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

[CPA]

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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.

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I agree with almost all of this. Here are a few thoughts:

1. I have tried to be very careful not to make any conclusions on this subject.

2. The IRS may or may not rule on these issues any time soon. Honestly, they have bigger issues to deal with. Therefore, people may conclude that they shouldn't have to wait for the IRS and take a reasonable position that they are a "professional" gambler for tax purposes which could potentially avoid harsh results.

[MicroBob]

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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.

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I've seen this before but I just don't see how it could be correct.

My situation:
2 years ago I didn't even know how to play poker.
for the past 10 months it has been my sole source of income.
I don't think I could really get-away with NOT filing as a pro even if I wanted to.

[sofere]

As CPA said...you may fail one factor and still be considered a pro. Hence the keyword may.

However, I believe you have to prove to the IRS that poker is more than just a hobby. An extreme example...you only played one poker game in 2004 which was a satellite for $10 and win a seat at WSOP, then win WSOP. Poker may have been your sole source of income for the 2004, but there is no way you'd be considered a professional gambler.

I believe the IRS treats poker similarly to how they treat other hobbies such as coin collecting (except probably more strictly as the government must do what it can not to appear to condone gambling). If you regularly collect coins and sell them on ebay, in order to prove that it wasn't just a hobby, you would have to show a track record of profit. If you had come across a box of 365 very rare coins at a garage sale and sold one per day for a year for $100 each and that was your sole income, I doubt you would be considered a professional coin collector.

However, if you had researched coins for years and scowered the earth to look for these rare coins to sell on ebay, and did so for a few years, you probably would be considered a pro.

[CPA]

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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)

[/ QUOTE ]

1. You are referring to the hobby loss rules. An activity is deemed not be be hobby if you make income in any three of five consecutive tax years. By definition, a hobby is an activity not engaged in for profit.

If you are not making money playing poker, then it certainly would be hard to call that person a professional anyway (see the listing above).

2. I touched on this in my initial post. Remember that during the court case, the concept of a professional gambler was a new concept. People have to be careful when they read the case not to get caught up in the facts, but rather understand the theory and the thought behind the ruling.

[sofere]

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1. You are referring to the hobby loss rules. An activity is deemed not be be hobby if you make income in any three of five consecutive tax years. By definition, a hobby is an activity not engaged in for profit.


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I thought that three of five years from the website looked familiar. I apologize for not doing due diligence and checking the accuracy of what was stated in the website.

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2. I touched on this in my initial post. Remember that during the court case, the concept of a professional gambler was a new concept. People have to be careful when they read the case not to get caught up in the facts, but rather understand the theory and the thought behind the ruling.

[/ QUOTE ]
So would you say that it the IRS would consider the intent of playing and the effort put forth in improving your profitability more so than your actual profit in relation to other sources of income? Would your hours/week played have much significance.

In addition, if you file as a professional one year, but for tax purposes it would be better for you to file as an amateur...would they allow you to switch? (I think this was touched on a bit before)

[MicroBob]

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So would you say that it the IRS would consider the intent of playing and the effort put forth in improving your profitability more so than your actual profit in relation to other sources of income? Would your hours/week played have much significance.

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I'm not CPA of course....but this is the impression I got from the book Gamblers Guiude to Taxes by Walter Lewis.
He recounts a case involving a horse-racing handicapper who actually LOST money but since the handicapper was able to show that he put forth significant effort to make it a source of income. 40-50 hours a week scouring over the betting-sheets (or whatever they're called), etc etc.

So....if you are able to show that you are consistently winning and putting forth the hours each week then you are in good shape.
but if you didn't win but it is still obvious that is legitimate attempt at income then I suspect you would be okay.


there was another case where a lady lost a ton in slot-machine play and tried to count it as a deduction as a professional gambler. I think it was determined that she couldn't just decide to be a professional just because she played a few hours per week (and also....she was trying to deduct her gambling-losses from her made income in a floral-shop or something....which is a no-no).


you probably face a slightly tougher battle if you haven't been making money imo. but if you are legitimately making this a 2nd job I bet you'll be okay.



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In addition, if you file as a professional one year, but for tax purposes it would be better for you to file as an amateur...would they allow you to switch? (I think this was touched on a bit before)

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I've thought about this as well.
It seems to me that doing so could run the risk of setting off some serious warning-bells with the IRS.


If you switch to filing as an amateur you better damn well be able to show that you just aren't taking it as seriously as you did the previous year.


I'd be interested to hear CPA's take on both of these questions of course.


And thanks again to CPA for taking time to come to our little forums and clear up so many misunderstandings.
This is easily the best online-poker-taxes thread we've had on here (that I've bothered reading anyway).

[Scuba Chuck]

If you are a professional gambler, thus filing as a business, you are entitled to use all of the tax code which relates to a business, and includes using a SEP IRA.

Thus you can save up to 25% of your earnings (not to exceed $42,000 for 2005) into subsequent IRA.

I do believe this $42,000 number reflects to the total amount you are saving for retirement though (I could be wrong here, but I don't think so.) So, if you are saving $12,000 in your 401(k) at work, then you would be limited to just $30,000 in a SEP IRA.

[broiler]

If I remember correctly, the slot playing woman was filing 3 schedule C's for different businesses. She ran into the problem of spreading herself too thin to qualify as a professional gambler. It didn't help that she lost money at it, too. Intent and profit motive are what I consider the two most important factors to claim professional status, but everyone would rather have a standard test for clarity. Losing money in your first year puts you in a bad spot to call yourself a professional gambler. The IRS is usually in a "prove it" mode with filing schedule C's that lose money.

I think that the best way to go down to amateur status would be to get a full time job doing something else. Switching back and forth seems like an audit waiting to happen.

I agree with your thought that this has been the best tax thread. I don't know what has kept the troll posts away, but this has been a great discussion. Get a couple of CPA's answering questions for everyone and you really can get a good discussion going.

[moondogg]

Jesus Bob, how much of RBS do you own? [img]/images/graemlins/grin.gif[/img]

[Ulysses]

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Let's assume a few things:

1. I am not a professional gambler.
2. I'm married.
3. I won $20000 in 2004.
4. I lost $15000 in 2004.

If I don't really have any other deductions, does this mean I get screwed big time?

Let's assume I have $1000 of deductions so I would just opt for the standard deduction. Now, because of poker, I lose that $9500 deduction, because I have to say that I lost $15000 gambling, esentially robbing me of $9500 in deductions.

Is this correct thinking? I'm just trying to get a sense of how screwed I'm getting.

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You are the textbook example of the individual that gets royally screwed by the way the IRS requires gambling income to be reported.

It can get even worse. Imagine your situation, except you won $15,000 and lost $20,000. In that case filing by the law, you would report the $15,000 and match it with $15,000 in losses (the max you can deduct to offset) and lose your standard deduction - even though you had a net loss in your gambling.

There are many scenarios like this that really screw over the small-time gambler, especially if he is not a high-income filer otherwise.