My hypothetical friend started playing poker in one of the 14 states where online poker is illegal and is wondering about taxes for next year.

If he has things straight, he needs to keep a log of winning and losing sessions and then itemize them for federal returns instead of simply netting them. But, say he lives a number of hours away from a B&M casino. Isn't itemizing 150+ sessions of poker providing evidence that he is playing online poker?

To him, it sounds like a catch-22. Either do the taxes wrong and net the wins or provide evidence he was playing online. There are obviously a huge number of players that play in these states. Does anyone know how they approach this problem?

FWIW, he also lives in a state where gambling loses are not deductible. So hypothetically speaking, he could spend all year playing bad, break-even poker, net $50 on the year, and have a monster tax bill. Correct?

Should he just say screw it and stop playing?

Yes.

Seriously, I'm not sure what I'd do if I lived in a state that didn't allow deductions for gambling losses. However living in a state where online gambling is illegal should be a non-issue.

what states can you not deduct gambling loses?

Rumor has it WI is one of them.

I heard the same, im wondering if Maryland is also

There is no worry about providing evidence that he played online poker if states ever decide to come after individuals?

When you actually file your taxes (and being honest on your taxes is the best bet) you are not required to specify where your gambling or poker playing took place. Your records for an audit need to hold that info, but not your actual return. So, do the math and report your real numbers. If you get a notice you are going to be audited HIRE A GOOD LAWYER FAST and follow his or her adivce before doing anything else.

If you live in a state that does not allow gambling losses to be deducted, you are going to pay one way or another. I can think of certain ways, under certain statutes, that can help - but no way would I suggest them on the web, its too delicate and case specific. Again, consult an experienced tax lawyer if you find yourself in this situation.

Skallagrim

Skallagrim's answer is better and more complete than anything I could say. I'll just add that Al Capone went to prision for tax evasion, not rum running or whatever it was he did. Don't do anything to make it obvious where and how the gambling was done, obviously. Even so the IRS isn't looking for people breaking state laws and I suspect the state tax authority isn't either.

Minnesota doesn't allow deductions for losses either, jerks. Apparently we are not allowed to misrepresent our income unless it royally screws us, in which case it is required.

RI and MA are two I know of.

Rhode Island does allow gambling losses as an itemized deduction. RI's phase-out of itemized deductions does not impact gambling losses as an itemized deduction.

Here are the states that don't allow gambling losses to be claimed (or have significant restrictions):

Connecticut
Illinois
Indiana
Louisiana
Massachusetts
Michigan
Minnesota
Mississippi
New York
Ohio
West Virginia
Wisconsin

Most of these states base their income tax on federal Adjusted Gross Income (AGI), and allow no itemized deductions. Exceptions are Louisiana (uses a formula which eliminates about 40% of itemized deductions), Minnesota (Minnesota AMT will impact almost all amateur gamblers and cause most to pay tax on their gross wins), Mississippi (only MS gambling deductions are allowed--this is likely unconstitutional but good luck fighting that), and New York (if your AGI is over $100,000, your itemized deductions begin to be phased out).

Of course, the professional gambler files a Schedule C and is not impacted by this.

-- Russ Fox