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

[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]

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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.


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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." [img]/images/graemlins/wink.gif[/img]

[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

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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. 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]

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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

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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. [img]/images/graemlins/grin.gif[/img]

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.