Rakeback, taxes, and an argument for the IRS

[Guthrie]

Good luck with that.

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I have been thinking about rakeback, and I think it is not taxable income. I believe it is arguably a purchase price adjustment, much like a mail-in rebate. A discount on goods and services if reasonable and still within the boundaries of fair market value for that good or service is not taxable income.

I am not a CPA, but I did consult a tax attorney on this point. I suggest to those of you that try to comply that you account separately for your rakeback and exclude it. Even if the IRS audits you and calls it income, the argument is reasonable enough to avert penalties in my opinion.

This does not apply to bonuses, which are pretty clearly income IMO.

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.





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If you consider rakeback a rebate of rake, then it still increases your taxes.

Example: You won $10,000, but your account balance only went up $4000, because you paid $6,000 in rake. Do you want to pay tax on the entire $10,000? No, you want to deduct the rake.

So if you get $1500 in rake back, then you will have to deduct that from the $6000 rake deduction. You made $10000 - ($6000-$1500), or $10000 - $4500, which = $5500.

Or, you can decide the rakeback is income, in which case you made (10,000 + 1500) - 6000, which again = $5500.

You made the same amount either way.

[david050173]

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.


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So if my boss gives me a "Time spent working rebate" instead of a bonus, I don't have to pay tax on it? Word games are fun on the internet, but they are not going to help you in a court of law. Even better I am pretty sure that you are supposed to pay income tax on some rebates/rewards (like credit cards and airline miles) but no one does. Somethings (like car rebates) are explicitly exempted.

People have been trying to do this type of tax avoidance since the law was inacted. All the easy shelters (like this) have long since been closed.

[Maddenboy]

I tried to twist rakeback in my mind to make it like a volume discount, which is not taxable.

However, for volume discounts (like when Costo buys a zillion bars of soap for less per bar than mom&pop), the discount is a function of how many/much you bought.

For rakeback, it is not typically increased or decreased for volume. Its pretty much a straight-line payment, so I couldnt make it work. But i'm tryin.

Help me.

[randomstumbl]

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.


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So if my boss gives me a "Time spent working rebate" instead of a bonus, I don't have to pay tax on it? Word games are fun on the internet, but they are not going to help you in a court of law. Even better I am pretty sure that you are supposed to pay income tax on some rebates/rewards (like credit cards and airline miles) but no one does. Somethings (like car rebates) are explicitly exempted.

People have been trying to do this type of tax avoidance since the law was inacted. All the easy shelters (like this) have long since been closed.

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I'm not saying that his interpretation is correct. I haven't looked up the relevant sections of the tax code and it sounds like you haven't either. Therefore, neither one of us has any clue if this is a legitimate treatment or not.

There's probably nothing specifically about rake rebates in the code. Therefore, there's probably room to argue that they fall into one of several existing categories. For example, when you get the 5th cup of coffee free, it's not earned income. So, I still think there's probably an argument that could be made.

[Cactus Cactus]

I have to say, I think you made a VERY good point. In fact I am going to ask my CPA on that

[broiler]

Disclaimer: I am a CPA and have had 3 clients audited for online gambling in the last 5 years, two for sports betting and one for poker and sports betting.

The IRS did consider bonuses and rake rebate as a part of income in all 3 situations. Their reasoning is that play is required to qualify for a bonus or rake rebate. The play is a taxable event, therefore any payment received as a result of this play is taxable. The IRS equated bonuses and rakeback to comps, which are taxable and have been upheld as taxable in multiple tax court cases.

A purchase point discount would be a different scenario, but if the underlying event is taxable, then the discount has an effect on taxes. Lets say you buy your poker laptop for $1,000, but receive a $100 rebate. Your depreciable basis for the computer is $900 because the rebate reduced your cost to place the asset in service. If the computer was personal use only, then the $100 rebate has no impact on your taxes whatsoever as the underlying purchase was not taxable.

My thought is that the tax attorney didn't have all of the information in order to make a correct analysis of the situation. I know that people come on here every month and try to argue that rakeback and bonuses are not taxable, but they never have any proof or reason that stands up in their defense. I would be interested in seeing what the tax attorney used as his basis for the decision that rakeback is not taxable. Not trying to be a jerk here, but I need hard evidence to change my opinion, especially since I have dealt with the IRS in 3 circumstances on this matter. The poker player's return included rakeback as income and we would love to amend his return to reduce that income since it was more than 15% of his income for the year.

This is a bit off topic, but I don't think it is worthy of a whole new thread, since it is about internet poker and taxes.

Does cocaine sales constitute "income?" Internet poker, according to the US federal government, is illegal. The IRS works for the US federal government. Drug dealing is illegal, just like internet poker is. Do convicted drug dealers face income tax evasion charges?

This is one thing that completely boggles my mind. The federal government cannot, on one hand, deem something illegal, and on the other hand, expect people to pay income tax on it, as if it were a legitimate form of income. It seems that logically, it would have to be one or the other.

[randomstumbl]

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This is a bit off topic, but I don't think it is worthy of a whole new thread, since it is about internet poker and taxes.

Does cocaine sales constitute "income?" Internet poker, according to the US federal government, is illegal. The IRS works for the US federal government. Drug dealing is illegal, just like internet poker is. Do convicted drug dealers face income tax evasion charges?

This is one thing that completely boggles my mind. The federal government cannot, on one hand, deem something illegal, and on the other hand, expect people to pay income tax on it, as if it were a legitimate form of income. It seems that logically, it would have to be one or the other.

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Al Capone is the perfect example of this. He went to jail solely for tax evasion because he didn't pay taxes on his illegal income.

It seems to me that paying taxes on his illegal income would have gotten him thrown in jail for admitting to doing something illegal.

I haven't played poker online long enough to worry about paying taxes on it yet, but that time is rapidly approaching.

What is keeping the IRS from taking a list of people that claimed some income (or even a loss) from online gambling on their tax returns, and turning it over to the Justice Department for some mass raiding? Is their own laziness the only thing protecting poker players?