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

[CPA]

I have read several posts on this forum and am taken back by all of the misinformation provided about Poker and Income taxes. This is a very confusing issue, and this is why:

For the average person, gambling income must be reported as income, and losses from gambling must be taken as an itemized deduction. Since many people don't itemize, you do not get the deduction. This is a particularly harsh result.

A common perception on this board is that you must be a professional gambler to offset your gambling income and losses. This is generally done by filing Schedule C (Schedule for your Form 1040).

So why the confusion ?

For one, the concept of carrying on a trade or business as a gambling "professional" is only defined in the courts, not the Internal Revenue Code.

The Supreme Court concluded, in holding that the taxpayer was engaged in the business of gambling, that "to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose in engaging in the activity must be for income or profit." (Groetzinger v. Commissioner).

What does this mean?

I think many people conclude that since you have a day job, you cannot be a poker professional for tax purposes. This line of thinking may be incorrect.

Depending on your facts and circumstances, there is a reasonable position that many of you are a "poker professional for tax purposes." Some of the factors to make this determination include: time spent playing and researching, detailed records kept, etc. (Note: There are several factors)

This distinction is important because, as mentioned earlier, losses can offset income. Furthermore, the debate as to "when does a session end" is null and void....it doesn't matter!!!!

Keep in mind I said "reasonable position" The court case mentioned above was for a full time gambler. No court case has ever ruled (and likely never will) about a professional part time gambler. But the fact is, the concepts explained in the ruling (i.e. if a taxpayer's primary purpose if for profit) is the same whether you are a full time or part time gambler.

The determination of whether you are a tax professional is up to you and your tax accountant. But keep in mind, playing good poker is a skill, and many people on these boards work hard on their game to make money.....This may very well make you a professional for tax purposes !!!!!

[sfwusc]

I agree. What state are you a CPA?

Tax side or audit?

SWUSC

[CPA]

State of Florida, Tax CPA.

[LinusKS]

CPA - I think you summed up the situation nicely, but I'm not sure "it doesn't matter" when you begin and end your sessions.

The IRS - idiotically - says that you're supposed to track your sessions individually (and even record the names and contact info of people who were at your sessions with you((!)).

I do agree the end result is the same no matter how you interpret "session," since at the end of the day it will still come out to wins-minus-losses.

I suspect, though - as a practical matter - the IRS is thankful anytime anyone reports and pays taxes on gambling winings, since they know full well the vast majority of gamblers never report anything.

Plus, they must know if everybody did report everything, it would be a negative number - since the net result of gambling winnings minus gambling losses minus house cut is a negative number.

[CPA]

"I do agree the end result is the same no matter how you interpret "session," since at the end of the day it will still come out to wins-minus-losses."


That is all I meant by "It doesn't matter." In fact, detailed records obviously do matter.

It is amazing how threads ask "when does a session start and end." This concept may be irrelevant to many players.

[kenberman]

[ QUOTE ]
It is amazing how threads ask "when does a session start and end." This concept may be irrelevant to many players.

[/ QUOTE ]

Could you explain why this concept may be irrelevant?

[slickpoppa]

My main problem witht the definition of sessions is that it wildly inflates your income and increases the chances of your tax return looking suspicious. For example, I wouldn't be surprised if the average player making 100,000 has an income of 500,000, minus 400,000 in deductions, which might look kind of suspicious to the IRS. Am I wrong to be concerned about such things?

[CPA]

[ QUOTE ]
[ QUOTE ]
It is amazing how threads ask "when does a session start and end." This concept may be irrelevant to many players.

[/ QUOTE ]

Could you explain why this concept may be irrelevant?

[/ QUOTE ]


Because if you are a professional for tax purposes, you generally would file a Schedule C. You would add up your total income and deduct your total losses for the year.

If you are a casual player and not a "tax professional", then your losses would have to be repoted on Schedule A, the itemized deductions. Many people either don't itemize or have these deductions phased out, so you do not get a benefit for all of your losses.

The "when does a session end" debate is basically trying to determine what portion of your losses go on Schedule A. If you are a professional and file a Schedule C, it doesn't matter when a session ends.

[kenberman]

thanks for the reply.
[ QUOTE ]
If you are a casual player and not a "tax professional", then your losses would have to be repoted on Schedule A, the itemized deductions. Many people either don't itemize or have these deductions phased out, so you do not get a benefit for all of your losses.

[/ QUOTE ]

I am both a casual player, and have itemized deductions (I believe Pokertracker tracks all the neccesary info?). So session start/end would be relevant for me, correct?

[cardspeak]

Thanks, CPA for the post.

I've been wondering about this issue, too. Saying it's "particularly harsh" to have to treat any session win as pure income and all one's session losses as only itemized deductions is an understatement. It's brutal. I wonder how this can be the position of the IRS. It strikes me as malicious. Certainly the IRS can't be that ignorant about how gambling actually works.

One's net win, before expenses, is the only real basis for calling it income. Why don't they just rule that every time you win a hand, that's income? Every time you lose a hand that's a potential itemized deduction that you, of course, have to defend with lots of records and which they can deny as inadequate for no particular reason. Since, in IRS land, one is guilty until proven innocent it would be a nightmare for the audited taxpayer. The only reason they don't require all winning hands be considered income is it's impractical, but the principle is the same.

How are players, especially on-line, dealing with this? The evidence of your transactions are all flowing through your bank. What is your true net win rate if you have to pay taxes as if you never lose?

Frankly, this whole issue pisses me off. Even the excellent input you provide, CPA, about how one could have a wider basis for claiming they are a poker professional, still puts one in the uncomfortable position of not knowing whether the IRS will buy it. If they don't, watch out. Given the bizarre position they take on what is income, I wouldn't expect understanding. They seem to be taking a breathtakingly obtuse position simply to bleed people.


Has anyone on this forum ever had to defend themselves with the IRS? What was your actual experience? I wonder if there aren't thousands of poker players who will be getting a very rude surprise sometime in the next 5 years when the IRS finally gets around to auditing them. I hope I'm not one of them.