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

[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.


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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?

Commissioner v. Groetzinger (Supreme Court Ruling)

[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.