DISCLAIMER: In the US anybody can give free tax advice, as long as no legal advice is rendered. Some of the answers to tax questions below are based on clear and concise tax law, such as the fact that any money won at poker is considered gambling income and is a reportable event. Other answers, such as how winning and losing gambling sessions are counted, are less certain but based on knowledgeable interpretations, by experienced individuals, of the tax code, IRS-issued tax guidance and tax court decisions. As there is little clear IRS guidance issued so far in relation to poker play, other interpretations might be reasonable and defensible. Any interpretations, including those below, could be either accepted or rejected at the discretion or whim of an IRS tax examiner in an audit. If your tax situation is complicated, it is best to seek the advice and support of a knowledgeable tax professional who can help you determine the best way to fill out your tax returns and provide representation should your return be selected for audit.
I am not a tax professional myself. This was a community effort, and I have merely compiled the information provided from discussions on this forum and elsewhere. Please don't PM me with tax questions that aren't covered here, I won't be able to be much help! But, if there's are any corrections or additions that you feel are merited, get in touch and I'll add them in my yearly update.
Tax Year 2011 Special: How do I handle frozen online poker account balances (FTP, UB/AP, etc) on my taxes?
Q: Since my frozen balances were never cashed out, aren't the tax implications the same as they would be if I had voluntarily left that balance on the site?
A: No. It's certainly not that simple, at least. Poker income is
generally realized when it is won. Withdrawals or deposits from or to a poker site are events that never impact your taxes in any way. See the question "If I don't withdraw my online poker winnings, do I still owe income tax on them?" later in this FAQ.
The notion of "won" is not simple in the case of funds that you were prevented from ever withdrawing, or funds that may have never been backed by adequate assets to pay player balances. Read on.
Q: Since these funds are irretrievable, does this affect the amount of my gambling winnings in 2011 or previous years?
A: Possibly. The doctrine that governs when gambling wins and losses are realized is called
constructive receipt. As this applies to online poker, most of the time this means that winnings and losses are realized as soon as they occur, since players always
have the option of immediately withdrawing their balance after each, regardless of whether or not they actually do.
In the case of Full Tilt Poker and UltimateBet/Absolute Poker, the events of Black Friday have shown that, despite public appearances, neither site was solvent. Had every player simultaneously requested a withdrawal in 2011 prior to Black Friday, the money would not have been there. This is most clear in the case of Full Tilt Poker with its highly publicized asset shortfall, but is arguably true for UltimateBet/Absolute Poker as well as
they have entered the process of declaring bankruptcy. The lack of assets to cover player balances poses substantial doubt over the ability of players to have withdrawn their funds, which suggests a reasonable argument that constructive receipt was not in effect for the irretrievable frozen account balances of Black Friday. However, this is not completely settled and should be seen only as an opinion.
Under this assumption, any frozen funds that can be attributed to money you won in 2011 would, therefore, not be 2011 gambling income. If the funds were returned in 2012, they would then be 2012 gambling winnings. You would not have the option of choosing to realize them in 2011, even if that would be favorable for your tax situation.
Note that, for funds that you were able to successfully withdraw during the first 3.5 months of 2011, they are treated normally for tax purposes. You successfully received the money, so constructive receipt definitely applies.
Casualty Losses, Constructive Receipt and Full Tilt Poker
Poker and Taxes: 2011 Year in Review
Tax Consequences of Online Poker Withdrawals Post-Black Friday
Taxation of Gambling: US Tax Implications of Black Friday
Q: What portion of my frozen balance should be attributed to winnings rather than deposits, and what are the tax implications?
A: All funds in an online poker account must represent either funds won at the tables or funds deposited (or received in a player transfer, which we categorize as a deposit for these purposes). It is necessary to utilize some sensible means of accounting in order to determine which portion of your frozen funds are from 2011 winnings and which portion are from prior year winnings or deposits, as the tax implications are different for each. Frozen 2011 winnings are, as noted in the prior question, income that was not constructively received, and thus not 2011 income. Note that any winnings from 2010 or earlier are considered to have been constructively received in 2010, as the reasoning given in the prior question does not extend across tax years. Therefore, winnings from prior years will be treated the same as deposits in the analysis to come.
Since there is no direct legal precedent on issues like this, the most reasonable accounting method to adopt for the "cost basis" of a poker account is FIFO (first in, first out), which dictates that the particular funds withdrawn on any given cashout are the funds which entered the account first. In particular, if you only made a single initial deposit and eventually withdrew more than that amount, then your deposit will have been withdrawn and the remaining funds in your account could be considered to be 100% winnings. An example is giving in the following article. Keep in mind that these are only guidelines, and that many real-life cases may be much more complicated. Seek a tax professional.
Taxation of Gambling: US Tax Implications of Black Friday
Q: Can I just take the balance of my frozen online poker accounts as a gambling loss?
A: No. A gambling loss would only be appropriate if the money were lost in a wagering event. There is no argument that this is the case in this situation.
Q: Can I take them as a casualty loss or any other sort of deduction?
A: First and foremost, as far as 2011 income is concerned, the answer is no. The earliest that you might generate a casualty loss from our frozen account balance is in 2012, which means that this issue will not impact your 2011 tax return.
The portion of a frozen account balances representing deposits or constructively-received winnings at Full Tilt Poker and UltimateBet/Absolute Poker
may go on to be casualty losses, but not as long as there remains some uncertainty as to whether or not players will be able to retrieve these funds in the future. This includes the possibility of partial repayment at cents on the dollar after the liquidation or bankruptcy of an online poker site. The taxable loss will occur on the hypothetical date in which there is public confirmation that the funds are gone forever. This has not happened as of the end of 2011.
Note that frozen funds that were attributable to winnings rather than deposits won't be casualty losses; if you fail to receive the funds, you can't also take that portion as a deduction, as that would be double-counting against income you never received.
Frozen Online Poker Funds and the Casualty Loss
Casualty Losses, Constructive Receipt and Full Tilt Poker
Taxation of Gambling: US Tax Implications of Black Friday
Risky sites, the casualty loss, and possible implications for *future* play post-Black Friday
Q: What are the tax implications if I've sold or bought "shares" of a frozen poker account balance?
A: For example, let's say that Adam has $1,000 in your Full Tilt Poker account and "sold the account" to Bob for $600. Bob paid Adam $600 for the right to receive Adam's full account balance in the event that it becomes retrievable.
If Adam files as a professional, he can likely take a $400 loss on Schedule C (as long as the full $1000 amount was counted previously in his gambling income). If Adam files as an amateur, he likely has a $400 casualty loss on Schedule A.
Bob's $600 outlay in 2011 is likely not a taxable event. If Bob ends up receiving a payoff from this contract in 2012, he will realize income on the payoff less the $600. If Bob files as an amateur, this gain is either gambling winnings or "Other Income", both on Form 1040. If Bob files as a professional, this is business income on Schedule C. If Bob ends up suffering a loss on the contract, such as if a poker site is confirmed in 2012 as unable to ever repay player balances or if they pay out at cents on the dollar, Bob has some sort of loss for the appropriate amount, likely a casualty loss for an amateur and a Schedule C business expense for a professional.
Both parties should be diligent in documenting this transaction in a detailed contract.
The discussion of this issue is ongoing here:
tax question about selling your ftp/cereus roll
When do I owe taxes on poker winnings?
Q: How much in poker winnings can I have before I need to file taxes on it?
A: Any amount of gross poker winnings is taxable, regardless of whether they are from online poker, cardroom poker, or even private home games. Assuming that you have enough income from other sources such that you must file a tax return, you must file your poker winnings if you've ever had a session where you won $1 or more. So almost all players who play poker even casually must claim their winning sessions as income on their tax return.
If your total income gross (from all sources, including your total gross winning poker sessions) is small enough, you might not have to file a tax return at all. See
Do You Need to File a Federal Income Tax Return?
IRS Resources:
Do I have to file a tax return?
Do You Have To File?
Do You Need to File a Federal Income Tax Return?
Q: Do I report and pay taxes on just my net winnings for the year?
A: No. You must keep track separately of each of your winning sessions and your losing sessions. The total of your winning sessions is reported as gambling income on your Form 1040. The total your losing sessions, up to a maximum of your total winning sessions, can only be reported as an itemized deduction on your Schedule A as gambling losses. For the professional player, both figures are reported on a Schedule C Business Income and the net amount, including deductions for standard business expenses, is transferred to the Form 1040 as net business income. See below for more details about the definition of a session and who may file as a pro.
Q: That's not fair! Why is poker taxed at all?
A: It might not be fair, but it's the law. In general, all forms of personal income are taxable in the US unless specific exemptions are made. While there may be reasonable arguments as to why income passed among players in a zero-sum game shouldn't be taxed, poker winnings will probably always remain taxable -- after all, "gambling" is generally seen as an activity which should be discouraged through a so-called "sin tax".
Q: Why do I owe income tax on online poker winnings if online poker is illegal?
A: First of all,
playing online poker isn't illegal, even in the wake of the Black Friday indictments. Secondly, even if it were, your income from it would still be taxable. Al Capone was famously busted on tax evasion charges for his unreported illegal income.
IRS Resources:
Other Income (Illegal Activities section)
Q: What if I'm worried about incriminating myself if I am worried that online poker is illegal, or if I live in a state where online poker actually is illegal?
A: The only information you write on your tax return is that you have "Gambling Winnings/Losses". The IRS won't know if your winnings come from online poker, legal brick-and-mortar cardroom poker, or any other form of gambling. This is true for both amateur and professional gamblers.
The general rule under the Internal Revenue Code is that returns and tax return information are confidential and may not be disclosed to federal or state agencies, with a few exceptions, detailed in the third link below. There may be some risk for you if you live in a jurisdiction where playing online poker is illegal. Professional legal advice, in this case, is your best option.
What rights do I have not to incriminate myself under the 5th am. when declaring winningsc
Exceptions to Privacy of Taxpayer Information: Disclosure to Federal & State Agencies
Q: How does the IRS even know that I have poker income?
A: They usually don't, except for large live tournament cashes where forms (such as Form W-2G) are sent to the IRS by the casino. Also, cash transactions in excess of $10,000 will be reported by the casino via a Currency Transaction Report. However, this does not mean that you don't owe tax on other poker income, and it does not mean that you would be safe evading your taxes on this income. As noted by 2+2 author Dan Harrington in his book series, even from a purely selfish perspective, you are much better off paying your taxes properly and being able to consume your poker income freely than attempting to evade taxes by hiding your poker income and being unable to spend or invest it without creating an inconsistency with your reported income that would ruin you in an audit. Also, there is a definite possibility that online poker rooms and/or payment processors will eventually hand over records of US players' past poker account activity to the US government as part of the implementation of a US regulatory and licensing system.
Form W-2G Basics
U.S. Casinos and Currency Transaction Reports
Q: If I don't withdraw my online poker winnings, do I still owe income tax on them?
A: Yes, you do. You realize the income when you earn it, not when you choose to withdraw it. From
Question about funds in your account that you're not going to cash out:
Quote:
Originally Posted by Russ Fox
The US uses the doctrine of "constructive receipt" to determine when (or if) you have income...
For the online gambler the questions that must be asked are, (a) could the gambler have used the funds he won for more gambling, or (b) could he have cashed out at any time after he won? If the answer to either question is yes that gambler generally has a reportable gambling win for tax purposes...
For specific issues relating to irretrievable online poker funds, constructive receipt may not apply. See the section "2011 Tax Year Special: How do I handle frozen online poker accout balances (FTP, UB/AP, etc) on my taxes?"
Q: Wouldn't it make more sense to pay as I withdraw, because that's when I actually get the money?
A: This is not allowed. If it were, poker players would be able to strategically plan their withdrawals from year-to-year to minimize their total tax due. The IRS doesn't permit this in general. Traditional investments where capital gains are realized are an exception to this rule, but poker does not fit the form of such investments.
Q: If I transfer my winnings to another player and have him cash them out for me, who pays the taxes?
A: You do. The player who earns the poker winnings realizes the income for tax purposes. If, for some reason, you do frequently cash out via player-to-player transfer agreements, you should probably keep some formal records along with your counterparty to explain why your poker winnings differ significantly from the amount you've cashed out personally, as the IRS would question this discrepancy in an audit.
Q: If I play on an account in my mom's name (for rakeback purposes), who should file the income?
A: Similarly to the above question, the income is yours and it would be fraudulent for your mom to file it as if it were hers. The IRS doesn't care if you're violating the T&Cs of a poker site by playing under an account that you do not own. Again, keeping a formal record of this agreement seems advisable.
Q: What if I'm underage?
A: The IRS doesn't care, and this should be of no consequence for tax purposes. Follow the normal IRS rules for tax returns for minors. However, you should also be sure to be aware of the "kiddie tax" as it will likely impact you -- see "If I am 23 years old or younger, under what circumstances does the "kiddie tax" apply to my poker winnings?" later in this FAQ.
IRS Resources:
Publication 929 (2011), Tax Rules for Children and Dependents
Q: What if I have dual citizenship, or am visiting from another country?
A: Dual citizenship does not change your obligation to pay U.S. taxes on your income, including income from poker. You may also be obligated to pay taxes in your other country of citizenship.
Non-resident aliens visiting the U.S. are subject to income tax and tax withholding on poker income unless they are a resident of a country which has a tax treaty that which exempts gambling income from U.S. income tax. These countries currently include: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russian Federation, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom. If you are playing at a casino, you will need to provide a U.S. Taxpayer Identification Number on an IRS Form W-8BEN to claim such treaty benefits and avoid tax withholding.
The issues for resident aliens earning gambling income while in the U.S. are complicated, as they may involve not only tax issues but visa qualifications as well. It is recommended for resident aliens to consult an immigration specialist on this matter to avoid risking your visa status.
There are three ways to obtain an ITIN: By filing a US tax return and attaching
Form W-7 to the front of the return with the required documentation, by completing Form W-7 and the required documentation to an Acceptance Agent, or for poker players, by placing high enough in a poker tournament where a
Form 1042-S would be issued and the casino then issues the ITIN when you present proper documentation.
Note: For US residents, casinos/cardrooms are required do reporting and withholding (using
IRS Form W-2G) only on net tournament poker winnings over $5,000. For non-US residents, reporting and withholding is required on any amount using
IRS Form 1042-S. Technically, this reporting and withholding for non-US residents applies to both cash games and tournaments, but you will probably only see it done for tournaments.
For further discussion of this, see
Taxes for Non-Resident (1040NR)
IRS Resources:
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities: Other Income
Individual Taxpayer Identification Number
United States Income Tax Treaties
IRS Form W-8BEN
Q: If I am American and play poker in another country or on a cruise ship, is that a taxable event?
A: Yes. All US citizens and permanent residents are taxed on their gambling activity irrespective of where it takes place.
Q: Can I avoid my US tax obligations by moving out of the US?
A: Generally, US citizens and resident aliens are taxed on their worldwide income, whether they reside in the United States or abroad. In certain circumstances, you may be able to exclude a portion of your foreign earnings. To qualify, you need to meet two tests:
- The tax home test
- The bona fide residence/physical presence test.
Details of the requirements can be found in
IRS Publication 54. You would also have file as a professional player for your poker income to qualify for the exclusion. If you qualify, you are able to exclude up to $92,900 (2011 figure) of your foreign earned income.
As to whether you can renounce your citizenship and thus avoid paying U.S. taxes, this is possible in theory, but the process is not straightforward. Even if you are able to renounce your citizenship and do not plan to return to the U.S., you may still have to pay tax on your property as if you had sold it for its fair market value in the year that you leave. See
IRS Publication 519 regarding the Expatriation Tax.
Also note that, if the state you're moving from has a state income tax, you may also still owe state income tax while abroad if you are considered to meet your state's "tax domicile" requirements. These can vary from state to state, but loosely depends on a list of general factors available here:
State taxes while living abroad.
For further discussion of this, see
Why dont more US poker players give up US citizenship and move to UK?
IRS Resources:
IRS Publication 54
IRS Publication 519
Q: Might I still owe state income tax as well, if I've moved out of the US?
A: If your state has a state income tax, then you indeed still may, if you are considered to meet "tax domicile" requirements. These can vary from state to state, but loosely depends on a list of general factors available here:
State taxes while living abroad.
Q: I didn't realize that I needed to file taxes and I haven't done so for previous years! What do I do now?
A: You need to reconstruct your poker records as well as possible and amend your previous years' tax returns. If you filed your return, but did not include your poker income, you generally have three years from the day that your return was due to amend your return. There are a number of exceptions to this rule, however, that will extend or completely eliminate the three year statute of limitations. For example, if the amount of income that you failed to report is greater than 25% of the amount stated in the filed return, then the statute is extended to six years.
You should also know that in general, an amended return needs to be submitted in hard copy (i.e. no electronic filing) and receives some extra scrutiny by the IRS, since an agent must call up and compare your amended return to the return that you previously filed.
If you did not file a return at all and now believe that you should have, or if you do not have records of your play, the best advice is that you should speak to a tax professional about your particular situation.
IRS Resources:
Instructions to Form 1040X
How do I properly account for my poker income?
Q: What records of my play do I need to keep?
A: The IRS requires that you keep an accurate log of your gambling losses and winnings.
Quote:
Originally Posted by IRS Publication 552
Gambling Winnings and Losses
You must keep an accurate diary of your winnings and losses that includes the:- Date and type of gambling activity,
- Name and address or location of the gambling establishment,
- Names of other persons present with you at the gambling establishment, and
- Amount you won or lost.
In addition to your diary, you should keep other supporting documents:
Quote:
Originally Posted by Publication 529, Miscellaneous Deductions
Proof of winnings and losses. In addition to your diary, you should also have other documentation. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.
The IRS also has guidelines that suggest that your log should also contain the "table number" of the table at which you play poker for each session:
Quote:
Originally Posted by Publication 529, Miscellaneous Deductions
Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc.). The number of the table at which you were playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.
Also, note that your records for live play must be handwritten in a log with pen and paper. Records are allowed to be electronic for online play. If you play both live and online, you can copy your live results into a master spreadsheet, but you should retain your physical records for live play. The IRS does not currently fully allow electronic records for live play.
IRS Resources:
Publication 552
Publication 529, Miscellaneous Deductions
Q: For the purposes of tax recording, what constitutes a "session"?
A: The IRS has not fully defined this as it would apply to modern poker situations, so this is up for some debate in some cases. If you play a poker tournament, it is fairly well-settled through the IRS definition of session that each tournament must be its own session, even if you multi-table SNGs all day. If you multi-table cash games, it is probably OK to treat that entire period of continuous play as a single session. It might not be okay to combine play at different games into a single session.
Although there is no definite guidance from the IRS so there are different interpretations possible, here is a breakdown of the current general consensus:
Online Play:
Cash games: Count all play in one continuous sitting as one session, including multi-tabling, but count play at different games (Omaha, Texas Holdem, etc.) as different sessions.
SNGs: Each one is a separate session.
MTT: Each one is a separate session.
Live Play:
Cash games: Count all play in one continuous casino visit as one session, unless you change games (Omaha, Texas Holdem, etc.) or switch to a tournament and then back to cash game. Each time you change games or switch to a tournament, you start a new session. Changing stakes or tables is not starting a new session as long as it is the same game.
Tournaments: Each one is a separate session.
Note: For tournaments and sngs, the winning session amount is your total payout less the entry fee.
For further discussion of this, see
What Is a Gambling Session?
Q: How should I keep these records for online play?
A: If you use database software such as PokerTracker or Holdem Manager, these are sufficient for online records. If you do not use database software, you can keep your online records manually by recording your cashier balances before and after each session you play (keeping in mind the caveats about how sessions are defined, discussed above).
Neither PokerTracker or Holdem Manager will calculate your gross wins(/losses) automatically for you, but you can calculate them easily by exporting your session results to Excel. In Holdem Manager, this is done by going to Sessions, right-clicking on the sessions list, and exporting the grid to a CSV file which can then be opened in Excel. Once exported to Excel, you can use these formulas to calculate the sum of the positive entries and the sum of the negative entries:
=SUMIF(G:G,">0")
=SUMIF(G:G,"<0")
where G is the column containing the results for each session.
Q: Are rakeback and cash bonuses taxable?
A: Yes and yes. Each of these should be treated as a winning gambling session when you are paid them. Rakeback isn't a "refund" that would be tax-exempt. Think about it this way: if, instead of receiving 27% rakeback, you were simply charged 27% less rake, each of your session results would be increased by an amount totaling your total rakeback, which would lead to a higher poker income. Also note that, for a rakeback provider that does not allow you to withdraw your earned rakeback continuously (for example, perhaps you have to hit $100 in accrued rakeback before you can withdraw), then you would not have constructive receipt on any unpaid rakeback balance under this threshold at the end of 2011. It would carry over and become income in 2012 when you were able to withdraw it. For more on constructive receipt, see the question "Since these funds are irretrievable, does this affect the amount of my gambling winnings in 2011 or previous years?"
Q: Are non-cash bonuses or casino comps taxable?
A: Yes. Generally, these should be accounted for using an estimate of fair market value. See
Accounting for Comps and Bonuses -- Special Cases and
Are comps taxable.
Q: Do I owe taxes on my FPPs?
A: In most situations, players account for these by accounting for the value of the merchandise or bonuses they receive (see above) at the time when they cash in their FPPs. However, if you intend to carry over a FPP balance of significant value from year-to-year, you might want to develop an accrual-based method of accounting for them. An ongoing discussion of this issue is taking place here:
Do you owe tax on your PokerStars Frequent Player Points?
Q: How do taxes work if I am staked, or if I stake another player?
A: A staking arrangement causes the staker to realize the gambling wins/losses of the stakee. For example, if Adam puts up the $10,000 entry fee for Bob to enter the WSOP ME in return for 50% of whatever Bob cashes for in excess of the repayment of the initial $10,000, and Bob ends up cashing for $50,000, the proper way to account for this is a $20,000 gain for Adam and a $20,000 gain for Bob. It is not an option to have Bob realize the full $40,000 gain. If Bob busts out of the tournament with no prize, Adam realizes a $10,000 gambling loss and Bob does not have any taxable event.
When a staking arrangement involves a large live tournament where W-2Gs will be given, there is an additional form (
Form 5754) used in conjunction with the W-2G to document which persons realize the tax burden of the individual's gambling winnings. Although they are supposed to, some cardrooms do not recognize this form, in which case Bob can issue a Form 1099-MISC to Adam for the amount of his share. For more, see
this article.
Both Adam and Bob should be diligent in documenting this transaction themselves in a detailed contract, established prior to the outcome of the event.
Staking/backing tax question - turbotax
IRS Resources:
Form 5754
Form 1099-MISC
Q: Can I get deductions from my losses from casino games, lottery tickets, sports bets, etc.?
A: Yes. In the eyes of the IRS, poker is gambling and all gambling is treated the same. If you are a net winning poker player, you can deduct a $100 loss at the craps table or the sportsbook the same way you deduct a $100 loss at a poker game.
Q: So can I go gather a bunch of losing lottery tickets to get extra deductions?
A: This, of course, is fraud, and it is illegal. Same with fabricating gambling losses through any other method. Fake gambling losses will not hold up in an audit, and receipts alone are not going to convince anybody that the gambling losses are yours. You may be found liable not only for additional taxes, interest and penalties, but also criminal penalties for tax fraud.
Q: Will my poker site or cardroom send me any sort of tax form like a W-2 at the end of the year?
A: No. Online and offline poker rooms do not currently provide their players with summaries of their play for tax purposes, and they do not furnish information to the IRS (except for big cashes in live tournaments) like most other businesses would. The reputable online poker sites, however, should be able to supply you with your hand histories or a play summary for a year if you email them to request it.
Q: Can I deduct poker-related expenses such as coaching fees, purchase of software, books, travel expenses for live games, etc.?
A: If you file as an amateur, you cannot deduct any costs associated with your poker play. One exception is tips and small cash purchases such as drinks that are done within a poker session. That is, if you take $5 off your stack to buy a drink from and tip a casino server, it is generally seen as reasonable to simply disregard this, continue playing, and to go on to have $5 less in profit from that gambling session, no paperwork necessary. Another possible but unsettled exception may be in-session expenses directly tied to the profit and loss of a single gambling session, such as ATM; if you need to pay a $5 fee to take out $500 from an ATM to rebuy within a session, it may be reasonable to count that as having invested $500 in the game to obtain a $495 stack. There is another possible theoretical exception that unavoidable fees directly associated with your gambling but not with a specific session (such as mandatory fees charged for online cashouts) could be deductible as hobby expenses for amateurs. However, as hobby expenses, they would only be deductible to the extent that they exceed 2% of your Adjusted Gross Income (AGI), which is the figure which includes the sum of your winning gambling sessions [i]before[i] your losing sessions are deducted; one would be highly unlikely to ever exceed this threshold.
If you file as a professional, you can deduct these expenses, along with some other poker-related expenses, under the rules for self-employed businesses. For discussion and examples of what expenses are allowed as write offs, see
Pro poker write offs,
Deducting meals from taxable income, and
Taxation of Gambling: Professional Gambler Business Expenses.
IRS Resources:
Publication 535 (200), Business Expenses
How do I properly file my tax return with respect to my poker income?
Q: What is the difference between filing as an amateur gambler and filing as a professional gambler?
A: The big differences are:
- An amateur player cannot report only the net of their wins and losses on their income tax return. Instead, the sum of their winning sessions is reported as Gambling Income under Other Income on line 21 on their Form 1040 and the sum of their losing sessions can be deducted (up to the extent of winnings) as Gambling Losses on Schedule A Itemized Deductions under Other Miscellaneous Deductions (see below for more on when you should or should not itemize). In the end, tax will be paid on the net when you itemize, but the gross will impact Adjusted Gross Income, which can limit other taxpayer deductions and credits. (see Tax Implications for Recreational Gamblers
for examples)
- A professional gambler nets his or her winnings on a Schedule C Business Income.
- A professional gambler is able to take deductions for business expenses related to his or her gambling. Note that a 2011 U.S. Tax Court case confirms that professional poker players can take such deductions even in excess of a net gambling win for the year. For example, a professional with a losing year will still be able to deduct his "ordinary and necessary" business expenses against other income, or carry it over as a net operating loss. (see Victory in U.S. Tax Court for Professional Gamblers as well as Paying taxes on losing year? for a more detailed discussion of the mechanics of handling a losing year for a professional player).
- A professional gambler must file Schedule SE and pay an additional ~13.3% of his or her income in self-employment tax (For 2011, it's 10.4% towards Social Security on the first $106,800 of income, plus 2.9% towards Medicare on all income).
- A professional gambler may be entitled to the Earned Income Tax Credit, available for low-income individuals. (see Earned Income Tax Credit for Professional Gamblers )
Tax Implications for Recreational Gamblers
Victory in U.S. Tax Court for Professional Gamblers
Earned Income Tax Credit for Professional Gamblers
IRS Resources:
Form 1040 -- Note that both amateurs and professionals must file the Form 1040, and not either of the shorter forms 1040A or 1040EZ.
Schedule A
Schedule C
Schedule SE
Self-Employment Tax
Q: Should I file as an amateur or a professional? Must I file one way or the other?
A: This is a very complicated question that should be handled on a case-by-case basis. Most people will not have a choice, as their circumstances will dictate that they file one way or the other.
In general, if you have been making your living solely from poker and have no other job and are not a full-time student, you definitely must file as a professional. If you have a full-time job, you usually must file as an amateur. A full-time student can usually choose to file as either an amateur or a professional.
For further discussion, see
Tax Court, SE TAX, and what you really HAVE to do. A non-exhaustive list of factors that tax courts have considered in making the amateur-vs.-professional determination is available at [URL="http://pokerfuse.com/features/in-depth/taxation-gambling-professional-versus-amateur-gambler/"]Taxation of Gambling: Professional Versus Amateur Gambler[/a].
Q: If I am filing as an amateur, should I take the standard deduction or itemize my deductions so I can deduct my gambling losses?
A: If the sum of your losing sessions plus any other personal deductions that you could itemize totals to less than the standard deduction (e.g. $5,800 for a single taxpayer in 2011), then you will be better off choosing not to itemize and you will essentially pay taxes on all of your Gambling Income (that is, the sum of your winning sessions with no way to deduct losing sessions). If this sum exceeds the standard deduction, then you will be best off choosing to itemize deductions, in which case you lose out on the value of the standard deduction that you would have received in the absence of poker activity. The wife or husband of an amateur poker player will also lose out on the standard deduction in this case, regardless of whether or not the couple is filing jointly or separately (see
Gambling taxes for married couple).
Q: What happens if I have a losing year?
A: You are not allowed to deduct gambling losses in excess of your gambling winnings. That means if you end up having a losing year, you will pay no tax from gambling income, but you will not get a deduction against your other income or a carryover for future years. This is true of both amateur and professional gamblers, though professional gamblers can carry forward businesses expenses via a net operating loss on a losing year. See
Victory in U.S. Tax Court for Professional Gamblers, as well as
Paying taxes on losing year? for a more detailed discussion of the mechanics of handling a losing year for a professional player.
If you would otherwise be taking the standard deduction, you also may end up owing additional tax on having a breakeven or losing year at poker, as filing properly may demand that you itemize deductions (see the previous question).
Q: Can I file as a corporation?
A: This is generally not a good idea for an individual player. The IRS does not allow the formation of a partnership or corporation without economic substance. There is no economic substance in these entities for the individual player. It also my be illegal under the gambling laws of your state. There may be situations involving actual partnerships, economic ventures, etc. where such entities are warranted, but professional legal advice is highly recommended. From
Starting an LLC for one's poker career:
Quote:
Originally Posted by Russ Fox
There are numerous issues regarding LLCs for gamblers. You absolutely need to discuss this with your own tax advisor and an attorney before forming an LLC as a professional gambler.
A single-member LLC is generally a disregarded entity for tax purposes. That is, it files a Schedule C. That doesn't save you a penny in taxes.
What I suspect some of those who have LLCs have done is make a tax election to be taxed as an S Corporation. An S-Corp owner is required to pay himself a "reasonable" salary. The tax savings are from the non-salaried income that flows through to the owner; self-employment tax isn't paid on that income. There are additional costs: a second tax return, costs for forming the LLC, costs for maintaining it, etc.
There are many potential problems... (continues)
Quote:
Originally Posted by CPAEvil
Guys, I wrote the book on How to Turn Your Poker Playing Into a Business. After much research, it is not advisable to do this. I totally feel that the IRS will not agree with an S-Corp and once they decide not to allow it, you are probably looking at several years down the road, which will be a lot of penalties and interest.
Q: Can I deduct rake paid?
A: No. If you think about how you account for your poker sessions, you will realize that your rake has, essentially, already been deducted in the traditional means that poker sessions are already accounted for. It would only be a deduction if your recorded sessions consisted of pre-rake winnings, which is impractical to track in live play and atypical to track in online play. See
Can you deduct rake paid when you file taxes?
Q: Should I get an accountant, or use Turbotax?
A: If you are filing as an amateur and have kept good records, it is not too complicated to account for your poker income properly, and a program like Turbotax should be well-suited for it. If you are filing as a professional or if you have any special circumstances that might complicate your poker tax situation, you should definitely seek a tax professional, preferably one with experience with poker players, as many accountants do not know how to handle gambling tax well.
Q: How does the FBAR (Form TDF 90-22.1) work? Who needs to file it?
A: As of 2011, it has been clarified that poker account balances do NOT qualify as foreign bank accounts for the purposes of the FBAR. See
FBARs No Longer Required for Poker Accounts. However, e-wallet accounts such as Neteller that are based outside of the U.S. still qualify.
If the total of the maximum balances of all of your foreign bank accounts during the year exceeds $10,000, you are required to declare foreign bank accounts to the IRS by filling out the
FBAR (Form TDF 90-22.1).
This maximum is calculated as follows: for each foreign bank account, take the highest balance of that account for the entire year. If the sum of these exceeds $10,000, you have to file the form. For example, even if you never had more than $10,000 total online at any moment in the year, if you had $6,000 in one international e-wallet account on March 20th and $6,000 in another international e-wallet account on November 2nd, your total maximum balance is $12,000 and you must file this form.
Note that the FBAR form itself is filed separately from the rest of your tax return. It is due June 30th of the following tax year, i.e. two and a half months after the deadline for filing your 1040 for that year. Nonetheless, if you are going to be filing an FBAR form, you will indicate this on your tax return on Schedule B of the 1040 under Part III – Foreign Accounts and Trusts.
IRS Resources:
Form TDF 90-22.1
FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) - Filing Requirements
Q: Do I have to make quarterly tax payments?
A: Generally, yes, poker players are expected to make quarterly tax payments during the year to cover their estimated tax for that year. The amount of the estimate is roughly based on the prior year's taxes, but involves various rules and exceptions; see
Form 1040-ES for details. At the end of the year, when the player files his or her tax return, he or she pays the remaining amount if his or her income ended up being higher than estimated, and receives a refund if his or her income ended up being less than estimated. However, some people prefer to not pay the quarterly estimates, as the penalties and interest are not very high.
For more information, see
Err...I haven't been paying quarterly taxes. Should I have been?
IRS Resources:
Form 1040-ES
Q: Can I put some of my poker winnings into an IRA?
A: If you file as an amateur, no. Gambling income is considered to be unearned income, just as interest and dividend interest are. Only earned income can be used towards making tax-advantaged IRA or Roth IRA contributions. However, if you have earned income from another source (generally, anything that issues you a Form W-2), you can contribute that income. It is worth noting, though, that a high Adjusted Gross Income resulting from high gross poker winnings may make you ineligible to make tax-advantaged contributions to an IRA or Roth IRA.
If you file as a professional, then your net poker income is considered earned income and allows you to be eligible for tax-advantaged IRA or Roth IRA contributions. Also, a professional player may be able to set up a SEP IRA as a small business, which can have a higher contribution limit than other IRAs (see the link below).
IRS Resources:
Publication 590 (2011), Individual Retirement Arrangements (IRAs)
Publication 560 (2011), Retirement Plans for Small Business
Q: If I have played poker in more than one US state, do I need to file returns to each state?
A: Yes, you will need to file returns to each state you've had poker winnings in, except for states that have no state income tax. This falls under the "jock tax" which is meant to allow states to tax travelling athletes and entertainers that visit. See
The Jock Tax Hits Poker Players.
Q: What if my state does not allow Gambling Losses to be deducted?
A: This impacts only amateur players, as professionals carry over their net business income from their federal income tax return. Unfortunately, there is no good solution to this for amateur players. You are not allowed to report different gambling winnings and gambling losses between your federal and state tax returns, so you do not have the option of filing your federal taxes properly and simply netting your wins for your state taxes. To comply with tax law, you must pay your artificially-inflated state taxes, even though this could constitute an arbitrarily high percentage of your net poker winnings (or even exceed them).
A list of such bad tax states for poker players is available
here.
Q: How does the AMT interact with poker taxation?
A: As an amateur player, the itemized deduction for your Gambling Losses will not affect your eligibility for the Alternative Minimum Tax one way or another. However, if you are otherwise eligible for the AMT, your Gambling Losses deduction can significantly increase the amount of income tax you owe. If you are in this situation, you should seek professional tax advice.
AMT is imposed on a taxpayer if the “tentative minimum tax” exceeds the regular tax, and the taxpayer then must file a
Form 6251. AMT is based on a different measure of income than regular federal income tax is. This different measure is called “alternative minimum taxable income,” and includes, among other items, AGI.
In general, the greater a taxpayer’s AGI, the greater “alternative minimum taxable income” is, and accordingly, the greater the likelihood the dreaded AMT bites. All else equal, a taxpayer has a lower AGI if reporting as professional gambler than if reporting as a recreational gambler.
Q: If I am 23 years old or younger, under what circumstances does the "kiddie tax" apply to my poker winnings?
A: The "kiddie tax" can affect the tax rate of unearned income for certain young people by increasing it to their parents' marginal tax rate. If you file as a professional, then the "kiddie tax" will not impact you for your poker winnings, as they are earned income. If you file as an amateur, then your poker winnings are unearned income and may be subject to the "kiddie tax". If you had more than $1,900 total of unearned income (amateur poker income + any other investments) in a tax year and, at the end of the tax year, you were either:
- under 18 years old
- 18 years old, and your earned income was less than half of your support (rent, food, entertainment, generally all costs of your life)
- 19-23 years old and a full-time student, and your earned income was less than half of your support (see above)
then the "kiddie tax" may apply to you for that tax year, depending on your other facts and circumstances. Note that "earned income" generally includes W-2, salaried income from employment but never includes any element of poker winnings for those who file as amateurs. See the Form 8615 Instructions for the other criteria. If the "kiddie tax" may apply to you, you should discuss your personal circumstances with a tax professional to determine whether or not it does. It if is determined that the "kiddie tax" applies to you, then you must file Form 8615 with your tax return.
IRS Resources:
Form 8615 Instructions
Q: If I file the FBAR form or file a huge Adjusted Gross Income, are they going to audit me?
A: Outside of poker, these two things can be indicators of "suspicious" activity that might trigger an audit. However, in recent years, the IRS has audited only a small percentage of taxpayers who file the FBAR or have a high AGI, as many poker players do. There is no public information on the overall audit rate for poker players.
Other Useful Links
Russ Fox is the premier poker tax accountant and a longtime contributor to our forums. He frequently discusses poker-related tax situations and news in his tax blog:
http://taxabletalk.com/
Brad Polizzano is a tax accountant who blogs about poker-related tax topics:
http://taxdood.com
This site features a compilation of old articles by Russ Fox:
http://www.gambling-law-us.com/Artic...mbling-tax.htm
This is a commercial website, but has plenty of useful information:
http://www.professionalgamblerstatus.com/
A bunch of compiled information and examples on assorted tax topics:
http://forumserver.twoplustwo.com/sh...8&postcount=47
A Q&A-style article on basic poker tax issues by Ann-Margaret Johnston:
http://www.pocketfives.com/tax-qa
Thanks to the following users who contributed information and suggestions to this FAQ (though none of them should be considered as providing any legal advice, or as liable for any errors): repulse, Chubbyfunsta, Russ Fox, Niediam, BigAlK, scrivenerjones, Kevmath, PokerXanadu and taxdood, among others.
Special thanks to those tax professionals who were willing to contribute their expert knowledge:
- Jonathan Becker [tax attorney who represents numerous clients involved with competitive gaming (becker.taxes *^AT^* gm&&&&ail.com)]
- Sayeed Choudhury [tax attorney and financial consultant (bio), aka Chubbyfunsta]
- Russ Fox [tax practitioner]
- Brad Polizzano/taxdood [tax attorney]
Last edited by PokerXanadu; 03-12-2012 at 06:53 AM.
