Online winnings and taxes

[pullmyfinger]

I've been playing 15/30 recreationally for a while now on Party. (I have a full time relatively low paying job). I recently realized that my online hobby has been very lucrative. I've earned almost ten thousand during the last year.

I see this money as "won" and don't really want to pay taxes on it. At a B and M casino, this would be no problem in that it is all cash, and it is easy to discretely spend this amount of cash. I don't want to cash this money out to my regular bank, because of the paper trail I believe might be sent to the IRS.

But if I understand correctly if one sets up a second bank account in which there is never more than $10,000, no documentation is sent to the IRS, and one can cash out this money without too much fear of government oversight.

Has anyone else thougth about these issues or have any advice? I am rather naive and uninformed when it comes to this subject. Does the IRS even really care about $10,000 won at cards over a period of a year?

Thanks,
pullmyfinger

[Webster]

I have and I know (have heard from a bank person) that every $2000 check is not really reported but kept track of.

IF yo are making $10k it is best to report it. It's the IRS we're talking about and THEY are the bad guys and can be VERY mean.

Take your pill and report. It's the SMART thing! They don't talk to the fed at all and are WAY WAY understaffed. BUT - they can a hornets nest if something leaks out and banks are their friends.

As you can see I've thought about it A LOT!

[BradleyT]

[ QUOTE ]
Does the IRS even really care about $10,000 won at cards over a period of a year?

[/ QUOTE ]

Does the IRS really care about you paying taxes on a job that pays $10,000 a year?

[n1stunnor]

Pay dude!I found out the hard way and all the checks i cashed were under $2000.

[OrangeHeat]

Hi Pull,

I struggled with this for awhile earlier in the year and even more recently started debating it in my head again. But - once you get in the 10 k range it really becomes hard to hide that much money.

I acutally bought a big fire-proof safe - but I still cant see keeping 30k cash in my house...I'd rather claim it take the hit and then invest the rest. So now my old hockey cards occupy that space.

BTW...Every account you open now is required to be tied to you by SS, address, 10,000 forms of ID, etc....becuase of the Patriot Act - this would not be a good way to hide money from big brother. Patriot ACT really sucks - especially since they are using it more for non-terrorist related investigations....

Just my thoughts.

Orange

[LetsRock]

Do yourself a favor and handle it above board with the IRS. I think they have their hands in too many pots, but this is one agency you don't want to mess with.

Aside form the legal aspect, the problem with IRS is they tend to take a couple years to bring up these kinds of oversights.

How fun would it be for you to get hit up for a bill for your taxes on $10,000 3 years from now? Plus interst and penalties? What if, for some reason, you're not "in the money" at that time but you're still liable for the past earnings? Not a pretty picture. These guys are brutal if they get on your scent and there's no hiding from them once they're on to you.

[Sarge85]

Ok - I know this topic comes up often, and I have searched the archives, but I've yet to find the answer I'm looking for.

Basically is there a set number on gambling income that once you pass you have to pay taxes on?

I've only cashed out $1500 dollars from the sites, into my bank account.... Do I need to claim the $1500? or am I below the radar?

[Redhotman]

I am still very young and living at home. But if I continue along these lines I wouldnt mind establishing citizenship in another country.

[Cyndie]

if you file and report income the clock starts ticking on the time they have to question you about it...unless there is fraud.

If you do not file, they can always ask you about it and the burden of proof is on you!

Kind of like an eternal "gotcha" waiting to happen if you do not file.

The rule is *every* dollar is taxable...realistically, I doubt anyone ever admitted to a $50 win...but it doesn't cost much to report a few bucks, and it sure makes it easier to survive later questions.

[LetsRock]

I had first hand experience with a late decision to chase me down. This was many years ago. One year (the only year I've ever owed money) I sent them my return and check and thought it was all done. A couple years later, the house I was renting burned down (by a bone-headed, little puke, juvenile arson who tried to light half the block on fire) and I basically lost everything I owned, including records.

So the next year I hope to get a big return by writing off my losses (not much consolation, but it was the extent of my options). So instead of getting a big fat check, I get about a third of what was due to me along with a bill saying they never recieved my return from year X and that they had deducted what THEY thought was appropriate. (I don't remember all the details, but I expected about $10K, they sent me about $3K and the amount I owed in year X was in the $150 range.) They didn't even account for what I'd paid through payroll deductions; somehow they knew how much I'd earned, but not how much I'd contributed. They told ME to prove it. Hmmmm. Well if you've ever had to deal with these %$*&^#**s you would know that it's worse than dealing with a wall - at least you can talk to the wall. How do you prove that something got lost in the mail (or whatever happend to my return)? My records had been destroyed and the company I had been working for had gone out of business so I had no reasonable way to provide any documentation regarding any of this. It was THEM against little young me. I'm going to spend what little I got to hire lawyers and sue the Feds instead of trying to get my life back in order? Right.

All I know is that I don't trust IRS at all and do what I can to be above board so they won't come a knockin.

[Prickly Pete]

[ QUOTE ]
Do I need to claim the $1500? or am I below the radar?

[/ QUOTE ]

Both in a way. There is a minimum income threshold overall for filing taxes in the US ($600 I believe). But assuming you have other income anyway, you're already filing a tax return. And the $1500 is income and is taxable. But are you under the radar? Probably - you'll most likely never have to ante up if you don't report it. But, like the others in the thread have said, why take the chance? Pay the tax.

[BradleyT]

Any amount is taxable. It's equal to earned income.

[JeffO]

Is there a statute of limitations concerning how many years they can go back on?

[Cyndie]

If you file...and make a reasonable effort with no obviously fraudulent claims or omissions, they have a few years...and that can be looked up, but the actual fact is that if you file April, or August, they will question you the next year, or they don't really bother. (I think it is 3 years from the due date, but 7 is pretty safe for everything except real estate as far as storing records)

In the situation of Let's Rock, he almost certainly missed some notices that they were questioning his missing return, or it takes them a year longer to realize that the return really wasn't there. Remember, many returns do not hit the IRS until October of the following year, and it takes them time to process.

The year I had an office audit, they sent the request just about the time the next year's taxes were done...eg. file 4/15/2004 for the year 2003...and they ask you about 1/2005 about the year 2003. I think it gives them something to do while they are waiting for the returns to come in?

[MtSmalls]

Just to make one thing a bit clearer (and of course to throw my 2 cents in), technically you should include ALL winnings for the year *not* just those 'cashed out' of your account. This isn't handled like a stock or bond, where you only pay tax on the sale (withdrawl).

Sucks, but what can you do?

[astroglide]

www.rbstaxes.com (http://www.rbstaxes.com)

[Don_Lapre]

The correct thing to do is report your winnings and pay. It sucks but it is the ethical thing to do and will give you peace of mind. Although if you winnings are $1500 you could probably slide underneath the radar or if questioned say you lost the money in a real casino. I've also read that banks do not report any transfers to the IRS unless they are over $5000, but I'm not for sure about this. I have some friends you have online winnings over $10K, did not report them, and nothing happened, yet.

Don

[Inthacup]

I found out the hard way and all the checks i cashed were under $2000.


Can you elaborate on this? Thanks.



Cup

[SamJack]

Part of the problem is what constitues 'winnings' and 'losses' in on-line poker.

Is it,

1. Winning/losses from each session played.
2. Winning (cashout)/ losses (deposit).
3. something else?

IRS clearly states that lumping (making winnings and losses in a single year into one event) is not legal. Therefore, they want each winning (whatever that means in on-line poker) to count as earnings, and you may itemize each loss (whatever that means in on-line poker) as deductions.

Hmmm... What do you guys think? Each session should be the unit for win/loss or each cashout/deposit as the unit for win/loss?

Trying to draw parellels with B&M does not work well. In B&M those two things are the same since you cash out at the end of a session.

Any Opinions?

Sam

[Schneids]

Between deductions and write offs, wouldn't it be possible to almost entirely avoid paying taxes on your winnings?

If I'm deducting losing sessions, that means I'm deducting money about 40% of the time. Those losing sessions add up...

Plus, if I'm going to get taxed on this, am I therefore entitled to write off things such as ISP fees, new computer (if applicable)/upgrades, poker books, chairs, etc?

Those who know, please clarify... /images/graemlins/blush.gif

[SamJack]

In order to write-off you must be able to prove that you are a professional meaning this is your primary income.

The portion of the write off for Computers, ISP cost etc also must match your usage. e.g. if you want to write of 80% of the cost, you must be able to prove that you use your computer for poker 80% of the time.

Sam

[astroglide]

you keep your session logs, with the most important information for taxation being how long you played and how much your won or lost.

you add up all your wins, and those are your wins.
you add up all your losses, and those are your losses.

so when you file (for example), you list 100k in wins and 25k in losses, for a total of 75k.

if you file as a professional, you may also write off stuff like a percentage of your rent/electric/gas/etc, your computer, your internet connection...

[Munga30]

Every time you sit at a single table, that's a session. Have a win, it's income. Have a loss, you can deduct it.

[Schneids]

So if I've only worked from June-August, and from June-now have earned five times as much off poker as I have from that employment, while I was employed, in the eyes of the IRS does that constitute me as a "professional poker player" (I put that in quotes because I personal don't look at myself as being that)?

[pullmyfinger]

Thanks for all of your suggestions. But I wonder if any of you have thought of an alternative way to at least temporarily avoid the IRS.

What if one keeps the $10,000 at the online card rooms and Neteller? Does anyone know whether Neteller has any type of document filing relationship with the US government. The online rooms are all based abroad.

If they are all completely beyond the prying eyes of the IRS, then I can at least postpone cashing out into January 2004 and not make a decision about filing (and how to do it) until April of 2005.

Have any of you thought about this strategy in relation to your own winnings?

thanks,
pull

[Cyndie]

The method you are using for reporting NET income will get you a world of hurt with IRS, unless you file as a professional.

They want you to claim 100,000 income on your 1040 line 21 or something "gambling winnings" but you cannot claim your losses except as an itemized deduction on schedule A and for a single person, until you reach your standard deduction of somewhere in the $5000 range, you do NOT get to deduct your losses at all!

IRS will want somewhere in the neighborhood of $750 to $1,500 more in taxes than you are suggesting, depending on if you are in the 15% or the 30% tax bracket...plus they are very fussy about what you can write off if you are not a professional gambler.

[Cyndie]

It has been discussed, and has been found desirable, but wanting...nope, not legal! It might work, because there are not reporting requirements NOW, but it probably would make someone rather angry if they did find you later.

[Cyndie]

have a win...claim it...have a loss? well, maybe! Fair? Not IMO.

[astroglide]

a professional is defined as a person who has continuity to their play, and plays with an excepectation of profit.

[astroglide]

[ QUOTE ]
The method you are using for reporting NET income will get you a world of hurt with IRS, unless you file as a professional.

[/ QUOTE ]
i was speaking about filing as a professional

[astroglide]

[ QUOTE ]
What if one keeps the $10,000 at the online card rooms and Neteller? Does anyone know whether Neteller has any type of document filing relationship with the US government. The online rooms are all based abroad.

[/ QUOTE ]
that is a terribly gray area. if you have control of the funds, it is considered 'real' - and taxable.

but the fact remains that you go from usd to neteller to partypoker, and 2 of those aren't exactly currency. furthermore, one couldn't exactly say they have CONTROL of the funds as they could get their cashout denied and have no clear method of disputing it.

if i gave my money to bob for 'bob bucks', used those 'bob bucks' to buy troll dolls, wagered with the troll dolls, and won more troll dolls would those be considered as good as us currency? probably not. but i bet party poker's troll dolls would be if you got audited.

[Cyndie]

that is the traditional definition of a professional. IRS has one for determining a "hobby" versus a business as well.

However, an attorney buddy of mine who lost NYC attorney kind of job right after 911, then started playing BlackJack quite regularly for a living. He was still concerned with the legality of claiming he was a professional gambler. IRS does have some pretty strict rules for allowing it.

The key is that pros pay social security taxes on their income, so 15+% goes to SS. Be sure to factor that in when you think about the loss of $750 or so by not being able to claim dollar one of your losses. Also, if you own a home, you probably have interest deductions that will use up most if not much more than all of the standard deduction. I am almost sure that goes on that line. My own home has been paid off for a few years, and I don't have to check on that now, sorry.

[Hung]

How much are the taxes? let's say you win about 20k a year. How much are the taxes in the US?
If it's only a small percentage, I wouldn't care. But in Belgium it's up to 50% (I think)
I don't want to play every day to take only half of what I win...

[Jeffage]

Has anyone used these guys? Are they good...what do they charge typically if u have made significant money online but also have a normal job? Just curious...

Thanks,
Jeff

[Brian]

Hi RedHotMan,

No, you don't. If you are anything like the typical U.S. teenager (like myself), you would absolutely loathe living in any foreign country besides maybe Canada or Australia. U.S. 4 L. /images/graemlins/smile.gif

-Brian

[astroglide]

i've ordered their book and spoken with them a bit on the phone for a fee (their standard rate is $150/30mins).

they seem quite competent, if perhaps not exactly geared toward online stuff. they knew of partypoker, for example, even the names of the executives and where they were located. they hadn't heard of statking or pokertracker, though.

anyway i'm negotiating with them to take care of a number of outstanding issues for me. if i accept, i'll certainly keep everyone posted.

[tiltboy]

[ QUOTE ]
Pay dude!I found out the hard way and all the checks i cashed were under $2000.

[/ QUOTE ]
What happened n1? Were you audited?

[Cyndie]

If a single person earned $20 K...4,000 deduction for standard deduction and 2,500 for personal exemption makes $13,500 taxable at 15% plus 15.4 social security from dollar one...or $3,000 social security and $2,000 more in taxes for about 25% of gross income in taxes.

Very rough, but not as bad as Belgium?

[Cyndie]

I bought their book and have read through it. I am hoping they do an online guide for poker players, as this is not quite as specific as I would like. He knows the answers, I am sure, but just didn't have them spelled out the way the teacher in me would like to see.

Very laid back but at ease with his knowledge. I spent half an hour chatting and expect to send some friends to him. Too many people don't know how to get back into the system...DO NOT DELAY...get started today.

[Cyndie]

I know part of this story...and it is not fun to have to rebuild from the ground up...he did it, but I know he doesn't want to do it again!

Congrats stunnor, and thanks for speaking up!

[MrBlini]

If you are not a professional and you don't own your own home, you can pay far more than 50% of your net poker income in taxes in the U.S. You can pay any rate up to infinity--you may have to pay taxes on your winnings when you have none.

Example 1
---------
Total of winning sessions... $10,000
Total of losing sessions... -$6,800
Net winnings... $3,200
Taxes paid on winnings (state and federal, assuming 6% and 25% marginal rates, respectively)... $3,100
Tax deduction for losses... $0 (standard deduction for married couples is larger)
Effective tax rate... 96.9%
Net winnings after taxes... $100

Example 2
---------
Total of winning sessions... $5,000
Total of losing sessions... -$4,999
Net winnings... $1
Taxes paid on winnings (state and federal, assuming 6% and 25% marginal rates, respectively)... $1,550
Tax deduction for losses ... $0 (standard deduction for married couples is larger)
Effective tax rate... 155,000%
Net winnings after taxes... -$1,549

You can see that the U.S. tax system doesn't exactly encourage compliance.

[BradleyT]

You either won, broke even, or lost for the year. If you broke even or lost you can't deduct anything.

If you won, that's your win minus your losses so you can't deduct anything.

[Redhotman]

this from 2001, any changes?

[astroglide]

they claim there haven't been any changes in law regarding it

[Schneids]

[ QUOTE ]
If you are not a professional and you don't own your own home, you can pay far more than 50% of your net poker income in taxes in the U.S.

[/ QUOTE ]

Wow that pretty much describes me. Scary.

Alright, I got my hands on Walter Lewis' "The Gambler's Guide to Taxes." It's pretty much looking like I'd be foolish to not do all I can to file as a professional.

Does anyone have any other literature/websites they would recommend to a poker player about to experience his first time filing, or will I find Lewis' book to be suffice?

[Cyndie]

THey are writing an updated version...but for clarity, and perhaps some focus on online gaming, but the laws haven't changed.

[SamJack]

Great job of showing the numbers. The example is somewhat extreme which assumes, the individual has no other itemizable deductions, in reality, most have some (even if less than the standard deduction) such as state taxes paid, mortgage interest, charitable donations, etc.

But example does illustrate very well the fallacy of the tax code. I was browsing and find that there has been specific court decisions barring lumping (netting) of your winnings. Each wager (whatever that mean in one line poker) must be separated as wins and losses. I think their is some debate (on the thread and the forum) as to what each wager means for on line poker. Most seem to think that it equates to each session.

Sam

[Warik]

Isn't failure to report your gambling winnings from an online casino (which certainly doesn't report them without your SS#) just punishable by penalties and interest?

Can they throw you in jail or anything like that for something under $10,000 or $10,001 - $20,000?

The way I see it is that it's an "EV" thing.

We play poker because we know that if we play skillfully, then in the long run, our EV will be positive and we will making a profit.

Well, consider this EV.

Scenario 1: Willingly pay 15%-39.6% of your winnings from your hobby to an overworked institution that is busy scrutizing business practices and the incomes of wealthy individuals when you will still have to pay tax on the winnings that you lose.

Scenario 2: Keep 100% of what you win at the risk of having to pay 15%-39.6% tax, plus penalties, plus interest for your winnings for the past 3 years (is 3 years the limit?) BUT only if an overworked institution that is busy scrutizing business practices and the incomes of wealthy individuals manages to get around to checking on you.

Looks to me like our respective EVs would be better off with Scenario 1 than Scenario 2.

What do you think?

Also I read some stuff about being ethical and reporting while skimming this particular forum... here's my take on that:

I work 40-50 hours a week and have roughly 20% of my income confiscated by force from me, 90% of which goes to pay for welfare, retirement, healthcare, etc... benefits for people I don't even know and MAYBE 10% of that confiscated money goes toward something that benefits me less than it would if I went out and bought it myself from a private organization... and then the government wants to take the same percentage from the money I win playing with whatever they leave me with on April 15th after butchering my bank account... frankly, I think it's actually UNethical to report.

Any thoughts... or am I the only one who would like to see the IRS dismantled?

[taxat]

Let me preface by saying I don't know much about personal income tax, but here goes...

First, you are right--your chances of getting audited are low.

Second, jail is possible if you evade $1 of taxes, see Sec. 7201, but again unlikely.

SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.

Any person who willfully attempts in any manner to evade or defeat ANY tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Second, your post makes you sound like a tax protestor. The IRS, the DOJ and the courts don't like tax protestors.

Finally, there is no statute of limitations in cases of willful evasion of taxes, so the IRS can go back more than three years.

[GuyOnTilt]

I'm planning on filing taxes on my poker winnings (this is the first year I've been playing). I've only kept good records for the past 2 months, so if I claim all of that and what I can expect to make for the rest of the year (~$28k), what percentage can I expect to see the IRS taking?

Also, next year I'm planning to work full-time for the whole 12 months. If I make $140k, what percentage can I estimate the IRS taking?

Thanks guys.

GoT

[Grivan]

So what about if your a losing player overall for the year? Do you still have to claim all of your winning sessions as income and then deduct the losses? And assuming you don't make the standard deduction have to pay income tax on gambling winnings when you lost money gambling for the year? That is what the current way I understand it sounds like and that doesn't seem reasonable at all.

[fat_nutz]

From the IRS homepage:

"Hit a big one in 2002? With more and more gambling establishments, the IRS reminds people that they must report all gambling winnings as income on their tax return.

...

Generally, if you receive $600 or more in gambling winnings, the payer is required to issue you a Form W-2G."

Should I then expect a W-2G from Party and Empire? Or will this not happen since they're not based in the US? Has anyone received these forms in years past? I haven't kept strict records on my winnings, so this would definitely be useful documentation to have.

[SamJack]

You are correct, you will not get a W2-g from online sites because they are not based in the US.

Sam

[Cyndie]

They key for limiting your audit time to 3 years is not to *evade* and not to have *fraud* in your dealings. Fraud has NO time limit.

If you make an honest effort to report winnings...IRS is not used to seeing that...they tend to think it is nice that you are complying.

I do not think it raises red flags to scrutinize more closely, especially with all the interest in poker. At least it hasn't in the several years I have filed as a professional gambler. One year I even claimed that status while I was a full-time teacher. I am still not sure if that should have been allowed...but it was!

Your "overworked understaffed" is right on target...do you think they go looking for people who wouldn't generate enough to pay for the cost of the audit? or are they looking for people/groups who have big bucks?

Of course they do a few random audits of small fry.

[Kurn, son of Mogh]

That is what the current way I understand it sounds like and that doesn't seem reasonable at all.

Since when is the IRS reasonable?

[Kurn, son of Mogh]

Depends on your deductions. Download the appropriate forms and do a pro-forma return and see for yourself.

[MrBlini]

[ QUOTE ]
And assuming you don't make the standard deduction have to pay income tax on gambling winnings when you lost money gambling for the year? That is what the current way I understand it sounds like and that doesn't seem reasonable at all.

[/ QUOTE ]That is my understanding as well. Nice, isn't it?

[SamJack]

Majority of the Audits are flagged by IRS computers.

Some of the things that will make you more likely for an audit are:

<ul type="square"> You have large amounts of itemized deductions on your tax return that exceed IRS targets You claim tax shelter investment losses on your tax return. You have complex investment or business expenses on your tax return. You own or work in a business which receives cash and/or tips in the ordinary course of business. Your business expenses are large in relation to your income on your tax return. You have rental expenses on your tax return. A prior IRS audit resulted in a tax deficiency. You have complex tax transactions without explanations on your tax return. You are a shareholder or partner in an audited partnership or corporation. You claim large cash contributions to charities in relation to your income on your tax return. An informant has given information to the IRS. [/list]

Note the first risk item. This means that itemizing your losses will increase your chances of an audit. Sigh... You better keep good records of your sessions.

Sam

[Cyndie]

The theory is that the standard deduction already allows you a deduction for some winnings, but the income is all profit.

[PokerKId]

Hi guys,

I am making significant money online as was wondering if there is anyone from Austalia doing the same that can give me few pointers as to how the tax system down here works in regards to this

Thanks PK