Poker & Taxes (For Non-Professional Players)
Benjamin Franklin said, "In this world nothing is certain but death and taxes." Unfortunately, our poker endeavors are not immune from this phrase. This post is intended to discuss tax considerations as they relate to poker winnings.
Who needs to pay taxes? The IRS response to this question is: anyone who had a winning session during the course of the tax year, regardless of your overall outcome for the year.
Per the IRS website:
"Gambling winnings are fully taxable and must be reported on your tax return. You must file Form 1040 (PDF) and include all of your winnings on line 21. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips.
You may deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A (PDF), line 27. However, the amount of losses you deduct may not be more than the amount of gambling income you have reported on your return. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses."
So what this means is that the sum of all winning poker sessions must be aggregated and included as "Other Income" to arrive at your adjusted gross income. Losing sessions, which are only deductible up to the amount of your gains, are deductible as itemized deductions.
Translation into English If you are not itemizing your deductions, you are going to get screwed!
The problem with the IRS method of calculating your taxes on gambling winnings is that you essentially gross up your winning and losing sessions, rather than simply reporting them on a net basis. If you play poker with any kind of scale or volume, or if you are already itemizing, then it doesn't have a tremendous impact on your tax liability. Otherwise, you may lose the ability to report some, or all, or your losing sessions, resulting in a higher tax liability than if your net gain was reported.
What is a session? Unfortunately, we don't have an easy answer to this question. The problem is compounded by online play, wherein one can play multiple tables of different games.
Per Russell Fox, E.A., a tax practitioner enrolled to practice before the IRS, the following rule is described:
"We, thus, have a rule: a player can net his results in two (or more) different games/tables if they were the same poker game played continuously as part of the same session."
So playing multiple tables of one type of poker game for a period of time would be construed as 1 session. However, what if you play different poker games at the same time? Per Fox, each game would constitute a different session:
"Now, what about an online player playing multiple games at the same time? Take Player E, who plays at one online site. He plays simultaneously at four different virtual tables: Tables 17 & 18 in $1/$2 Texas hold'em games and Tables 19 & 20 in $1/$2 Omaha games. E wins $10 at Table 17, loses $20 at Table 18, wins $30 at Table 19 and loses $5 at Table 20 while playing these tables simultaneously during the same one-hour period.
There are no rules created by the IRS to treat online gambling differently than gambling in a bricks & mortar cardroom. This means that we can apply the above rule. E has two sessions, a loss of $10 in hold'em and a win of $25 in Omaha."
Record Keeping So you've determined that you had a qualifying winning session during the tax year and must report your poker activity on your taxes. The next stage is to consider the required record keeping. Fox quotes the following in discussing the http://www.gambling-law-us.com/Articles-Notes/Gambling-Session.htm ">requirements of record keeping:
"IRS Publication 529 (Miscellaneous Deductions) provides general guidelines:
You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information. 1. The date and type of your specific wager or wagering activity. 2. The name and address or locations of the gambling establishment. 3. The names of other persons present with you at the gambling establishment. 4. The amount(s) you won or lost.
For specific wagering transactions, you can use the following items to support your winnings and losses....Table games (twentyone, blackjack, craps, poker, baccarat, roulette, wheel of fortune, etc.): The number of the table at which you were playing....
Before we try to determine what constitutes a "session", let's take a brief look at documentation requirements for gamblers. You must keep a log (diary) of your results. Courts have held that the log should be a "...contemporaneous daily log" and that the records be permanent.
If you are audited you have the burden of proof of showing that you have maintained good records. "[T]he taxpayer should not be allowed to avoid paying income taxes simply because he keeps incomplete records.
The simplest method to comply is a written log. You can use a small pocket paper notepad or diary and write down the date, cardroom name, game, table number(s), time you played (e.g. 1:00pm - 3:00pm), and your result (amount of win or loss). This is the method that the IRS suggests.
Alternatively, you can use a computer system. IRS Publication 552 describes the requirements for a computerized system: "If you use a computerized system, you must be able to produce legible records of the required information. In addition to the computerized records, you must keep proof of payment, receipts, and other documents to prove the amounts shown on your tax return." Back-up records for tournaments are your tournament receipts. For live (cash) games, though, it's just your word. The IRS likes written records because it believes they are less likely to be forged.
The final record-keeping requirement is that the data be entered contemporaneously. While there are no specific standards for gambling expenses, similar requirements exist for other types of expenses. For example, travel expenses must be entered "...at or near the time of the expenditure." Thus, you should enter your results in your log daily, or as quickly after playing as possible. The burden of proof of records is on you, not the IRS."
Online poker presents unique challenges in that you do not receive receipts from you poker play. It appears that the key attribute would be to maintain an accurate log of your play, whether written or in excel, and ensure that this log ties to deposits/withdrawals from the cash account linked to your online poker account.
Hopefully this post has been helpful in defining your tax obligations. Note that I am NOT tax expert, and the information herein is not guaranteed to be suitable or accurate, so use at your own risk. This information is provided "as-is", and you should consult with a tax professional.
The Greedy Gecko
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