standard deduction of $9,500 unless he doesn't want to declare his gambling losses, so he files a Schedule A showing $15,000 as gambling losses.

This reduces his taxable income to $18,800. This means he is paying taxes on $9,500 more income ($18,800 - $9,300) even though he only netted $4,000 from his poker.

Is this correct??

Thanx so much for pointing this out and for your help!

[sjguppy]

A question on what is considered expense. Can any gambling loss be offset against your winning.

I play craps and use a player card. This records for the casino how much action I am generating. It also shows how much I have bought in for each time I go to a table. Can this be used as a deduction against your poker winnings. Over the course of a day or weekend I might buy chips 5 to 10 times and then cashout multiple times. Can it be argued that the chips you purchased are what you lost. The casino has no record of you ever cashing out. As far as I am concerned I am a terrible player and lose the majority of time. For what I buyin I could easily cover any poker winnings I have.

On the same issue. I haven't tried this yet but if you can offset gambling winnings with any losses, do lottery tickets count. I have thought about just picking up every lottery ticket on the ground when I get gas. This may sound cheap but if you pick up 30 or 40 dollars worth each time you get gas you can offset your winning by a few thousand a year. And you will have the lottery tickets to prove your loss.

[Catt]

CPA - Thanks for this great thread. I pretty much assumed the answers you provided, but nice to hear it from someone who is an accountant.

My question for you: Assume one meets the definition of "professional" for Schedule C purposes. What do you think of listing rake as a business expense on Line 10 ("Commissions and Fees"). If all one's gambling wins/losses were at craps, there is no "fee" for playing -- the house makes money based on the odds offered. But one might argue that rake in a hosted game is in fact a business fee which is required in order to operate one's business as a player. (And rakeback could be an offset to rake expenses, or included in income; bonuses as an offset to rake?)

Thanks for any thoughts.

[richrf]

Hi,

Since I have been through audits, I can relate to you some of my experiences.

1) An audit will usually be automatically flagged by some deductions, but sometimes they are random. I would be very surprised, given the amount of online gambling going on, that the IRS does not automatically audit lots of gambling deductions.

2) When you are flagged, the first thing the IRS will do will send you a standard computerized request for more information. You will either have to compile all of the information yourself (which is going to be one major mess), or have someone else do it for you (which is one major expense).

3) Sometimes one audit will initiate another audit. For example, if you cannot supply appropriate data, the IRS will ask for more data, and in some cases assume that you have incomplete records in many other situations.

4) If the IRS is not satisifed with your response, they will either ask for more information or ask you for an on-site visit. When you go on-site, you better have your tax preparer with you to explain all of the deductions. This will probably cost additional time and money.

5) At the on-site, the IRS agent may ask for additional information or my finalize the return at that point. It all depends upon how it goes.

President Bush has increased the budget for IRS audits. My guess is that this area is going to be one that the IRS will be looking at very closely.

[dgoldsmith]

[ QUOTE ]
My question for you: Assume one meets the definition of "professional" for Schedule C purposes. What do you think of listing rake as a business expense on Line 10 ("Commissions and Fees").

[/ QUOTE ]
Bogus idea. Lets look at a simple example of 1 hand. You sit down with $10 at the poker table. You contribute $5 to the pot which ends up being $28. The house takes a $3 rake reducing the pot to $25 which you win. The end result is you now have $30 dollars.

Under a 'normal' scenario, you simply have a $20 profit.

Under your idea, you would add the $3 rake back into your profit and then deduct it as an expense. So you would have $23 in profit and then $3 in expenses which results in the same $20 profit.

Even if this didn't raise red flags with the IRS, I don't see how this benefits you.

[junkmail3]

[ QUOTE ]
Junkmail wrote:

[ QUOTE ]
Let's assume a few things:

1. I am not a professional gambler.
2. I'm married.
3. I won $20000 in 2004.
4. I lost $15000 in 2004.

If I don't really have any other deductions, does this mean I get screwed big time?

Let's assume I have $1000 of deductions so I would just opt for the standard deduction. Now, because of poker, I lose that $9500 deduction, because I have to say that I lost $15000 gambling, esentially robbing me of $9500 in deductions.

Is this correct thinking? I'm just trying to get a sense of how screwed I'm getting.



[/ QUOTE ]

Let's just add one more assumption if no one minds:
ASSUMING NO POKER, junkmail's income was $25,000.

So, WITHOUT POKER, his AGI would be $25,000. His exemptions (assuming 1 for himself and 1 for his wife) would be $3,100 each or $6200 total. That brings him down to $18,800 taxable income. Then he takes standard deduction of $9,500 bringing his taxable income down to $9,300

WITH POKER, his AGI becomes $25,000 + $20,000 = $40,000.
He still gets the $6,200 exemption bringing his taxable to $33,800. But now he can no longer use the standard deduction of $9,500 unless he doesn't want to declare his gambling losses, so he files a Schedule A showing $15,000 as gambling losses.

This reduces his taxable income to $18,800. This means he is paying taxes on $9,500 more income ($18,800 - $9,300) even though he only netted $4,000 from his poker.

Is this correct??

Thanx so much for pointing this out and for your help!

[/ QUOTE ]

Thank you for stating my question in much better words. I look forward to any informed reply.

[Catt]

Not a bogus idea, a legitimate question.

What I missed in thinking about it was that my profit statistics show only net winnings (minus the rake), so in order to do what I questioned doing, I would need to report gross winnings (without the rake).

So, with that pointed out to me, does this mean that rakeback is unquestionably income? And bonus payments, too (even though bonus payments are not tied explicitly to rake)?

[kutuz_off]

Is there an amount such that if my net poker winnings for the year are under it, I don't have to report them?

[broiler]

Your calculations are correct, but I look at the standard deduction differently. A person taking the standard deduction gets the benefit of deductions that were never paid. That is where you lose in the scenario. I look at the standard deduction as a floor, which is why I see it differently.

[OldLearner]

[ QUOTE ]
A couple of things for everybody to remember about IRS Auditors:

1. Some are smart, some are not so smart.
2. Most are nice and reasonable, some are out to stick it to you.

As such, it is really hard to answer the question "what will happen if I get audited." A reasonable auditor may accept what you are doing.


[/ QUOTE ]

I live in Canada, but we have CRA auditors that are much the same (maybe leaning towards the prickly side more often).

It may be worthwhile to hire an accountant to do your taxes for you if they include gambling earnings/losses.

The tax auditors here are much less likely to tangle with you if you have an accountant. Not sure if it makes a difference with the IRS.

[CPA]

[ QUOTE ]
Junkmail wrote:

[ QUOTE ]
Let's assume a few things:

1. I am not a professional gambler.
2. I'm married.
3. I won $20000 in 2004.
4. I lost $15000 in 2004.

If I don't really have any other deductions, does this mean I get screwed big time?

Let's assume I have $1000 of deductions so I would just opt for the standard deduction. Now, because of poker, I lose that $9500 deduction, because I have to say that I lost $15000 gambling, esentially robbing me of $9500 in deductions.

Is this correct thinking? I'm just trying to get a sense of how screwed I'm getting.



[/ QUOTE ]

Let's just add one more assumption if no one minds:
ASSUMING NO POKER, junkmail's income was $25,000.

So, WITHOUT POKER, his AGI would be $25,000. His exemptions (assuming 1 for himself and 1 for his wife) would be $3,100 each or $6200 total. That brings him down to $18,800 taxable income. Then he takes standard deduction of $9,500 bringing his taxable income down to $9,300

WITH POKER, his AGI becomes $25,000 + $20,000 = $40,000.
He still gets the $6,200 exemption bringing his taxable to $33,800. But now he can no longer use the standard deduction of $9,500 unless he doesn't want to declare his gambling losses, so he files a Schedule A showing $15,000 as gambling losses.

This reduces his taxable income to $18,800. This means he is paying taxes on $9,500 more income ($18,800 - $9,300) even though he only netted $4,000 from his poker.

Is this correct??

Thanx so much for pointing this out and for your help!

[/ QUOTE ]


As broiler already stated, this calculation is correct.

[CPA]

[ QUOTE ]



President Bush has increased the budget for IRS audits. My guess is that this area is going to be one that the IRS will be looking at very closely.

[/ QUOTE ]

Even though the budget for IRS audits has increased, this is going to impact corporations much more than individuals. For example, an audit from a decent size corporation could result in $1 million tax assessment. In contrast, the IRS could audit every single one of us and not get to $1 million.

This gambling issue is very small in the grand scheme of things, so I don't think it will be a focus.

[CPA]

[ QUOTE ]
Is there an amount such that if my net poker winnings for the year are under it, I don't have to report them?

[/ QUOTE ]

Unfortunatly, you have to report any amount of income.

[SomethingClever]

[ QUOTE ]
But now he can no longer use the standard deduction of $9,500 unless he doesn't want to declare his gambling losses, so he files a Schedule A showing $15,000 as gambling losses.


[/ QUOTE ]

Riddle me this:

If I'm doing itemized deductions, I can deduct my gambling losses (against my wins) AND the interest I pay on my home mortgage, right?

[Glenn]

CPA-

Does there ever come a time when you are required to file as a professional? For some people with few deductions besides loses, the self-employment tax basically makes filing as a pro MORE expensive. So does it ever become wrong to file as unemployed with misc. income?

[Kellon]

[ QUOTE ]
Is there an amount such that if my net poker winnings for the year are under it, I don't have to report them?

[/ QUOTE ]

> $.50

[Kellon]

Yes. The fact that you deduct gambling losses doesn't change any of your other itemized deductions if you are already using Sced. A.

[scandal]

Yes, you can deduct both your mortgage interest and your gambling losses. However, once your AGI is above $143,000 you are subject to phase out which reduces the amount of non-exempt deductions (mortgage, etc) you are allowed to claim. The phase out rate is 3% of the amount over $143,000.

[CPA]

[ QUOTE ]
[ QUOTE ]
But now he can no longer use the standard deduction of $9,500 unless he doesn't want to declare his gambling losses, so he files a Schedule A showing $15,000 as gambling losses.


[/ QUOTE ]

Riddle me this:

If I'm doing itemized deductions, I can deduct my gambling losses (against my wins) AND the interest I pay on my home mortgage, right?

[/ QUOTE ]

You are correct. In your situation, it may not make that big of a difference whether you file as a professional or not. (This is a very general statement....it may make a difference for phaseouts, etc., but you get the point)

[dogmeat]

I have never been audited, but I have listed gaming income on my 1040 several times (simply putting the gross win on line 21) with a seperate form showing my numbers. I also filed three years where gaming was my only source of income, once on line 21 and two years with a schedule C where I listed income and deducted expenses. Since I have made more income from poker this past year I am paying quarterly taxes and will continue using schedule C.

FWIW, I have already filed jointly with my wife for 2004 and received our refund from the IRS.

Dogmeat /images/graemlins/spade.gif

[CPA]

[ QUOTE ]
CPA-

Does there ever come a time when you are required to file as a professional? For some people with few deductions besides loses, the self-employment tax basically makes filing as a pro MORE expensive. So does it ever become wrong to file as unemployed with misc. income?

[/ QUOTE ]

Very good question. I believe that you are either a "professional" for tax purposes or not based on your particular facts and circumstances.

You cannot choose which option is will result in less tax.

With that being said, I would have a hard time believing an IRS agent would force gambling income for a non full time player be reported as trade or business income (Schedule C)and therefore subject to self employment taxes.

[Kellon]

You're making the IRS's case.

On the one hand, if you don't go through all of the machinations of keeping track of rake and adding it back in and then taking it out and then adding your rakeback, etc (wow!), but simply let your profit or loss be the difference between what you selected (and reloaded) at the beginning of the session and what you had at the end, rake is already "deducted" from yoursession results and has reduced your profit or increased your loss. If you are paid by an affiliate some amount of your rakeback, that is a return of money that you initially took out of your profit or loss, and I will lay good odds that if the IRS wanted to do so, it could win the argument that it (the rakeback) was income.

On the other hand, if you go to the trouble of accounting separately for rake and rakeback, you will have to declare a gross profit from gambling (excluding rake) and hope that the IRS lets you deduct your rake (minus the amount of your rakeback) as a loss on Sched A. Low EV on that bet.

It would be an interesting question whether a pro could do this on Sched C. I seriously doubt that you get away with it on Sched. A.

For those of you who play in a B&M, you buy a rack when you start and get $$ back when you're done for whatever you have left. I don't foresee any one trying to keep track of rake, bad-beat jackpot, and dealer tokes, all of which are "deducted" from the session results.

[Catt]

[ QUOTE ]
It would be an interesting question whether a pro could do this on Sched C. I seriously doubt that you get away with it on Sched. A.

[/ QUOTE ]

I wasn't being clear -- this would only apply in a case of someone properly filing Sched C on gambling winnings. And I was mistaken in my first query because I overlooked that the winnings I would report have already had the rake subtracted from them (i.e., are net, not gross). I would not go to the trouble of calculating my gross profit (excluding rake) and then separately claim the rake as a business expense.

But: (1) if it is appropriate to report net winnings (i.e., winnings minus rake) on Sched C, or (2) it is also appropriate to report gross winnings and report gross rake, either way seems to me a very tough argument to win with the IRS that rakeback is anything other than taxable income reportable as part of one's gambling profit.

But how about this: a rake rebate represents a discount on the price one has to pay for a product or service and is therefore not taxable income (or a taxable event at all). Just as collecting a $50 rebate from BestBuy when you buy a TV isn't taxable income. I don't think this flies, but I'm willing to bet that there's no case law on it!

And how about bonuses? They are paid regardless of rake collected. I suspect they too would be considered taxable income by the IRS and I wouldn't wager that one wins that argument very easily. On the other hand, how are the different from "cash back" credit cards or airline frequent flier miles (didn't the IRS take a position in a revenue ruling that FF miles were taxable, but then reversed itself when Congress threatened to get involved?)

[CPA]

[ QUOTE ]
On the other hand, how are the different from "cash back" credit cards or airline frequent flier miles (

[/ QUOTE ]

One reason it is different is because you are not in the trade or business of flying.

[Kellon]

One thing to keep in mind -- Assuming for the moment that you only had income from gambling, you pay self employment tax of .124 (12.4%) on your net income up to $84, 900 (that was the max for TY 2003), or $10,528. As a pro filing Sched C, however, you get to deduct all kinds of expenses that you can't deduct if your gambling is a "hobby." This might include all of those wonderful 2+2 books, mileage, etc. if you travel to a B&M, maybe your home office, DSL, cable, computer, bank fees, whatever. Is it possible for a pro to run up over $10.5 large over the course of a year, even if most of his/her gambling is done on line? If it is, it might be well worth it to pay the SE tax.

If you're a "part time" pro, you maybe having FICA tax taken out of your other pay checks, so you might pay considerably less SE tax on your gambling income. Your gambling winnings could be taxed at a rate of only .029 (2.9%). This computation is handled on Sched SE. Thus, you may need way less expenses to meet the amount of SE tax, making the filing of Sched C an even higher +EV.

[MicroBob]

CPA -

Great thread.
My Dad does my taxes for me as he is very knowledgeable and I know virtually nothing (although now know a little bit more from Walter Lewis' Gamblers Guide to Taxes....and now this very informative thread).


My Dad is not a CPA but aced the HR Block course and actually worked for them part-time one tax-season even though he's retired...just because he was looking for something to do.

Anyway...we've been discussing how to go about my taxes for my first year as a professional gambler.
I have had no other employment but online-poker (and a little B&M poker) since April.


[ QUOTE ]
Very good question. I believe that you are either a "professional" for tax purposes or not based on your particular facts and circumstances.

You cannot choose which option is will result in less tax.

[/ QUOTE ]


My Dad might have been misinformed on this.
We had hopes of getting around the self-employment and SS and other stuff on sched C (but are still more likely to file it this way because I'm a bit gun-shy about testing them by filing as a casual gambler).



I asked my Dad if the IRS would notice that I am obviously a professional gambler and shouldn't be filing as a casual gambler. I mean...I have to show that I'm getting income from somewhere, right??


My Dad told me that he and my Mom (they are divorced) both earn income on their investments (and file estimated quarterly-taxes, etc) even though neither have been employed for several years...with the exception of my Dad's brief fun-run filing other people's taxes.


So.....it is obviously possible to generate income even though you're unemployed.


But you seem to be stating that the IRS would definitely not like it if I was very obviously "employed" (as a full-time professional gambler) and tried to 'get away with' saying that I'm not REALLY employed...I just happen to recreationally gamble 40+ hours per week.



I know you have already addressed this issue in your previous response but i would certainly appreciate it if you could elaborate on this idea a bit further....just to confirm for me that filing as a casual-gambler in my situation might be a really bad idea.


Thanks again for your thoughts on this matter.
Completely agree that almost every thread on this topic has been full of complete and total nonsense and misinformation.


To that end....thank you for making such a detailed subject-line about this. If you had just typed 'poker and taxes' I probably wouldn't have bothered opening it since so many of those threads are worthless.

You clearly indicated in the subject-line that this thread would be more informative.

[Shoe]

I have a hypothetical question regarding bonuses. Say I earned $500 in bonuses at party poker over the course of a year. What if Party poker sent me an email stating the $500 in bonuses was their gift to me? Would it then count as a gift and not be taxable? Or does the gift thing only count for person to person gifts up to 12k?

Note: I am reporting my bonuses as income.

[Kellon]

[ QUOTE ]
[ QUOTE ]
On the other hand, how are the different from "cash back" credit cards or airline frequent flier miles (

[/ QUOTE ]

One reason it is different is because you are not in the trade or business of flying.

[/ QUOTE ]

CPA--

In a different thread earlier today, I presented the issue regarding cashback on a credit card, such as the Discover card program. I don't see why this isn't virtually identical to the credit you get on a poker site based on the number of raked hands you play, which results in a bump in the number of hands you can play. Unlike the rakeback issue, I think we have a bone fide argument that deposit bonuses are not, in themselves, taxable, although any $$ won using them to play would be.

What do you think?

[Glenn]

" Is it possible for a pro to run up over $10.5 large over the course of a year, even if most of his/her gambling is done on line?"

The problem is it's a deduction, not a credit. So you need ~30k in deductions on 100k of income to compensate for this. Unless you are a traveling tourney pro, I would think it near impossible to get that much in (legit) dedcutions. It definitely mitigates the SE tax, but I never understood the clamor to be declared a professional. It is also much easier to file as a non-pro. Everything is a grey area with those deductions, and you HAVE to get a CPA or lawyer to help you, as opposed to using tax cut 200x.

Oh, btw, thanks for your reply, I don't mean to argue...

[BottlesOf]

This is an interesting post, but as you admit, not very helpful.

[CPA]

MicroBob,

Based on what you are saying, you appear to be the epitome of a professional gambler. (The purpose of my post was to bring to light that people on these forums should maybe think as themselves as a professional player even though they have a day job.)

I think the biggest risk you run by not filing a Schedule C is the self employment tax issue.

Also, the analogy to investment income really isn't very applicable. Investment income is passive income, while your gambling income obviously is not.

Hope this helps. PM me if you have a more detailed question.

[CPA]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
On the other hand, how are the different from "cash back" credit cards or airline frequent flier miles (

[/ QUOTE ]

One reason it is different is because you are not in the trade or business of flying.

[/ QUOTE ]

CPA--

In a different thread earlier today, I presented the issue regarding cashback on a credit card, such as the Discover card program. I don't see why this isn't virtually identical to the credit you get on a poker site based on the number of raked hands you play, which results in a bump in the number of hands you can play. Unlike the rakeback issue, I think we have a bone fide argument that deposit bonuses are not, in themselves, taxable, although any $$ won using them to play would be.

What do you think?

[/ QUOTE ]

In general, income is taxable unless specifically excluded in the code.

It is clear to me that the bonus and rakeback issue are taxable if you consider yourself a professional.

Frankly, I have not looked for any exclusions in the code for the nonprofessional (and I certainly have not read any in this forum.). Maybe this is a project for tomorrow.

[MicroBob]

Thanks CPA -
I have copied and forwarded many of the questions and your responses to my Dad (including your response to my questions).

If my Dad comes up with anything more that he would like to ask I'll forward it to you. But it looks to me like I really don't have much flexibility on this issue.
I'm obviously a professional and thus need to be filing a sched-C.

[tribefan9]

I think there is a lot of wiggle room in having the choice to not file as a professional gambler for people like Microbob.
You have to keep in mind that we are not following tax rules specifically for poker players with positive expectation, we are following tax rules for gamblers.
If he were to file as a casual gambler his return would look exactly like the tax return of someone who bought a lot of lottery tickets over the course of the year (gambling losses) and happened to get lucky once or twice (gambling income). I don't think the IRS could force this person to consider themselves a professional gambler since they probably did not expect to make a profit and can not reasonably expect the income to continue.
I think he could avoid the self employment taxes by stating he got lucky while pursuing his hobby.

[Kellon]

[ QUOTE ]
In general, income is taxable unless specifically excluded in the code.

[/ QUOTE ]

Agreed. But, is it so clear that it's "income"? As an example, a "gift" is not "income" to the giftee, is it? Would you say that the Discover cashback bonus is income? I doubt there is anything in the code or regs on this, although there could be something in a letter ruling, I suppose.

I go back and forth on the question of whether a deposit bonus is "earned" in the classic sense, even though we do have to perform a certain act to actually get it. In the end, it's not so clear, imo.

[Catt]

[ QUOTE ]
It is clear to me that the bonus and rakeback issue are taxable if you consider yourself a professional.

Frankly, I have not looked for any exclusions in the code for the nonprofessional (and I certainly have not read any in this forum.). Maybe this is a project for tomorrow.

[/ QUOTE ]

Thanks again for your views on these issues.

[Vern]

I decided to take bonuses as other income since it was not given outright, but contingent on some act or performance by me. Since this really is just a hobby, my bonus was a large enough percentage of my overall winnings that if audited I would have a hard time explaining the extra money in my account, but now I have declared it as other income.

Vern

[broiler]

The only thing I would like to note is the difference between investments and poker income. Investment income is easily tracked through 1099s provided by broker/company holding stock.

My personal experience (same as CPA's, but state of NY) is that the IRS gets real touchy with any income on the other income line. If you have a substantial part of your income there, I would say that the IRS may want to know why you aren't self-employed.

[CPA]

I am getting several PM'sn regarding if people are "professionals" or not.

Below is a list of factors (Profit Motive factors determining if you have a trade or business) that the IRS may consider. No one factor is more important than another. And if you fail one factor, that doesn't mean you are not a professional.

Like so many other areas of tax law, this is gray and debatable. That is why the determination is up to you and your tax accountant.

The factors that indicate the likelihood of a profit motive. Words like "large" and "substantial" are relative:


• abandoning activity when inability to generate profit ascertained;

• annual increases in net income from activity;

• devoting effort to the activity;

• devoting significant amounts of time to the activity;

• devoting substantial money to the activity;

• exercising care in carrying on the activity;

• expectation of large profits if activity successful;

• generation of profits;

• having or developing expertise with respect to the activity;

• investigating the profit potential of the activity;

• maintaining detailed records;

• operating the activity in a businesslike manner;

• previous profitable operation of similar activity;

• relative significance of the expected amount of profits when compared to other sources not generating substantial income;

[djcolts]

Let's say someone has a Roth IRA, and contributes to it monthly or bi-monthly. He has a full-time job that makes, say, 65K. However, he has recently discovered poker as of last year, and especially bonus chasing (poker and casino).

So, he becomes pretty good at it, and makes 50K in wins and 25K in losses in 2005. Well, this would be 115K in AGI, and this would effect the Roth IRA as it would be phased out. How does one handle this situation when he has contributed on a consistent basis to the Roth IRA for the full 3K when in fact he would be phased out?

[MicroBob]

Good list.

To boil it down...from what I gather from this list as well as from the book Gamblers Guide to Taxes....if you are putting in 20-30 hours (completely arbitrary number that was decided by me) to online-poker per week and are treating it like a 2nd job...including trying to make a profit at it and keeping accurate records then you can probably count yourself as a 'professional gambler' for tax purposes.


If you are the type who plays for 3 hours on Saturday and 3 hours on Sunday and doesn't really play much during the week (hey...some jobs will completery exhaust the best of us) then filing as a pro would probably not be a good idea.



Showing a profit is not mandatory to considering yourself a pro.....but I suspect it is helpful when trying to justify yourself to the IRS.


you would want to be able to say something like:
"look...I've shown a profit at this almost every week I've played. Here are my records to show that. I wouldn't even be doing it if I weren't profitable at it. I'm consistently around $300/wk for my 20 hours of online-poker play and have been treating it like a second job ever since I started."

Having a poker-database like pokertracker and/or statking indicates how seriously you are taking it.

If you can say something like this then I suspect you would be in good shape filing as a 'pro'.


CPA can correct me if my boiled-down version is incorrect.
Obviously he knows what he's talking about....and I'm only barely knowledgeable on this issue.

[broiler]

The first thing to do is to call the place that you have your Roth IRA at and explain the situation. They should be able to distribute your contributions back to you. If you get a 1099-R for the distribution, it should be marked with the code for "Excess contributions..." I don't remember the code off of the top of my head, but there is one. It really isn't that big of a problem since your Roth isn't tax deductible. A much bigger problem occurs when people overcontribute to their tax deductible plans.

[MicroBob]

I forwarded some of the interesting posts to my Dad (including my question and CPA's response).

He doesn't have any questions per-se....but I thought I would post his thoughts in case CPA and others were interested.

The case that he is referring to is the one with the slot-machine lady that i think cubs-win posted a few weeks ago.


----------------------------------


Bob--I read the emails with the CPA narrative. He certainly seems knowledgeable but some of his conclusions do not agree with the gambling tax book. The issue of how to define a session is indeed confusing especially internet poker is definitely problematic. No doubt the IRS previous rulings were based on gambling other than internet poker. So that one will probably ultimately get tested with the IRS. However, as CPA indicates if one files as a professional gambler the issue of session is probably irrelevant.

The issue of whether one is a professional or casual gambler has not been adequately addressed by the IRS. The case that I recall dealt with a lady who wanted to claim losses on Sch C which is not legal for gambling so that was not a good test. The gambling book seemed to think that the professional vs casual issue could be self-defined. CPA may be right here in that the Feds would obviously benefit from the professional status since the gambler would owe about 15% in self-employment taxes in addition to the regular income tax.

Based on our phone conversation I still think that it would be to your overall advantage to file as a professional even though you would potentially owe more taxes due to the self-employment taxes. I think this approach is less likely to trigger audits especially if you claim losses as part of itemized deductions.

In view of the tremendous increase in on-line poker and other forms of gambling it is likely that there will be further rulings by the IRS and perhaps ultimately the courts on the above issues.

All for now.

[broiler]

I would also add to this that your retirement planning options are much greater if you file as a professional. You have no earned income when you treat your gambling income as other income. Filing as a professional would allow you to set up one of many different retirement plans that would put a decent dent into your tax liability.

[Scuba Chuck]

CPA, I appreciate your time on this subject.

On a related note. It is my understanding we must claim bank accounts in foriegn countries if the balance is greater than $10,000

http://www.onlinepokerfaq.com/guide/tax-fbar-90221.html

If this is true, then is Party Poker, Neteller, and the likes all statements that we need to be claiming on our tax returns?

[broiler]

If I remember the instructions from the form, you have to report if any account was above $10,000 during the year. There is a box to check for "other", which is vague but I would include various poker accounts in the definition of other. The rules state that the report is for any account in which you have a financial interest. I would include your various gambling accounts in their definition.

There were 2 new exceptions to the rules that came out in the last tax act. One of the exceptions related to not reporting as long as you claimed all of the income that went through the accounts. I remember thinking that it might be possible to not report the accounts if you were properly accounting for the income. With the vague nature of online poker income treatment from the IRS, I would not recommend using the exception to not report the account. All you would need is the IRS to start digging through your records and next thing you know they are asking questions about offshore accounts. From personal experience, I can tell you the next sentence out of their mouth will relate to money laundering.

[sofere]

First of all, thank you CPA for your posts...most informative.

Two things that I don't feel were emphasized enough though:

(1) In order to distinguish poker as a business instead of a hobby, one must show a track record of profitablity. I believe the convention is that you must be profitable for 3 of 5 years. This means that if you have not been playing poker for at least three years, you may not be eligible to file as a professional gambler.

(2) Gambling activity must be done with the expectation of making income to support yourself. Note that a professional gambler may have another source of earned income, but a significant source must come from gambling

Please correct me if I am misinformed.

Useful links...
Am I a pro? (http://www.cardplayer.com/poker_magazine/archives/showarticle.php?a_id=13166&m_id=59)

Commissioner v. Groetzinger (Supreme Court Ruling) (http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&court=US&case=/us/480/23.html)

[YoureToast]

I've read that one of the advantages of filing as a professional is that you can create a SEP IRA account? Can you describe how this works, what the limitations are and how they are affected if your primary source of income is a "day job"? thanks.

[CPA]

[ QUOTE ]



Bob--I read the emails with the CPA narrative. He certainly seems knowledgeable but some of his conclusions do not agree with the gambling tax book. The issue of how to define a session is indeed confusing especially internet poker is definitely problematic. No doubt the IRS previous rulings were based on gambling other than internet poker. So that one will probably ultimately get tested with the IRS. However, as CPA indicates if one files as a professional gambler the issue of session is probably irrelevant.

The issue of whether one is a professional or casual gambler has not been adequately addressed by the IRS. The case that I recall dealt with a lady who wanted to claim losses on Sch C which is not legal for gambling so that was not a good test. The gambling book seemed to think that the professional vs casual issue could be self-defined. CPA may be right here in that the Feds would obviously benefit from the professional status since the gambler would owe about 15% in self-employment taxes in addition to the regular income tax.

Based on our phone conversation I still think that it would be to your overall advantage to file as a professional even though you would potentially owe more taxes due to the self-employment taxes. I think this approach is less likely to trigger audits especially if you claim losses as part of itemized deductions.

In view of the tremendous increase in on-line poker and other forms of gambling it is likely that there will be further rulings by the IRS and perhaps ultimately the courts on the above issues.

All for now.

[/ QUOTE ]

I agree with almost all of this. Here are a few thoughts:

1. I have tried to be very careful not to make any conclusions on this subject.

2. The IRS may or may not rule on these issues any time soon. Honestly, they have bigger issues to deal with. Therefore, people may conclude that they shouldn't have to wait for the IRS and take a reasonable position that they are a "professional" gambler for tax purposes which could potentially avoid harsh results.

[MicroBob]

[ QUOTE ]
This means that if you have not been playing poker for at least three years, you may not be eligible to file as a professional gambler.

[/ QUOTE ]

I've seen this before but I just don't see how it could be correct.

My situation:
2 years ago I didn't even know how to play poker.
for the past 10 months it has been my sole source of income.
I don't think I could really get-away with NOT filing as a pro even if I wanted to.

[sofere]

As CPA said...you may fail one factor and still be considered a pro. Hence the keyword may.

However, I believe you have to prove to the IRS that poker is more than just a hobby. An extreme example...you only played one poker game in 2004 which was a satellite for $10 and win a seat at WSOP, then win WSOP. Poker may have been your sole source of income for the 2004, but there is no way you'd be considered a professional gambler.

I believe the IRS treats poker similarly to how they treat other hobbies such as coin collecting (except probably more strictly as the government must do what it can not to appear to condone gambling). If you regularly collect coins and sell them on ebay, in order to prove that it wasn't just a hobby, you would have to show a track record of profit. If you had come across a box of 365 very rare coins at a garage sale and sold one per day for a year for $100 each and that was your sole income, I doubt you would be considered a professional coin collector.

However, if you had researched coins for years and scowered the earth to look for these rare coins to sell on ebay, and did so for a few years, you probably would be considered a pro.

[CPA]

[ QUOTE ]
First of all, thank you CPA for your posts...most informative.

Two things that I don't feel were emphasized enough though:

(1) In order to distinguish poker as a business instead of a hobby, one must show a track record of profitablity. I believe the convention is that you must be profitable for 3 of 5 years. This means that if you have not been playing poker for at least three years, you may not be eligible to file as a professional gambler.

(2) Gambling activity must be done with the expectation of making income to support yourself. Note that a professional gambler may have another source of earned income, but a significant source must come from gambling

Please correct me if I am misinformed.

Useful links...
Am I a pro? (http://www.cardplayer.com/poker_magazine/archives/showarticle.php?a_id=13166&m_id=59)

Commissioner v. Groetzinger (Supreme Court Ruling) (http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&court=US&case=/us/480/23.html)

[/ QUOTE ]

1. You are referring to the hobby loss rules. An activity is deemed not be be hobby if you make income in any three of five consecutive tax years. By definition, a hobby is an activity not engaged in for profit.

If you are not making money playing poker, then it certainly would be hard to call that person a professional anyway (see the listing above).

2. I touched on this in my initial post. Remember that during the court case, the concept of a professional gambler was a new concept. People have to be careful when they read the case not to get caught up in the facts, but rather understand the theory and the thought behind the ruling.

[sofere]

[ QUOTE ]
1. You are referring to the hobby loss rules. An activity is deemed not be be hobby if you make income in any three of five consecutive tax years. By definition, a hobby is an activity not engaged in for profit.


[/ QUOTE ]

I thought that three of five years from the website looked familiar. I apologize for not doing due diligence and checking the accuracy of what was stated in the website.

[ QUOTE ]
2. I touched on this in my initial post. Remember that during the court case, the concept of a professional gambler was a new concept. People have to be careful when they read the case not to get caught up in the facts, but rather understand the theory and the thought behind the ruling.

[/ QUOTE ]
So would you say that it the IRS would consider the intent of playing and the effort put forth in improving your profitability more so than your actual profit in relation to other sources of income? Would your hours/week played have much significance.

In addition, if you file as a professional one year, but for tax purposes it would be better for you to file as an amateur...would they allow you to switch? (I think this was touched on a bit before)

[MicroBob]

[ QUOTE ]
So would you say that it the IRS would consider the intent of playing and the effort put forth in improving your profitability more so than your actual profit in relation to other sources of income? Would your hours/week played have much significance.

[/ QUOTE ]


I'm not CPA of course....but this is the impression I got from the book Gamblers Guiude to Taxes by Walter Lewis.
He recounts a case involving a horse-racing handicapper who actually LOST money but since the handicapper was able to show that he put forth significant effort to make it a source of income. 40-50 hours a week scouring over the betting-sheets (or whatever they're called), etc etc.

So....if you are able to show that you are consistently winning and putting forth the hours each week then you are in good shape.
but if you didn't win but it is still obvious that is legitimate attempt at income then I suspect you would be okay.


there was another case where a lady lost a ton in slot-machine play and tried to count it as a deduction as a professional gambler. I think it was determined that she couldn't just decide to be a professional just because she played a few hours per week (and also....she was trying to deduct her gambling-losses from her made income in a floral-shop or something....which is a no-no).


you probably face a slightly tougher battle if you haven't been making money imo. but if you are legitimately making this a 2nd job I bet you'll be okay.



[ QUOTE ]

In addition, if you file as a professional one year, but for tax purposes it would be better for you to file as an amateur...would they allow you to switch? (I think this was touched on a bit before)

[/ QUOTE ]


I've thought about this as well.
It seems to me that doing so could run the risk of setting off some serious warning-bells with the IRS.


If you switch to filing as an amateur you better damn well be able to show that you just aren't taking it as seriously as you did the previous year.


I'd be interested to hear CPA's take on both of these questions of course.


And thanks again to CPA for taking time to come to our little forums and clear up so many misunderstandings.
This is easily the best online-poker-taxes thread we've had on here (that I've bothered reading anyway).

[Scuba Chuck]

If you are a professional gambler, thus filing as a business, you are entitled to use all of the tax code which relates to a business, and includes using a SEP IRA.

Thus you can save up to 25% of your earnings (not to exceed $42,000 for 2005) into subsequent IRA.

I do believe this $42,000 number reflects to the total amount you are saving for retirement though (I could be wrong here, but I don't think so.) So, if you are saving $12,000 in your 401(k) at work, then you would be limited to just $30,000 in a SEP IRA.

[broiler]

If I remember correctly, the slot playing woman was filing 3 schedule C's for different businesses. She ran into the problem of spreading herself too thin to qualify as a professional gambler. It didn't help that she lost money at it, too. Intent and profit motive are what I consider the two most important factors to claim professional status, but everyone would rather have a standard test for clarity. Losing money in your first year puts you in a bad spot to call yourself a professional gambler. The IRS is usually in a "prove it" mode with filing schedule C's that lose money.

I think that the best way to go down to amateur status would be to get a full time job doing something else. Switching back and forth seems like an audit waiting to happen.

I agree with your thought that this has been the best tax thread. I don't know what has kept the troll posts away, but this has been a great discussion. Get a couple of CPA's answering questions for everyone and you really can get a good discussion going.

[moondogg]

Jesus Bob, how much of RBS do you own? /images/graemlins/grin.gif

[Ulysses]

[ QUOTE ]
Let's assume a few things:

1. I am not a professional gambler.
2. I'm married.
3. I won $20000 in 2004.
4. I lost $15000 in 2004.

If I don't really have any other deductions, does this mean I get screwed big time?

Let's assume I have $1000 of deductions so I would just opt for the standard deduction. Now, because of poker, I lose that $9500 deduction, because I have to say that I lost $15000 gambling, esentially robbing me of $9500 in deductions.

Is this correct thinking? I'm just trying to get a sense of how screwed I'm getting.

[/ QUOTE ]

You are the textbook example of the individual that gets royally screwed by the way the IRS requires gambling income to be reported.

It can get even worse. Imagine your situation, except you won $15,000 and lost $20,000. In that case filing by the law, you would report the $15,000 and match it with $15,000 in losses (the max you can deduct to offset) and lose your standard deduction - even though you had a net loss in your gambling.

There are many scenarios like this that really screw over the small-time gambler, especially if he is not a high-income filer otherwise.

[MicroBob]

Well...you had a smiley-face in there so this must be some kind of a joke.

Unfortunately, I don't know what RBS is so I guess I don't get it.

My initial thought is Random Bull-Sh--...in which case I am ALL about RBS.

[moondogg]

[ QUOTE ]
Well...you had a smiley-face in there so this must be some kind of a joke.

Unfortunately, I don't know what RBS is so I guess I don't get it.

My initial thought is Random Bull-Sh--...in which case I am ALL about RBS.

[/ QUOTE ]

RBS Taxes (http://www.rbstaxes.com/), publishers of Tax Guide for Gamblers.

Edit: Just realized that you the book you were referring to is a different one.

[fnord_too]

Fantastic post, thank you!

[2ndGoat]

<<Jesus Bob, how much of RBS do you own?>>

Ownership or not, is a good book... RBS is better than their B.S.!

[DesertCat]

[ QUOTE ]
If you are a professional gambler, thus filing as a business, you are entitled to use all of the tax code which relates to a business, and includes using a SEP IRA.


[/ QUOTE ]

I think this a very important point, so I'll resurrect this thread. Esp. for Bob. By paying self employment tax, you create for yourself the ability to pay less income tax, via contributions to SEP IRA's or self employed 401ks, etc. I'm not a CPA, and don't know your specific situation, but you typically can end up paying less tax overall this way.

In my case, I'm a full time investor. I willingly pay self employment tax on some of my (short term) capital gains, so I can put a similar amount into self employed 401k for myself and my wife. This makes that income free of income tax. Since the income tax rate is higher than the self employment tax, it reduces my overall taxes. And the 401k contributions compound tax free until retirement.

[Matty]

Can someone tell me where in the hell in PokerTracker I can find my gross winnings / losses?

I only made like $4,000 profit playing poker last year, but my tax preparer is telling me that I have to count my winnings and losses by hand and not by session.

This could [censored] me out of financial aid for school.

[witeknite]

Don't worry. It's supposed to be by session. The fuzzy line for us on-line players is wether a session is a solid stretch of multi-tabling, or each sitting at every table. I'm erring on the side of caution and going with every table.

As to your initla question, under the session tab you can export you total list of session out to excel. After that you need to open the file in excel and tabulate your winning sessions and your losing sessions. The easiest way to do that is, in a separate cell put in "=sumif(?:?,">0")" where the ?'s are the letters of the colunms that have the CO_Won field. Also only paste in what is inside the outer quotation marks. For you losing sessions change ">0" to "<0". Hope this helps.

WiteKnite

[Kellon]

Check out this link (http://www.gambling-law-us.com/Articles-Notes/Gambling-Session.htm).

[MicroBob]

get another tax preparer. seriously.


My understanding is that it could be interpreted by each hand (or each bet placed....which I think stemmed from a previous court-decision that involved sports-handicapping or horse-racing).
But it is kind of silly to thing that any judge would hold you to that standard of knowing that you won $25 in one pot (and thus owe taxes on that $25) but did not win the next pot so you don't owe taxes on it.


Try to make a good faith effort to report your taxes accurately and hopefully you will be okay.


I don't go by the 'session' on pokertracker.
I go by daily wins and losses and add it up that way.


As was noted previously in this thread I'm hardly an expert though.



reply to other post - thanks for the thoughts on the 401k. But right now I'm looking at paying a ton in taxes already and will be kind of running short after I pony up the check for a few grand.
I talked with my Dad about it and I suggested that contributing to a 401k is probably not a good idea for me right now since it would mean less money in my roll NOW and that would mean I would have to step back a limit (as I wouldn't feel comfortable playing at the higher limit).
My Dad agreed with me....the parents have made contributions to a couple different retirement funds for me since I was born so i'm not as concerned about the money when I turn 60 as I am about the money right now.

It's a decent idea obviously for those in a different situation...and I will probably consider it in the future (assuming I stay with this poker 'thing'). But if I contribute $2k to a 401k I probably only save $500-$750 in taxes (I'm guessing) meaning I'm left with less total money right now which wouldn't be very good.

[Kellon]

[ QUOTE ]
get another tax preparer. seriously.


[/ QUOTE ]

I didn't want to say this, but I sure thought it, and since you said it, I'll second it. Telling someone to count their winnings by the hand tells me, loud and clear, they haven't a clue about reporting W & L from gambling.

[MicroBob]

I think they probably have 'kind of' a clue since I believe this actually IS how it 'literally' is supposed to be done...even though it's unrealistic and pretty impossible.

Actually...I think it is technically on each individual 'bet placed'. So if you pay the BB...and then raise and re-raise etc are you supposed to pay taxes based on each of those 'bets'?


As has been said on many aspects of the tax-code...it simply makes no sense.


Now...a tax-preparer who INSISTS on doing it that way is just not being terribly flexible nor practical and seems to be following some really bad all-encompassing 'how-to' guide for how to pay one's taxes on gambling winnings.


For the individual who won $4k and is trying to pay taxes on it.
Just go ahead and pay the taxes on the $4k....you will already be in the minority as there are thousands of BJ and poker (and other) players each year who probably win more than that at the live casinos and don't report it at all (for many it's simply because it never occured to them).


Again...I'm hardly one that should be spewing out advice on this stuff...so if anyone really thinks there is a reasonable chance that he can get in trouble for paing his taxes on his $4k this way then go ahead and correct me.

[Kellon]

[ QUOTE ]
I think they probably have 'kind of' a clue since I believe this actually IS how it 'literally' is supposed to be done...even though it's unrealistic and pretty impossible.

Actually...I think it is technically on each individual 'bet placed'. So if you pay the BB...and then raise and re-raise etc are you supposed to pay taxes based on each of those 'bets'?


[/ QUOTE ]

I'm going to have to disagree with you here. There really is no basis for defining "session" as each bet placed or each hand. The best discussion is in the link I provided above. You are not going to report W&L based on each hand or each bet in poker any more than you report your W or L on each spin of the roulette wheel or throw of the dice.

[MicroBob]

Well......I know I have hear that 'each bet' thing somewhere (in regards to blackjack, craps and other games) no matter how unrealistic it is.

I don't remember where I saw/heard it though but I know it wasn't just in one place.

I think it might just be a very literal interpretation of one sentence of the tax-code perhaps.
Something like that. Don't know.

I think it was also referenced in Gambler's Guide to Taxes by Walter Lewis...but again, I don't remember and don't claim to know what the hell I'm talking about on this one.

Either way...whether it's somewhere in there or not I'm hardly going to worry about it and I'm certainly not going to go looking for it just to say 'there it is!!' (especially since it might not be there at all).

you might be right...I don't recall where I heard it.
If I do happen to stumble upon it I'll post it here...but that's not very likely to happen if I'm not trying to find it of course.


It would be nice if the IRS got their act together and made the tax-code actually make sense...but that would be asking for a lot I guess.

[Matty]

Okay, so apparently I'm going to be filing as a professional gambler next year. Does that mean I get to itemize my internet connection, any poker books I buy, a second LCD screen, stuff like that?

And what exactly does itemize mean? I [censored] hate taxes. I had to miss all my classes today just dealing with this [censored] preparer.

[ QUOTE ]
For the individual who won $4k and is trying to pay taxes on it.
Just go ahead and pay the taxes on the $4k....you will already be in the minority as there are thousands of BJ and poker (and other) players each year who probably win more than that at the live casinos and don't report it at all (for many it's simply because it never occured to them).

[/ QUOTE ]I ended up paying taxes on 22k, and itemized 18k. :-/

[Kellon]

[ QUOTE ]
It would be nice if the IRS got their act together and made the tax-code actually make sense...but that would be asking for a lot I guess.

[/ QUOTE ]

The tax code actually does make a lot of sense in this instance if you keep in mind one of the fundamental purposes to which Congress puts the tax code: social engineering. This a rather moralistic society, and getting more so every day it seems. The puritanical principles on which this county was founded and developed say that gambling is a sin, and is bad for you, your family, and society at large. Congress has thus used to tax code to inhibit our interest in gambling to the extent possible, without making it outright illegal. At the least, they don't want to do anything to make it a more attractive means for the citizenry to make money, cuz that would send all of us straight to hell.

[bblock99]

I am a college student and claimed as a dependent by my parents. I pretty much only have a summer job as other means of income. What does this mean for the deductions i can make? I'm under the impression that I can't deduct my tuition even though i pay it because i'm a dependent, is this right?

I only made one $500 withdrawal last year (which was to buy an LCD monitor for poker), what would happen if i don't claim any income from poker and just say that i sold something online for $500 -or- should i just report everything as to try and avoid the possible penalties. I did make like $4000 last year, but didn't really start withdrawing till this year, how does that work? Do you know what effect this will have on getting financial aid? I don't get much already, and don't think that it will have much of an effect because my parents income dwarfs mine, but was posing it as a general question for others.

My fear is that congress will eventually require the poker sites to turn over their records so that the IRS knows exactly how much everyone made and getting audited 5 years down the road.

[kenberman]

[ QUOTE ]
My fear is that congress will eventually require the poker sites to turn over their records so that the IRS knows exactly how much everyone made and getting audited 5 years down the road.

[/ QUOTE ]

There's not too much the US congress can force offshore sites to do.

[rerazor]

People just don't get this. The IRS isn't going to ask the offshore sites for the records, they're going to ask YOU to ask the site.



My fear is that congress will eventually require the poker sites to turn over their records so that the IRS knows exactly how much everyone made and getting audited 5 years down the road.


There's not too much the US congress can force offshore sites to do.

[Kellon]

[ QUOTE ]

People just don't get this. The IRS isn't going to ask the offshore sites for the records, they're going to ask YOU to ask the site.


[/ QUOTE ]

No they're not. This isn't the way it works.

An interesting scenario, though, is what happens if, say, in 5 years North Dakota actually "wins" and opens up Internet poker, and many of the off-shore sites flock to open business in ND. Now they are doing business, legally, w/in the US and are subject to federal reporting laws. Think about that while you're pushing for legalization of online poker.

[chesterp]

so i just started playing poker in sept 04- was only up $2850 in 04. my total difference on deposits/withdrawels to neteller for 04 was +$50. makes me wonder if i should just wait til 05 to declare winnings (planning on sched. c most likely). but instead of neteller totals, i guess i could use pokercharts (and now switching to pokerdominator), as i started with pokercharts from day one. if so, then i do sched. c for 04 already, earning 2850.
i've never done sched. c, but thinking i may do it for my main career, singing (which hasn't seen much income either cause i've been in school). only made 4400 singing in 04. for 05 i expect both poker and singing to bring in around 15,000. so, anyone do schedule c's for 2 completely different careers? just wondering if that is weird or will set of red lights for the IRS to audit me. i could easily just do one (or none) of the two as schedule c. form 2106 (i think that's it) also good for singers as long as i'm under 16,000 or so.
thanks

[Chadt74]

BBlock just a few notes...

1 - your patents claiming you as a dependent has nothing to do with your poker income

2 - As for deductions, the general rule is that unless you own a home your deductions will not be greater than the standard deduction the IRS gives you.

3 - Withdrawals do not matter it is income generations. For example if you start the year with $1,000 in your bank account and $0 in Netteller. In 2004 if you earn $5,000 in gambling winnings and withdrawal $500 of it so your ending balances (assuming no other actions) are $1,500 in bank account and $4,500 in Netteller you need to report $5k if income not $500.

4 - How will it effect your Financial Aid? Well you will have more income, but how that effects your aid depends on the school (state school or not etc) but more income generally = less support but $4k will not hit you too hard.

Grey - to you unless you can prove you use that internet connection and second LCD screen 100% for poker than you can not deduct 100% of them as they can be used for non-business use. The poker books, yes they can be 100% since you are not using them for any reason other than your business (well hopefully you are not that kinky). That is just some general advice.

And what exactly does itemize mean? Certain items can be deducted against your taxable income. An easy example is donations made to qualified charities. The problem is that most people who do not own a house do not have enough of these deductions to equal more than the standard deduction. As a college student you will probably want to take the standard deduction (again in most cases) since your poker books and the percentage of the internet connection will not be greater than the standard deduction; and no you can not take both, it is one or the other.

Kellon, with the amount of rake going offshore I am pushing for the US to keep some of that $$ inhouse even though it might hurt me a little.

For what it is worth I am a CPA in Mass, and read this whole thread as CPA gives good general advice as he is more tax focused than I am.

[Kellon]

[ QUOTE ]
Kellon, with the amount of rake going offshore I am pushing for the US to keep some of that $$ inhouse even though it might hurt me a little.


[/ QUOTE ]

I'm all for it myself. I complete my 1040 strictly and pay my taxes, so I couldn't care less if the US feds get their hooks into the internet gambling sites. But there are lot of folks here who don't, who look for every conceivable fantasy to avoid it, and who suggest that others not bother to decalre their poker winnings, while at the same time "soap boxing" for legalization of on-line gambling in the US. Clear case of "Be careful what you wish for." /images/graemlins/wink.gif

[bblock99]

[ QUOTE ]


3 - Withdrawals do not matter it is income generations. For example if you start the year with $1,000 in your bank account and $0 in Netteller. In 2004 if you earn $5,000 in gambling winnings and withdrawal $500 of it so your ending balances (assuming no other actions) are $1,500 in bank account and $4,500 in Netteller you need to report $5k if income not $500.

4

[/ QUOTE ]

What if my poker money never hits neteller, but stays in my poker account, how would the IRS ever know that i have money in my poker account if they're never going to ask them for records?

[Kellon]

I rest my case.

[bblock99]

I'm just curious as to how all of this works...i plan on putting my poker winnings on my taxes.

[Chadt74]

You are right the chances of the IRS ever knowing is slim esp since you have such little income but as a CPA I can not advise you to 'hide' this income .A $5K increase in your poker account is $5k in income if it is all gambling winnings. And no unless Party Poker (or who ever) provides documentation to the IRS they will have no way of knowing (this is covered in this thread).

Your chances of being audited are slim at best at best but this is more of a questions of responsibility.

[soap box]
The US and your state pay for the roads you use, parks you play sports in, provide police to protect you and helped build the infrastructure so that your computer can reach the servers to play these games. We have one of the lower tax basis in the world (not counting developing nations) and I am all for paying as little tax as possiable, but nothing in life is free and taxes are your way of paying for many of the services you do not even notice.

Taxes are your responsibility as a US citizen and if and how you prepare them is just a reflection on your character as a person.

[end soap box]

[broiler]

I can tell you from an experience of a former tax client referred by an attorney who is now a ward of the Federal government in Florida that there is a clear order of operations for determining offshore income.

The first thing the IRS does after determining that there are transfers offshore is to request the information from that source. Of course, the offshore entity refuses the request for information. The IRS will then ask you to provide documentation for all of the transactions in question.

When you refuse the request to provide documentation, the IRS gets nasty and will attack every number on the return. Instead of an audit, you end up with obstruction and money laundering charges on top of a possible tax fraud charge. The IRS will also be allowed to use a "reasonable method" to determine the amount of income not reported. A reasonable method is the highest income number that a tax court judge will allow. The IRS number will have little basis in reality since they will use the transaction amounts that they know and try to find similar situations to extrapolate a number. The example I'm using is for an individual that the IRS believed had underreported income by $2.5 million from offshore sports betting. The real number since the individual had records was about 1/3 of the IRS guess and he was happy to turn over the records after the fact. He got the money laundering charge taken off and a reduced sentence for tax fraud for his later assistance with the investigation.

In terms of legalized US online gambling, anyone that thinks taxation would not be a part of any agreement is not thinking about the government motivations for such a change. My guess is that any site would have to purchase a license to operate and part of the licensing deal would be reporting requirements.

[Kellon]

With due deference to the two admitted CPAs that have posted extensively in this thread, I would like to make two points. I'm assuming that you are not filing a Sched C as "poker pro."

1. The IRS doesn't care about [Paradise, Stars, FTP, etc.] or Neteller, per se. It just requires you to complete your 1040 and decalre all of your gambling "winnings" according to the Code and regulations. Your "total winnings" must be reported by adding together all of your "winning sessions" (be they at a B&M, on-line, or at a casino overseas) and entering that figure on the "Other Income" line (line 21 on the standard 1040.) Much discussion around here has centered on what is a "session." A good discussion, by someone with some authority, can be found at link (http://www.gambling-law-us.com/Articles-Notes/Gambling-Session.htm). Do this to the best of your ability and in good faith, and it is very unlikely you will have any problems with the IRS or the State revenue folks.

2. I haven't done my own taxes yet this year and it has been a long time since I used the standard deduction, but there is one slim, but possible, chance that a person who has no other itemized deductions might be in a position to use Sched A and itemize, thereby allowing the deduction of "gambling losses." It is possible that whatever your NET winnings are, that they are the net of extensive play and very large total winning sessions and very large total losing sessions. For an active poker player playing mid-limit or higher, the total of the winning sessions could be 5 figures or more, as could the total of the losing sessions. In such a case, even if the NET winnnigs were only, say, $4000, it might be appropriate, in fact definitely would be appropriate, to itemize and deduct the lossses. The threshhold is the amount of the standard deduction compared to the total of the lossing sessions. It might be possible for a student, playing often at night and instead of going to boring classes, could find him or herself in this position.

I hope this helps. But if I'm off-base on any of this, I'm sure someone will correct me.

[Kellon]

[ QUOTE ]
I can tell you from an experience of a former tax client referred by an attorney who is now a ward of the Federal government in Florida

[/ QUOTE ]

Is that the client or the attorney who is the "guest" at the pen? In my experience, it could go either way, especially in FL. /images/graemlins/grin.gif

I agree with everything else you wrote, and hope some of this starts to get through the barriers that some folks try to erect.

[broiler]

Actually, both ended up in jail. The attorney was structuring transactions for his clients with offshore activity. He got a couple of years for his assistance with tax evasion and fraud on top of getting disbarred.

I just happened to be the CPA in the office to prepare the tax return after the fact.

[Kellon]

LOL. The perfect end note! /images/graemlins/laugh.gif