Who Pays Taxes on Poker Earnings? (POLL)

[Jimbo]

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lol what if someone makes like 100k over the course of the year in gross earnings but loses 99k and has 1k profit. I've been reading around and it seems as though that person has to pay higher taxes (higher tax bracket) because of that 100k even though they only profited 1k for the year since theres only a certain % they can deduct as losses... if they even deduct. What happens to this type of person? Do they end up paying a large % tax on that 1k they won? What if a person cant even deduct or itemize or whatever it is... do they pay taxes on 100k even though they only made 1k? lmao, this whole thing is a joke. I've talked to two accountants and both gave me apparently horrible advice. Both said "Off the record, my advice is to not file, you're not making enough for them to audit you". Even though i've had transactions that could have been over the 10k threshold where banks report.. but I broke them into smaller cash outs. Now wtf do i do... what happens if i just report my profits only? When I get audited do i still get the same penalties for someoen who didn't report anything at all? Might be easier to just move to europe :/ Oh but wait, i hear USA citizens are still accountable for any income even when in another country, great. This bites. I've got money that I havent been keeping records for and don't know how to report.... I can't be the only person in this situation. It's stressing me out.

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Here is a good link that helps define a session to satisfy the IRS.

Russ Fox Helps Define a Poker Session

[AcmeSalesRep]

The tax code is inherently "unfair" in the way it treats gambling income. But the IRS will not accept this as justification for not filing or for filing incorrectly.

Acme

[Thythe]

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bad form.

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Is it really that bad of form? Yes, I pay full taxes on my poker winnings just to preface, but it is unjust. 10 people each earn $100 at their job and pay 30% in taxes. Then they each take the $70 they have left to the poker tables. 5 people go bust and the other 5 make $50 each (with $100 total going to the house). That $250 is taxed another $75 and the house gets taxed $30. Then they pay their dealers who play the same games and get taxed again. The situation is unacceptable.

Who gives the state its power to tax? The people of course. Who can take it back? In fact, it is the right of the people to alter or abolish it.

Some people are just taking this opportunity to tell the government what they think.

[Mempho]

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Yea basically I've got the same situation. I've accumulated money that I haven't been keeping track of and I have no idea how to report it. I am with the group of "ignorant" 20 year olds and have just been recently looking this stuff up.

Adding up each session then itemizing the losses sounds like such a bad way to do this. I've also read that this can severely inflate my income and move me up several income brackets.

I will just have to hear what more people have to say. I'd like to report my winnings because I'm not a fan of severe penalties or jail time. I am considering making substantial side money playing poker in addition to my job income and by then I will more or less have to report my winnings.

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OK...so I work for a large accounting firm but I don't do taxes (I'm an auditor). I do, however, know this by heart.

You do get screwed by this. For instance, last year, my Adjusted Gross Income (not taxable income) was inflated by about $40,000. AGI is important because it is the amount that can limit certain itemized (or "below the line" deductions). Common itemized deductions include charitable contributions, medical expenses, sales tax deduction, and the home mortgage interest deduction.

Now, the worst part of all this is not the inflated AGI. It is that you have to lump all of your winning sessions into your total income and take out your losing sessions as an itemized deduction. "Playing" with these numbers is not acceptable and, if it was done extensively, it would probably be questioned.

So, my take from work was about $50K and my total winning sessions totaled about $40K. So, my AGI was $90K. Now, my losing sessions totaled about $30K (so I was showing about a $10K poker/wagering profit).

So, it goes like this:

Wages: 50K
Other Income: 40K

Adjusted Gross Income: 90K

Less: Itemized Deductions

Charitable Contributions: $1500
Sales Tax Deduction: $1000
Gambling Losses: $30K

Taxable Income: $57,500

Notice that I lost my standard deduction. If I had no other itemized deductions, I would, in effect, pay a double tax on the first $4800 (I don't know the exact figure; the amount of whatever your standard deduction is [and this varies according to single, married, dependants, etc.]

Now, I was able to negate some of this with charitable contributions and the sales tax deduction. Every poker player benefits, however, from the sales tax deduction. Your sales tax deduction can be your choice of either your actual sales tax paid or an arbitrary amount that is based on your AGI. Since your AGI is severely inflated, your sales tax deduction will be inflated. This, of course, was not thought about when the sales tax deduction was made law, but we should be glad to have it.

I personally recommend saving all of your receipts to see if your actual sales tax is higher than the amount you get on the table. You can view the table at the IRS web site. It varies by state, so there is no good way to give you that information.

Now, if you have no other job and you can argue that you spend substantially all of your time playing poker, then you can file as a professional regardless of skill level. This standard is the Groetzinger case (you can google this). Groetzinger was a losing horse bettor that argued that he was a professional and he won the case (he still could not deduct more in losses than in winnings, however.

For a professional gambler, the same taxes would look like this:

Business Income $40K
Business Losses $30K
Business Income $10K


One very big problem is this: You would now have to pay the Self-Employment tax (i.e. Social Security, Medicare) which is an additional 12.5% on top of your taxable income. In other words, it may not even be a profitable deal to file professionally in your situation.

Lastly, the standard for criminal tax evasion is 20%. If you underreport your income by 20% or more, the IRS will have you by the gonads and will probably make you a slave.

I encourage you to report your income if you ever plan on making any serious money playing poker. If you encounter an audit, they can go back seven years and there will likely be a lot of questions if your lifestyle ever exceeded your income.

That said, if you played live and locked all of your cash in a safe deposit box, it would be hard to get caught. However, you become very vulnerable when you decide to start spending it.

The line of questioning might go something like this:

Q: So, how did you afford $80,000 car.
A: I won the money playing poker. As you can see, I reported $120,000 in winnings this year.

Q: Ahh, I see. You say you play 30/60? How did you get the money for that? We have no poker earnings for you last year? Is this your first year? Do you have a backer?
A: Uhhhhhh

Q: Sir, could we see....???
A: That's priveleged information.

Q: Not in IRS terms. I think the judge would like to know how you are special and Willie Nelson is not.


For those of you that don't think you can go to prison, you are wrong. I know someone that went to prison for evasion (I think it was 2 years with 6 months served, plus he still had to pay a huge bill).

[r3vbr]

Move to a country that doesn't charge income tax.

Tip: Hong Kong

great post mempho, very informative, I have to bump it. So if you were a loosing player but you made a good living at a real job could you deduct your loses from taxable income and therefore pay less taxes? It would be a great way to pay less taxes for cronicaly losing players. You could even pay less taxes on your work related income while being a winning player, since you could easily disguise you winning if you play the cards right.

[Python49]

Mempho, excellent post.

Can you further explain this however:

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Your sales tax deduction can be your choice of either your actual sales tax paid or an arbitrary amount that is based on your AGI. Since your AGI is severely inflated, your sales tax deduction will be inflated. This, of course, was not thought about when the sales tax deduction was made law, but we should be glad to have it.

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How does an inflated AGI lead to an inflated sales tax. Well first, I guess i'd need to have a full understanding of the relationship of a sales tax to poker. How does sales tax relate to poker... what are you referring to when you say "on the table".. is the sales tax the rake? If not, is there anyway you can deduct based on rake?

[Jake (The Snake)]

Do you have any recommendations on how to define a session when reporting? How did you do it?

My book keeper has me filing under self employed business owner. I get to write off 1/3 of my mortgage everything I eat, travel, airline, hotels, gas and I get to save .30 for every mile I put on my car and even $4,000 a year I put in my IRA. It all comes down to about 1/3 of what I make online that I save on deductions. Just find a guy who has never had an audit.

[Python49]

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Just find a guy who has never had an audit

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find them for what?