Do small poker winners/losers get really screwed by IRS?

[Ulysses]

So, I just finished doing my taxes. I itemize anyway, so I just filed my wins/losses blah blah blah.

But here's a scenario. A relatively low-income guy plays poker just for fun. Let's say he loses $4000 over the course of the year. And he wins $3000. For a net loss of $1000 for the year, a small price for entertainment at the cardroom a couple of times a week - about the same as going to the movies. Let's say either he's really honest about taxes or he never won in the ring game and that $3000 came in the form of a jackpot win. Either way.

Now he does his taxes. He doesn't have any itemizable deductions besides poker so he's better off taking his standard deduction.

Yet he still has to file $3000 in winnings adding to his gross income even though he actually lost $1000.

Am I missing anything here? This seems flat out ridiculous.

[Zeno]

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Yet he still has to file $3000 in winnings adding to his gross income even though he actually lost $1000.


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I have a friend that played Internet poker for a while and I was helping him with his play - and he decided not to play any more. And it was because of the issue you have raised. He has a family now and does not want trouble with the IRS. He went over the tax laws and found that it is very convoluted and sometimes nebulous in reference to gambling wins or loses. And that you could not deduct losses. Or that was his conclusion also. Which does seem insane - But not surprising.

Card Player magazine use to have a guy or a column that would give tax advice or help. Perhaps you could contact them.

Others may know the official right thing to do. I have no comments other than that.

-Zeno

[Ulysses]

You can deduct losses against winnings. But you have to itemize. For someone who plays a lot (say you have $100k in winning sessions and $50k in losing sessions), this is not that big a deal. You report $100k in winnings as income and itemize $50k in losses as deductions.

But, for the small recreational gambler who wants to be legit (or has to be legit w/ reported things like a jackpot or tourney win), I think he can end up getting screwed when his losses are less than the amount of his standard deduction (and he doesn't have other deductions to itemize).

[Zeno]

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But, for the small recreational gambler who wants to be legit....

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Yes, My friend was a recreational gambler and came, I think, to the same conclusions that you have drawn. Plus the whole 'problem' with the legality of Internet poker lead him to shy away from it. He is a conservative engineer type that would probably only do well in smaller limit games. So it was best that he quit, anyway.

-Zeno

[Ragnar]

You can also get screwed if you are a small time gambler and win in one type of gambling and lose in another. This also assumes that you are honest with the IRS--and I am because the stakes are too high to get caught chiseling on small amounts.

I won in Fantasy Football last year, but had some winning and losing sessions with a net loss in poker. As a result my itemized deductions of losses didn't help that much in offsetting my winnings due to the itemization rule.

If the IRS were fair they'd simply let you offset the winning with all of your losses, at least to the extent of winnings.

Zeno is right. For the small time recreational gambler playing at low limits (like me and his friend) the costs might outweigh the fun. It is also a colossal pain to keep track of the wins and losses in the way that the IRS requires. Did you know that you start a new session every time you change tables in a B & M? You are supposed to record that.

Ragnar

[Easy E]

I won in Fantasy Football last year, but had some winning and losing sessions with a net loss in poker. As a result my itemized deductions of losses didn't help that much in offsetting my winnings due to the itemization rule.


Maybe I'm missing something here. What is different about how you're itemizing your sports bet wins vs. fantasy league wins vs. poker wins vs. any other wins?

If the IRS were fair they'd simply let you offset the winning with all of your losses, at least to the extent of winnings.
I thought that's what you WERE supposed to be doing.

[PuppetMaster]

[ QUOTE ]
I won in Fantasy Football last year, but had some winning and losing sessions with a net loss in poker. As a result my itemized deductions of losses didn't help that much in offsetting my winnings due to the itemization rule.


Maybe I'm missing something here. What is different about how you're itemizing your sports bet wins vs. fantasy league wins vs. poker wins vs. any other wins?

If the IRS were fair they'd simply let you offset the winning with all of your losses, at least to the extent of winnings.
I thought that's what you WERE supposed to be doing.

[/ QUOTE ]
You have to report total winnings under "other income", then report gambling losses under schedule A "itemidize deductions".

[Ragnar]

Let me attempt to explain Easy E's question with an example.
Suppose I pay a $100 entry fee in Fantasy Football. I win $1100. So my net gain is $1000.

I play five poker sessions (I obviously play more, but this is simplified, my swings weren't as bad either.) I am +200, -500, +100, -700, -200. So my net is -$1100. My overall gambling loss is -$100.

I report +1300 in my gross income. I take 1300 as a deduction in my itemized deductions. (I can't take the other 100 because you can only deduct gambling losses up to gambling gains.) Since the income is above the line, and the itemized deductions are below the line I still end up paying some tax on my "winnings."--Even though I lost on the year.

The reason is that below the line deductions don't have 100% value, and the IRS has put gambling losses there. That is because below the line deductions only reduce taxable income and not gross income. Then your tax is a percentage of taxable income. So you only get a percentage of your losses, but your gains count 100%.

Even if we assume that I didn't play fantasy and had the bad poker record I detail above I'd still have a negative tax impact. I'd report $300 in wins, deduct only $300 in losses and the wins would be above the line, and the losses below the line. So there'd be some tax paid.

I hope this helps. Perhaps an accountant can help clarify.

Ragnar

[jdl22]

Can you explain when you can itemize and when you can't a little more? Does it have only to do with the amount you lost? Are there other things you can do so that you have to itemize (donating to charity and the like)? If so it may be a +EV move to dump money away to either a charity or "accidentally" losing a few hundred at the tables on new years eve.

[Ulysses]

I'm pretty sure anyone can itemize. But you get a "standard deduction" of varying amount based on your filing status. If your itemized deductions add up to less than the standard deduction, it doesn't make sense to itemize. So, if you have a relatively small volume of gambling, you don't really get to offset wins v. losses. In fact, you could even be in a situation where you pay taxes on gambling losses.

Say you have $1500 in poker wins and $2000 in poker losses. But you have no other itemized deductions, so you take the standard deduction.

Without poker, your taxable income = income - standard deduction.

With poker, your taxable income = income + 1500 - standard deduction.

That sucks.