When are internet poker earnings taxable income?

[zoomer]

I know you have to pay taxes on poker earnings, but my question is when are those earnings really earnings. You play and win at an online poker site account and the earnings are put into that account when you leave the table. You withdraw the earnings from the poker site account into a neteller account. Then you withdraw earnings fron the neteller account into your local bank account. Right now I'm building up my bankroll so I'm leaving it in the neteller account. My thinking is that until the earnings have been deposited into my local bank account, they are not income. That is where I can get my hands on the earnings. Is this right? Or are they taxable when they are moved into the neteller account? Or are they taxable when they are in the poker site account? Thanks.

[felson]

They are taxable when you drag the pot.

EDIT: well, actually when you stand up from the table. according to most people anyway.

[Greg (FossilMan)]

I doubt the IRS would treat online poker any differently than live poker in this regard. And for live poker, you are supposed to be tracking your results on a session-by-session basis. So, I would say that everytime you finish a session, you have a taxable result. If it's a win, it goes in the win column, and the losses go into the loss column, just like playing in live games.

However, I doubt this issue has been litigated much, if at all, so there is no definitive answer. Plus, I'm not an expert, so if you rely upon my views, you're foolish to do so.

;-)

later, Greg Raymer (FossilMan)

[Yeknom58]

"Plus, I'm not an expert, so if you rely upon my views, you're foolish to do so."

I love disclaimers like this.

I'm thinking once you deposit into the the site that's the start of one long session and once the money leaves the site that's the end of that session...so I'm thinking it's the neteller transactions but I add the same disclaimer as above.

[J.R.]

your disclaimer is very relevant to the advice you gave.

[Yeknom58]

BINGO!!!!

Just a wild guess.

So where is your answer smart guy.

[Thythe]

Everyone always says that you report by a per table/session basis. They all then act high and mighty that they have this knowledge, but my question is do you actually follow through with it? I play pretty often but not full time and I'm sure I have thousands of sessions by this definition. Are you really recording thousands of small wins and deducting thousands of small losses?

[over_c]

I don't know the appropriate legal way, but I can tell you the way I am reporting my internet poker income.

I am reporting only the money that I have withdrawn from internet sites minus money I deposited into them during the year 2004.

[driller]

I think Greg's answer is correct. If you use poker tracker, its easy to export all your sessions to an excel spread sheet, then use an if statement to separate the wins and losses. Remember, you only have to report the total of your winning sessions under miscellaneous income and then subtract the total of your losing sessions (up to the amount of your winnings) on schedule A. What most of you will find, howerver is that if you had a break even or losing year you will pay more taxes than otherwise because your gross income will be higher. It's not fair but it is the law.

[felson]

[ QUOTE ]
I think Greg's answer is correct. If you use poker tracker, its easy to export all your sessions to an excel spread sheet, then use an if statement to separate the wins and losses. Remember, you only have to report the total of your winning sessions under miscellaneous income and then subtract the total of your losing sessions (up to the amount of your winnings) on schedule A. What most of you will find, howerver is that if you had a break even or losing year you will pay more taxes than otherwise because your gross income will be higher. It's not fair but it is the law.

[/ QUOTE ]

[Relentless]

So do all of you actually report your winnings/losses or just saying that is how it works?

[Thythe]

[ QUOTE ]
So do all of you actually report your winnings/losses or just saying that is how it works?

[/ QUOTE ]

My guess is that most people just say that's how it works. I'm sure a lot of people report it, but just the overall number, not wins and then deduct losses. Technically you're supposed to report wins and subtract losses, though.

[DesertCat]

[ QUOTE ]
I think Greg's answer is correct. If you use poker tracker, its easy to export all your sessions to an excel spread sheet, then use an if statement to separate the wins and losses. Remember, you only have to report the total of your winning sessions under miscellaneous income and then subtract the total of your losing sessions (up to the amount of your winnings) on schedule A. What most of you will find, howerver is that if you had a break even or losing year you will pay more taxes than otherwise because your gross income will be higher. It's not fair but it is the law.

[/ QUOTE ]

I'm reporting as a professional player, so all this goes on schedule C, along with expenses such as travel, internet access, computers, etc. This means you don't have to report on a session by session basis either and it doesn't artificially pump up your AGI. I can do this because I made a profit from, and devoted significant time to playing poker.

My tax advisor is comfortable with this, but I recommend consulting your own, as I am an idiot, and my tax advisor may be one too.

[AceHigh]

[ QUOTE ]
My tax advisor is comfortable with this, but I recommend consulting your own, as I am an idiot, and my tax advisor may be one too.

[/ QUOTE ]

I've talked with an accountant about this and he basically agrees. You don't need to track on a session by sesion basis. As long as you have a log of your winnings and it matches up with what you declare the IRS will accept it. But you need some type of log and of course if you declare a lot less than you made the IRS might make you explain those extra deposits, etc.

[Niediam]

I highly suggest you find a new accountant. (not joking)

[AceHigh]

Why don't you tell us how to file?

[Niediam]

http://www.irs.gov/individuals/page/0,,id%3D14476,00.html

[AceHigh]

I agree all income earned from gambling must be declared to satisfy the IRS.

I was just commenting on how "sessions" are recorded with respect to online poker. I believe this is different than live because you don't have ready access your internet poker account, where a live poker player can go to the cage and get cash. Internet poker players have to go thru a process to cash out, so it's more like stocks where the value fluctates day to day, so you only record earnings you "sell/cashout", so to speak.

[JSHamm]

I've always heard poker is just one long session though...so I figure the government can tax me when I'm dead /images/graemlins/grin.gif

[Randy_Refeld]

[ QUOTE ]
I was just commenting on how "sessions" are recorded with respect to online poker. I believe this is different than live because you don't have ready access your internet poker account,

[/ QUOTE ]

I would think that a session would be defined differently on-line. I really doubt that players that won at PokerSpot owed tax on their winnings.

[Niediam]

While that is a very interesting theory (and I can see some logic behind it), do you honestly think that the IRS is going agree with you?

The real problem with all of this is that we basically just have to do whatever the IRS says - regardless of how stupid it is or how much something else makes more sense.

[Niediam]

That's a really good point you bring up. I can totally see the IRS saying something dumb such as "You earned the money when you stopped playing for the day. It doesn't matter that it was then stolen from you." Of course they probably would never even find out about the situation so it's not something to worry about. /images/graemlins/smile.gif

[Lottery Larry]

I believe the latter is correct. It would be impossible to record a hand-by-hand session.

Cash in, cash out covers the range of a reportable session at the tables so I assume it is the same for online.

[Niediam]

Cash in - cash out is NOT how you report winnings from a B&M casino. It is done on a session basis.

[Lottery Larry]

[ QUOTE ]
Cash in - cash out is NOT how you report winnings from a B&M casino. It is done on a session basis.

[/ QUOTE ]

What are you calling a session and does it differ from what I said already?
"Cash in, cash out covers the range of a reportable session at the tables"

Sorry, did you read this as cashing out from the casino? I meant from each table as you play.

[renodoc]

I have a friend who wins entries into big tourneys. This would also include winning step tourneys on Party and then losing in step 5.

How are these treated at tax time?

If you play a step 2 ($55 expense) and win entry into step 3 ($215 I think), and then lose, what is your liability? It would seem to me that you must report winnings of $160, and then losses of $215, (or total loss of $160 to match winnings) This results in a net tax liability.

Comments appreciated. I will cross post this.

[Lottery Larry]

"If you play a step 2 ($55 expense) and win entry into step 3 ($215 I think), and then lose, what is your liability? It would seem to me that you must report winnings of $160, and then losses of $215, (or total loss of $160 to match winnings) This results in a net tax liability. "

If you would have ONLY these two gambling records for the entire year, I think this is:
Step Two- Win $215, cost $55 goes in gambling losses
Step Three- Win $0, cost $215 in gambling losses

If this is all you gambled for the year, you'd have to change the total deduction because your $160 "profit" from the Step 2 limits the deduction for the $215 cost for the Step 3.

You can't end up with the initial $55 being a "loss" unless you have other gambling wins to offset it and bring your loss to $0.

[AceHigh]

I think the IRS will buy it because it will match up with my electronic fund transfers. If they are knowledgable about poker they may suspect some "fudging", but as long as the numbers match, I don't think it will be a problem.

I'm not saying this is bullet proof, but in my opinion, it should survive an audit. And if my reported earnings are there and match there records of my earnings, I should be able to avoid penalties and fines.

[Niediam]

You do not have to report any income if the only prize you received in a tournament was entry into another tournament. But of course if you cash in the 2nd tournament you have to report that amount of money as income.

In addition, you almost have to report income for prizes won besides the entery fee. For example, lets say you won an online satilite for the main event of the WSOP. You do not have to pay taxes on the 10k entry fee, however, you would have to pay taxes on airline tickets, hotel, food, etc that may have gone along with the prize

[Niediam]

I think the point that you may be missing is that filling by a session by session basis will greatly increase your Gross Adjusted Income. For most people this will increase their tax liability. The IRS knows this and will want their 'fair' share of your money. I don't think the IRS would truely care if you were paying the correct amount no matter how you calculated it but that probably isn't the case here....

[renodoc]

Niediam,

Do you have a reference for the sattelite issue? My accountant seems to disagree, but I don't know of case law or tax code.

What is one supposed to do if they forgot/lost/can't find their records for the year? Make a guess?

Also, on a different note- Card Player publishes winnings which probably do not accurately reflect the true amounts taken by players because of deals made at the final table. Is there anyway to document this?

[Niediam]

I have read so much information on gambling tax law that a lot of the sources have blurred in my head but when I come across this issue again I'll let you know where you can find the information.

I really don't know what one should do when they don't have very good record. The most logical thing seems to make a good faith estimate. But you never know with the IRS...

There really is no way to know how much professional tournament players have really won because of prize splits, deals, and backers. Only way you are going to find out is to become friends with the player in question and hope they are honest. /images/graemlins/smile.gif

[renodoc]

Yes but if Card Player reports that someone won $25,000 but they actually cut a deal for $19,000, then they might have $6000 in unfair tax liability if someone calls them on it.

How do you document this?

[broiler]

If the tournament staff are aware of the deal, then they should adjust any W-2G according to the terms of the deal.

The other possibility is that they are unaware of the deal and report the higher amount to one side of the deal. You have to report any amount on a W-2G or there will be questions. The IRS is good at matching numbers reported to them. The next line under that I would state "amount reported to SSN: ..." with a negative amount. This of course would require you to get the other persons Social Security Number. If you don't have the SSN, you can still use the negative amount, but you may get questions.

Alerting the tournament staff is obviously the easiest way to fix the problem. A good director will know what to do or at least direct the people to the right answer.

[Niediam]

I assume the same way you do normal casino ring game play - you write it down in your journal.

[renodoc]

I dunno. The magazine and the casino's like to show big numbers for the winners. Most of the time a deal is struck but the "first place money" is still listed with the winner's name next to it.

W-2G's aren't always issued to tourney winners regardless of the amount of the win.

[broiler]

You won't find anything authoritative from the IRS that directly speaks to satellite tournaments. The only thing that you can do is look at similar situations and what others have said.

Gambler's Guide to Taxes says that satellites are not taxable until all related tournaments are completed. The book on the Frugal Gambler site (it was reviewed on here a couple of months ago) says that the satellites are taxable at every step.

I would say that a reasonable position is in between the two extremes. In a situation where you must participate in the next step, no income should be recognized. Therefore, the Party steps would not have a taxable event until you lose out or win cash. If you have the option to get cash, then you have a taxable event because you have chosen to participate in the next tournament with your cash.

Most B&M satellites will expressly state that you get lamers for a series of events or that you must participate in a specific event. They will also usually state that your entry is nontransferable as well.

Online is a problem because almost everything from a satellite can be transferred in some easy manner into cash. I think that in terms of online you are generally stuck treating the satellite as income because the sites generally assist in the process of transfer.

I equate the satellite issue to payouts of accrued sick time upon retirement. Some plans let retirees use sick time as health insurance premiums until the days run out. If the plan allows the retiree to choose cash or insurance, the payments are taxable. If the plan is take insurance or lose the sick time, the payments are not taxable. I think that this is the most similar situation where there has been an actual ruling.

As I said before, there are no rulings that specifically state the proper treatment. The IRS is always subject to inequitable treatment for different people.

[broiler]

I would say that the safest thing to do with a deal is to get your share broken down into a check or a bank transfer, so that if you were ever questioned, you could point to a specific transaction that relates to that tournament. Make sure to get a copy of the check or some documentation from the casino and you should be ok.

[Lottery Larry]

"You do not have to report any income if the only prize you received in a tournament was entry into another tournament."

When/if you do find the official legal source for this statement I would be interested as well.

[renodoc]

I think this is an important issue.

If you pay $60 and parlay that into a $25,000 seat at the WPT finals and then lose the first day, it makes a big tax difference whether or not you treat the entry fee as "winnings" or as some type of non-taxable sattelite rollover.

Since winnings are above the line, losses below it and deductions (unfairly) limited, one can lose money on this freeroll come tax time.

[scott8]

Going back to the original question about when income becomes taxable, it may very well be that the time "should" start when you get up from the table, but I often think of it in terms of what the IRS would look at if I ever had to show them documentation.
Therefore, what is in Neteller often wouldn't be counted, instead what my bank records show would.
Another words, say I win 500 on Party, transfer to Neteller, transfer 500 to Stars and lose, I would not claim this at all.
I'm not saying this is legal, but it makes sense to me.
This whole tax mess gives me a headache though, I will admit.

[Niediam]

What do you do though when they ask you to provide your transactions from Neteller, Party, and Stars though?

[Lottery Larry]

"If you pay $60 and parlay that into a $25,000 seat at the WPT finals and then lose the first day, it makes a big tax difference whether or not you treat the entry fee as "winnings" or as some type of non-taxable sattelite rollover.

Since winnings are above the line, losses below it and deductions (unfairly) limited, one can lose money on this freeroll come tax time. "

I agree this is important, that's why I'm hoping you find your source. I'm pretty sure that what you fear is EXACTLY what happens- your taxes don't break out evenly; you get taxed more on the rise in miscellaneous income than you do on the subsequent deduction for the $25K "loss".

I would be surprised if the IRS wouldn't look at the market value (here, full price) of the tourney token, since they tax you on the market value of other gifts that you receive (such as cars, trips)

When/if you do find your official source, please PM me with it. The next time I talk to a tax accountant, I'll have to ask that question.

[twomarks]

Mr. Raymer,

Not to be a smart-allick...but what would you know about taxable earnings...oh...wait...nevermind

[twomarks]

On review - this wasn't that funny - I apologize for any disrespect taken from my comment.

twomarks

[AceHigh]

[ QUOTE ]
I think the point that you may be missing is that filling by a session by session basis will greatly increase your Gross Adjusted Income.

[/ QUOTE ]

I'm not missing it, but I am trying to avoid it. /images/graemlins/wink.gif

Fortunately the IRS won't have access to docuementation other than my bank records. I think that will help my case.

[AceHigh]

FWIW, I found it humorous.

[broiler]

I see no justification for recording the entry fee as income if you don't have the ability to get cash. The entry has no value if you don't participate in the event. If you are locked into the event (see my previous post on the subject), then you have not finished the earning process of your original entry.

A better example, since there is no cases/laws directly on satellites, would be gift certificates. Gift certificates are not taxable income until redeemed or they expire. In this situation, the satellite would expire with a $60 loss or you would play and have winnings.

I can't see how the IRS would ever treat a satellite win as taxable if you can't get cash. I would argue that it is also similar to a parlay in sports and you don't pick up income until all of the events are completed.

I would be interested in what another tax accountant thinks about this topic. The ones around this office agree with my theory, but we all think the same on most topics. Maybe if CPA is around these boards he can throw in his opinion as well.

[Niediam]

If they decide to audit you they will see the various transactions with Neteller and require you to show them your Neteller account. They may or may not then require you to a show them your various accounts on poker sites.

[Lottery Larry]

I believe you are correct- look for my post to come shortly.

[dakine]

[ QUOTE ]
They are taxable when you drag the pot.

EDIT: well, actually when you stand up from the table. according to most people anyway.

[/ QUOTE ]

When your "Net" winnings!! is $600 or more. Ask your profesional Tax preparer.

[Lottery Larry]

I believe you are wrong

Or are you talking about issuing a W2-G?

[JAA]

Does anyone have any input in regards to this situation: One of my friends just graduated college and decided not to get a real job and just play poker. He has played very successfully for 3 years while in school, but did not record/report his earnings for that time period. Will it raise a red flag if he files as a professional player this year? Does the IRS have a policy of investingating people who "all of a sudden" make a lot of money playing poker professionally? What would you recommend my friend do in this situation?

I would really appreciate any responses, some of you are much more knowledgeable about this than either of us.

- Jags

[Niediam]

Obviously the 'right' thing for him to do is just back his back taxes. /images/graemlins/smile.gif

I'd guess that filing as professional while never before declairing gambling winnings should get some attention from the IRS but I really don't know anything as a fact. The real question is if the IRS is going to decide to look into your friend's financial records for the past few years or not...

[JAA]

[ QUOTE ]
The real question is if the IRS is going to decide to look into your friend's financial records for the past few years or not...

[/ QUOTE ]

This makes sense, but he's kind of banking on the fact that it doesn't look too odd for a kid to be broke while in college and then experience a huge upswing in income the year after he graduates. But if the IRS is going to make it a policy to ivestigate every poker player's past history the first year they file as a pro, then he may be in trouble.

Thanks a lot for your input. Anyone else care to chime in?

- Jags

[jakethebake]

When are internet poker earnings taxable income?

...when you report it.