THE BASICS
-Please explain the tax basics for poker winnings and losses.
The basic rule is this. If you earn money doing something, be it poker or any other form of income, you are supposed to claim this on your tax return. That is the tax law – they make it pretty cut and dry.
Now, if you have poker winnings and losses, the next question is how to report it on your tax return. This is where you have to figure out if you are treating your poker playing as a business or not. If it is your business, you are able to claim all expenses that you incur related to poker, not just the amount you spend to play (losses). Some examples of this include your meals and entertainment, travel, auto expenses, etc. If your poker is a hobby, you can only claim the losses you have – not any other expenses.
PRO OR HOBBY?
-What are the differences between filing as a professional and filing as a hobby player?
A hobby is an activity for which you do not expect to make a profit. If you are thinking of starting a business but it does not provide you with the ability to earn a living, or to make a profit, it very well may be a hobby.
It is important to first distinguish as to what your intentions are with your poker playing. Ask yourself these questions:
• How often do you play?• Do you depend on these winnings to pay bills?
• Do you have another job and if so, how many hours per week do you work?
• How much time do your dedicate to playing poker?
The answers to these questions are important. A hobby is something you usually do in your spare time and is not relied upon to pay the bills. It is normally for fun or entertainment in addition to your other main income source. Profit is not typically the main goal when you have a hobby.
It is important to know the difference between something that is a hobby and something that is for profit. Hobby expenses are deductible only to the extent of hobby income.
NOTE: Gambling expenses, if you are a hobby, are treated different from any other hobby. Non-professional gamblers are not allowed to deduct expenses for transportation, meals, lodging, etc. You can only offset your income with the money you lose.
As a professional gambler, you report your gambling activity on a Schedule C, Profit and Loss from Business. This form goes along with your personal tax return (Form 1040) and submitted to the government. This is the form where you summarize what you made from gambling, what money you lost and the gambling-related expenses that you had.
At this time, the IRS will not allow you to deduct more expenses than income – even if you are considered a business. Of course this is not true for other types of businesses. “Regular” businesses can take more expenses than income and have losses on their tax return.
Gambling is a totally different from other businesses. It has always been the rule that if you have gambling income you can offset it with gambling losses. This rule applies to the “hobby” gambler that can only offset these winnings if they can itemize. By taking it a step further and becoming a business, the IRS still applies the gambling rules. Basically, you cannot exceed gambling winnings and you have to show a net profit of zero if your expenses are more than your income.
So what are the tax benefits of treating your gambling as a business? Well, it’s the only way to take your gambling-related expenses even if you can only net them to zero. If you had income and were a hobby, you would still have to claim the income on the front page of your tax return. Remember the expenses are not deductible if you are a hobby, only the losses up to the income amount and only if you can itemize. Therefore, the adjusted gross income (AGI) for a professional gambler would be lower than the hobby gambler.
There are credits that you may be able to take that are based on the amount of your adjusted gross income (AGI). The lower your AGI is, the more likely you are to be able to take other credits or deductions. Some of these credits include Earned Income Credits, Child Tax Credits, Education Credits, deductibility amount of IRA contributions, phase-outs of personal exemptions, itemized deductions, etc.
-How does one file as a hobby player?
If you are not a professional gambler, your wins must be reported on the front page of your 1040, on the line that says “Other income. List type and amount.” This is called hobby income, specifically from gambling, and yes, you are required to report it.
Hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.
Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket. That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.
Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $10,000, then you may be able to itemize with just your gambling losses.
-What must you do to be considered a pro?
The IRS has several “facts and circumstances” tests in making the distinction between whether you are a hobby and a business. Unfortunately no one factor necessarily helps to determine this.
The following are factors that should normally be taken into account:
• Whether you carry on the activity in a businesslike manner
• Whether the time and effort you put into the activity indicate you intend to make it profitable
• Whether you depend on income from the activity for your livelihood
• Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business)
• Whether you change your methods of operation in an attempt to improve profitability
• Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
• Whether you were successful in making a profit in similar activities in the past
• Whether the activity makes a profit in some years, and how much profit it makes
• Elements of personal pleasure or recreation
The IRS guidelines on this topic are available in Section 1.183-2 (a) and (b) of the Federal tax regulations which is a great topic to read if you are an insomniac! The above bullets summarize what they are looking for.
-I made a modest amount playing poker in 2005, and now I'm conflicted as to whether or not I need to file a Schedule C form. I have no job. Poker is my only source of income, though it is far from a lucrative source, just enough to support myself. Do I need to file as a professional gambler if it's what I do full time? Or can I declare myself "unemployed" and report my poker winnings under gambling income on my primary form?
As you obviously have found out, hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.
Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket. That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.
Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $10,000, then you may be able to itemize with just your gambling losses.
So you do not know if you can itemize or you have no clue what this means? Basically, the IRS lets you take a “standard deduction” on your return or you can itemize your deductions. The standard deduction amount depends on if you are single, married filing joint, married filling separate, head of household, or if you are a qualifying widow. The IRS lets you use the greater of the standard deduction or the itemized amount for the most tax benefit.
How do you know which amount could be higher? You will want to calculate the numbers and see. Most people that itemize have the following expenses:
• Large amounts of out of pocket medical expenses
• Pay property taxes on a home/land etc.
• Have State tax withheld or paid in during the year
• Large purchases where sales tax was paid
• Have a mortgage and pay interest on that mortgage
• Have made both cash and non-cash contributions (clothing and other similar donations)
• Have a substantial amount of business expenses that have not been reimbursed
• Gambling losses
The above items are some of the frequently itemized deductions. There are more deductions that can add to the total. The best way to know is look at Schedule A and the instructions to better understand what could help you make this determination.
Again, if you see that the standard deduction amount is higher after adding these items together, then it is in your best interest to use the standard deduction amount.
Unfortunately, you don’t entirely reap the benefits of your gambling losses. And, to add insult to injury, if your income is really high, and you can itemize, the itemized deductions get limited! Feels like you literally can’t “win,” doesn’t it?! The standard deduction numbers change each year. For 2005, If you are Married Filing Joint it is $10,000, for Single its $5,000, for Head of Household its $7,300 and for Married Filing Separate its $5,000.
-Last year I had a part time job and simply put gambling winnings in as other income. But, this year gambling has been my only source of income. Can I still file as unemployed since I do not consider myself a professional yet and am still looking for a career outside of poker? Or do I have to file as self-employed?
You don’t have to file as a professional gambler. Doing that is a benefit so the IRS is more than happy for you to file as a hobby or “Other Income” **Remember – Do not think you can net out your wins and losses on that “Other Income” line.
-If I file with the IRS as a pro online poker player, or even file for earnings as if it were a side job, does the Department of Justice or other law enforcement agencies have access to IRS records?
In theory, the IRS is not the morality police for the type of business you have. They just want to make sure you report your income. I wouldn’t suggest that you get terribly specific on your tax return. I would simply call your earnings “Gambling” which is not illegal. Its just best, in my opinion, to not specify. I said “in theory” but I have a feeling if you called your business “money laundering”, my theory might be incorrect and you might find “Big Brother” watching you!
RECORDKEEPING
-How do you need to keep track of your poker play in order to satisfy the IRS if you get audited?
If you are claiming that you have gambling losses, if you are audited, the IRS would most likely want you to prove that you really had those losses. By this, they would want to see how much time you spent playing poker, whether you are playing at a brick and mortar or on-line poker game. Also, you would want to keep up with tournaments that you are in, such as sit and goes, home cash games, satellites, etc. It is important to keep track of every bit of time that you are playing poker.
The easiest way to do this is to have a poker log book. It’s a basic spreadsheet that shows the date you played, how much time you played on that date, and the amount of money that you won or lost. I would also state where you were playing poker and what type of game you were playing (i.e. $10-20 limit or a tournament) I have an excel spreadsheet that is available on my website that you can download at pokerdeductions.com. You can also use poker tracker.
-I'm disorganized and know almost to the cent how much I won and lost in poker in 2005, I just may not know exactly how much in each session over the 365 days. Would it be better to try to piece together a diary from memory or just guess on how much net I profit that I had?
It really is best to try to re-create something. Now, remember that the IRS won’t want to see any proof unless they decide to audit you. If they did audit you, and you say that you know to the cent how much you won and lost, the IRS would want to know basically how you came up with the number for this. You don’t have to show each session but I would compile my any on-line records and have them in a file just in case. Those records may be enough to show. You would also want to list any brick and mortar wins and losses if you happen to play other than on-line.
-I keep up with every session I play, how much I bought in for (started with), how much I ended with (often 0), and the net (profit or loss). Can I not just put in that total as additional income on my tax form, have it added to my total income and then tax derived there from? After all, that is what it is, additional income.
Well, its not good news here. The problem is that many gamblers think that because you have enough losses to offset winnings, there is no reason to report either to the IRS. YOU CANNOT NET THESE TOGETHER AND NOT REPORT THEM! You also cannot net them together either. They, unfortunately, have to be separated.
There was a court case about this exact situation involving a judge that was a hobby gambler. The judge testified in tax court that he thought he could “net out” his gambling wins & losses and if losses exceeded wins, nothing needed to be reported on the return. The end result is that the jury found that he willfully failed to report both gambling income and gambling losses. The Court of Appeals upheld the conviction. (US vs. Scholl, No. 97-10143, 97-10248)
A little harsh, yes, but my opinion is that the IRS was making an example out of him for other gamblers. Unfortunately it set a precedent.
-I haven’t kept track of anything. I've won a good amount but as far as how much I've lost vs how much I've won, I have not a clue. What do I do if my record keeping absolutely stinks?
It is best to try to re-create what you did as best you can. Believe it or not, the IRS requires you to keep a set of books and records for what you have listed on your tax return. Without SOMETHING, the IRS could disallow your expenses in an audit.
-Do we really need to do all this session tracking? Lets say I withdrawal 10% of my online stack each month, or, lets say I withdrawal everything over a certain limit.
No, you have to report what you made, not what you withdrew. You have to analyze your wins and losses as separate components. This sounds harsh but if you make money and don’t report it, you are committing fraud in the eyes of the IRS. It would be the same principal as if you made money and you wanted to not report it because you haven’t spent it yet!
ON-LINE AND HOME GAMES
-If I am an 18 year old non-professional poker player, am I obligated to pay taxes for online poker winnings? Also am I obligated to pay taxes on home poker games winnings?
Yes, you are required to report any income on your tax return, whether you are a professional or not.
Remember, it becomes a criminal offense to sign a tax return that is incorrect and untrue. If the IRS can prove that you had intent to violate the law, this is considered fraud. Then life gets really ugly for you with the government. If they determine fraud, there is no statute of limitations. What this means is that the IRS can look back to the first day that you ever filed a tax return.
-Can home game losses be used on your tax return against your winnings? Obviously there is no paper trail of home games, so will an entry in the spreadsheet be sufficient? This same question can apply to casino cash games, since there is no receipt or paper trail.
Yes, home game wins and losses should be reported, regardless of legality. Remember, the only thing they got Al Capone with was tax evasion! The IRS doesn’t care if what you do is illegal or not, whether its playing on-line poker or drug smuggling. They want any income reported on your tax return.
Home games, as well as any other cash games should be kept up on a spreadsheet. It is important to get into the habit of keeping up with your poker play. I have told people that if they are doing it as they go, its easier than if you have to try to re-create it later.
Because there isn’t a paper trail, it is more of a reason to keep good records. Remember that the IRS looks at your backup if you are audited and the more thorough that you are, the better off you will be if they question your play.
-If I win a satellite for a tournament entry, do I have to declare it to the IRS? How should I do that if I don't get the cash, but only get an entry ticket? What if the package includes the entry fee, transportation and spending money - are these treated differently? Are the rules the same for all satellites, or does the size of the prize matter.
Ok, this one will sound unfair but if you think about it, it will make sense.
Let’s say I pay $30 and after all is said and done, I win a seat to the WSOP valued at $10,000. If I play the WSOP and do not finish in the money, I basically won $10,000 and then lost $10,000 and am at a total loss of $30. The cost of the entry is the $10,000 that you won. When you receive the transportation and spending money, unfortunately this is also considered income. You can offset this (if you are a pro) with the ACTUAL expenses that you incurred. Think about it this way. If they give you spending money of $500 and you go and buy clothes, this is income to you and not used toward poker. If you took the $500 and used it for a hotel room during the tournament, then you can offset (if you are a pro) this against the money you received. The rules are the same no matter what.
Income from any gambling, whether Poker Stars, Party Poker, etc., has to be claimed as income on your tax return.
TOURNAMENTS
-What are the rules for sharing tournament action?
If you are swapping or selling action in a tournament and you win, you need to give the casino a Form 5754. You can find this Form along with the instructions on the IRS website at www.irs.gov. Believe it or not, this is a simple Form to understand and complete. All you do is complete Part 1 with the amount you won, your name, social security number and address. You then complete Part 2 showing each person that you are sharing your winnings with, along with their name, social security number, address, and the amount that you are paying them.
Seems like you are a bit of a snitch but really you are helping everyone. If you decide not to prepare this Form, (or didn’t know about it until now) the entire amount that you won will have to be claimed on your tax return. This can be a really big problem for several reasons. First of all, if your poker playing is something that you do for fun, i.e. a hobby, the entire amount you won will show up on your Form W-2G and will have to be claimed on the front of your tax return on Line 21 as “Other Income”. The only way to offset the money you won during the year is with the money you lost during the year and with the money that you “payback” to others that back you. The only place to do this is on a Schedule A which is for itemized deductions. The bad part is that if you cannot itemize, you technically cannot offset those gambling winnings at all. It’s not fair but it’s the rule. Whether or not you can itemize can be determined fairly easily by looking at the instructions for the Schedule A.
-I play poker as a hobby. I was lucky and won a $12,000 package which included my $10,000 buy-in in addition to $2,000 to cover my plane ticket, hotel room and food. How does this work on my tax return.
Let’s assume that this is all you made for the year. You would claim the $12,000 as income and then you would deduct the $10,000 as gambling losses (assuming you weren’t “in the money” in the tournament). Unfortunately that is it. Even if you spend the $2,000 or more for your expenses, there is no way to write this off. You can ONLY do this if you consider your poker play as a business.
-Using the same example, meaning that I won the $12,000 package but I am a pro, how would I treat this now?
In this instance, let’s assume this is all your income and expenses for the year. We will assume that you played the tournament and did not make any money. Let’s also say that you ended up spending $1,500 for your hotel and plane trip and $500 for your meals. It looks as if you can write off the entire $12,000 income against $12,000 in expenses and gambling losses but here is the twist. Yes, your income that you would claim on your Schedule C is $12,000. Your expenses, however, are only $11,750. Why? Meals are only ½ deductible. Remember also to keep your receipts so that you can prove you spent the money. Otherwise, it would all be considered income.
FOREIGN ACCOUNTS
-What do I need to know about declaring foreign accounts?
You have to answer the question on the Schedule B of your Form 1040 if you have “an interest in or signature or other authority over a financial account in a foreign country…” You have to list on the Schedule B what the foreign country is.
The best way is to go on the internet and type in what specific law you are interested and try to find a “free” link. Its all out there, it just depends on specifically what you are looking for.
-Is NETeller considered a foreign bank account? I know from the emails I have received from NETeller they certainly do not consider themselves a bank.
This is a really good question – almost too good! Even after doing some research on this, I am not sure. I know that if you earn interest on your money, and a bank is holding more than $10,000, you have to answer the question on the Schedule B of your Form 1040 if you have “an interest in or signature or other authority over a financial account in a foreign country…” Netteller may just be a holding company and we really don’t know where it is operated from. I know that you have to list on the Schedule B what the foreign country is. If you don’t know, how can you answer that? If we cannot find this out, then we really cannot truthfully answer the question on the schedule.
MISCELLANEOUS
-Reporting poker income properly per the Federal requirements seems to cause a problem on my State income tax. If I report Federal Income properly (gross poker winnings or inflows reported as 'income', poker losses or outflows then taken as a 'deduction'), then the gross amount of poker revenue hits the top line of your State return and since you cannot deduct poker losses you must pay tax on poker revenue and not just your winnings. Netting your winnings on your Federal return solves this problem for the State return, but reporting only net winnings is not permitted on your Federal return.
Tax law states that you cannot net your wins and losses – plain and simple. The problem is that many gamblers think that because you have enough losses to offset winnings, there is no reason to report either to the IRS. YOU CANNOT NET THESE TOGETHER AND NOT REPORT THEM! You also cannot net them together either. They, unfortunately, have to be separated.
Although this hurts you on the State Return, there is really no other way around it.
-What are some links to the actual tax laws so that I can look up specifics about these rules?
You have the main IRS website at www.irs.gov. Then you have www.business.gov.
Unfortunately most of the tax laws with opinions are in research packages. Such companies are RIA and TaxTools.
EXAMPLE – FILING AS A PRO VS. HOBBY ON YOUR TAX RETURN
Let’s try to break this down so that you can see how it works on your actual tax return. It’s important to realize what a difference this can make in your tax situation.
Here is the scenario: Your poker is a hobby. You are single without children. You made $40,000 in winnings, $20,000 in losses and spent $10,000 for your other expenses such as hotels and plane tickets (let’s don’t assume any meals in this example). This is all you had.
For your 2005 Tax Return, your income is $40,000, reported on line 21 as Other Income and the $20,000 would go on your Itemized Deduction sheet under Gambling Losses. You would get a personal exemption for yourself of $3,200 so your taxable income is $16,800. The Federal tax on this is $2,159, which is what you would owe the IRS.
Now, lets take the same scenario above except now you are a poker pro and treating your poker playing as a business. Here is how it looks now.
For your 2005 Tax Return, you report all of the information on a Form called a Schedule C, Profit or Loss from Business. You would show $40,000 as income, the $20,000 of wagering losses on the line for Cost of Goods Sold, and then claim the $10,000 as Travel expense. This gives you net income of $10,000. This $10,000 is subject to self-employment tax which is Form SE.
So, $10,000 shows up on the front of your Form 1040 on line 12, which flows from the Schedule C that you prepared. You will have to pay self-employment tax of $1,413. This is calculated on Form SE as the $10,000 less 7.65%, and then you multiply that number by the self-employment tax rate of 15.3%. The IRS gives you a deduction of ½ of this number, which is $707 on the front of your return on line 27. Now your income is $9,293. You get a standard deduction of $5,000 since you are single, and you get the exemption for yourself of $3,200. Now your taxable income is $1,093 and your Federal tax on this is $109. Remember that you now have to add your self-employment tax to this of $1,413 which goes on Line 58 (this comes from the Form SE). Now you owe the IRS $1,522.
See the difference in claiming as a pro versus a hobby. With this very basic scenario, your tax savings is $637. Believe me this amount is nothing compared to the larger numbers you will probably have. The more money you make, the more the tax savings as a professional poker player. Being able to write off expenses besides your wagering really makes a difference.
Pocketfives.com
-Please explain the tax basics for poker winnings and losses.
The basic rule is this. If you earn money doing something, be it poker or any other form of income, you are supposed to claim this on your tax return. That is the tax law – they make it pretty cut and dry.
Now, if you have poker winnings and losses, the next question is how to report it on your tax return. This is where you have to figure out if you are treating your poker playing as a business or not. If it is your business, you are able to claim all expenses that you incur related to poker, not just the amount you spend to play (losses). Some examples of this include your meals and entertainment, travel, auto expenses, etc. If your poker is a hobby, you can only claim the losses you have – not any other expenses.
PRO OR HOBBY?
-What are the differences between filing as a professional and filing as a hobby player?
A hobby is an activity for which you do not expect to make a profit. If you are thinking of starting a business but it does not provide you with the ability to earn a living, or to make a profit, it very well may be a hobby.
It is important to first distinguish as to what your intentions are with your poker playing. Ask yourself these questions:
• How often do you play?• Do you depend on these winnings to pay bills?
• Do you have another job and if so, how many hours per week do you work?
• How much time do your dedicate to playing poker?
The answers to these questions are important. A hobby is something you usually do in your spare time and is not relied upon to pay the bills. It is normally for fun or entertainment in addition to your other main income source. Profit is not typically the main goal when you have a hobby.
It is important to know the difference between something that is a hobby and something that is for profit. Hobby expenses are deductible only to the extent of hobby income.
NOTE: Gambling expenses, if you are a hobby, are treated different from any other hobby. Non-professional gamblers are not allowed to deduct expenses for transportation, meals, lodging, etc. You can only offset your income with the money you lose.
As a professional gambler, you report your gambling activity on a Schedule C, Profit and Loss from Business. This form goes along with your personal tax return (Form 1040) and submitted to the government. This is the form where you summarize what you made from gambling, what money you lost and the gambling-related expenses that you had.
At this time, the IRS will not allow you to deduct more expenses than income – even if you are considered a business. Of course this is not true for other types of businesses. “Regular” businesses can take more expenses than income and have losses on their tax return.
Gambling is a totally different from other businesses. It has always been the rule that if you have gambling income you can offset it with gambling losses. This rule applies to the “hobby” gambler that can only offset these winnings if they can itemize. By taking it a step further and becoming a business, the IRS still applies the gambling rules. Basically, you cannot exceed gambling winnings and you have to show a net profit of zero if your expenses are more than your income.
So what are the tax benefits of treating your gambling as a business? Well, it’s the only way to take your gambling-related expenses even if you can only net them to zero. If you had income and were a hobby, you would still have to claim the income on the front page of your tax return. Remember the expenses are not deductible if you are a hobby, only the losses up to the income amount and only if you can itemize. Therefore, the adjusted gross income (AGI) for a professional gambler would be lower than the hobby gambler.
There are credits that you may be able to take that are based on the amount of your adjusted gross income (AGI). The lower your AGI is, the more likely you are to be able to take other credits or deductions. Some of these credits include Earned Income Credits, Child Tax Credits, Education Credits, deductibility amount of IRA contributions, phase-outs of personal exemptions, itemized deductions, etc.
-How does one file as a hobby player?
If you are not a professional gambler, your wins must be reported on the front page of your 1040, on the line that says “Other income. List type and amount.” This is called hobby income, specifically from gambling, and yes, you are required to report it.
Hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.
Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket. That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.
Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $10,000, then you may be able to itemize with just your gambling losses.
-What must you do to be considered a pro?
The IRS has several “facts and circumstances” tests in making the distinction between whether you are a hobby and a business. Unfortunately no one factor necessarily helps to determine this.
The following are factors that should normally be taken into account:
• Whether you carry on the activity in a businesslike manner
• Whether the time and effort you put into the activity indicate you intend to make it profitable
• Whether you depend on income from the activity for your livelihood
• Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business)
• Whether you change your methods of operation in an attempt to improve profitability
• Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
• Whether you were successful in making a profit in similar activities in the past
• Whether the activity makes a profit in some years, and how much profit it makes
• Elements of personal pleasure or recreation
The IRS guidelines on this topic are available in Section 1.183-2 (a) and (b) of the Federal tax regulations which is a great topic to read if you are an insomniac! The above bullets summarize what they are looking for.
-I made a modest amount playing poker in 2005, and now I'm conflicted as to whether or not I need to file a Schedule C form. I have no job. Poker is my only source of income, though it is far from a lucrative source, just enough to support myself. Do I need to file as a professional gambler if it's what I do full time? Or can I declare myself "unemployed" and report my poker winnings under gambling income on my primary form?
As you obviously have found out, hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.
Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket. That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.
Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $10,000, then you may be able to itemize with just your gambling losses.
So you do not know if you can itemize or you have no clue what this means? Basically, the IRS lets you take a “standard deduction” on your return or you can itemize your deductions. The standard deduction amount depends on if you are single, married filing joint, married filling separate, head of household, or if you are a qualifying widow. The IRS lets you use the greater of the standard deduction or the itemized amount for the most tax benefit.
How do you know which amount could be higher? You will want to calculate the numbers and see. Most people that itemize have the following expenses:
• Large amounts of out of pocket medical expenses
• Pay property taxes on a home/land etc.
• Have State tax withheld or paid in during the year
• Large purchases where sales tax was paid
• Have a mortgage and pay interest on that mortgage
• Have made both cash and non-cash contributions (clothing and other similar donations)
• Have a substantial amount of business expenses that have not been reimbursed
• Gambling losses
The above items are some of the frequently itemized deductions. There are more deductions that can add to the total. The best way to know is look at Schedule A and the instructions to better understand what could help you make this determination.
Again, if you see that the standard deduction amount is higher after adding these items together, then it is in your best interest to use the standard deduction amount.
Unfortunately, you don’t entirely reap the benefits of your gambling losses. And, to add insult to injury, if your income is really high, and you can itemize, the itemized deductions get limited! Feels like you literally can’t “win,” doesn’t it?! The standard deduction numbers change each year. For 2005, If you are Married Filing Joint it is $10,000, for Single its $5,000, for Head of Household its $7,300 and for Married Filing Separate its $5,000.
-Last year I had a part time job and simply put gambling winnings in as other income. But, this year gambling has been my only source of income. Can I still file as unemployed since I do not consider myself a professional yet and am still looking for a career outside of poker? Or do I have to file as self-employed?
You don’t have to file as a professional gambler. Doing that is a benefit so the IRS is more than happy for you to file as a hobby or “Other Income” **Remember – Do not think you can net out your wins and losses on that “Other Income” line.
-If I file with the IRS as a pro online poker player, or even file for earnings as if it were a side job, does the Department of Justice or other law enforcement agencies have access to IRS records?
In theory, the IRS is not the morality police for the type of business you have. They just want to make sure you report your income. I wouldn’t suggest that you get terribly specific on your tax return. I would simply call your earnings “Gambling” which is not illegal. Its just best, in my opinion, to not specify. I said “in theory” but I have a feeling if you called your business “money laundering”, my theory might be incorrect and you might find “Big Brother” watching you!
RECORDKEEPING
-How do you need to keep track of your poker play in order to satisfy the IRS if you get audited?
If you are claiming that you have gambling losses, if you are audited, the IRS would most likely want you to prove that you really had those losses. By this, they would want to see how much time you spent playing poker, whether you are playing at a brick and mortar or on-line poker game. Also, you would want to keep up with tournaments that you are in, such as sit and goes, home cash games, satellites, etc. It is important to keep track of every bit of time that you are playing poker.
The easiest way to do this is to have a poker log book. It’s a basic spreadsheet that shows the date you played, how much time you played on that date, and the amount of money that you won or lost. I would also state where you were playing poker and what type of game you were playing (i.e. $10-20 limit or a tournament) I have an excel spreadsheet that is available on my website that you can download at pokerdeductions.com. You can also use poker tracker.
-I'm disorganized and know almost to the cent how much I won and lost in poker in 2005, I just may not know exactly how much in each session over the 365 days. Would it be better to try to piece together a diary from memory or just guess on how much net I profit that I had?
It really is best to try to re-create something. Now, remember that the IRS won’t want to see any proof unless they decide to audit you. If they did audit you, and you say that you know to the cent how much you won and lost, the IRS would want to know basically how you came up with the number for this. You don’t have to show each session but I would compile my any on-line records and have them in a file just in case. Those records may be enough to show. You would also want to list any brick and mortar wins and losses if you happen to play other than on-line.
-I keep up with every session I play, how much I bought in for (started with), how much I ended with (often 0), and the net (profit or loss). Can I not just put in that total as additional income on my tax form, have it added to my total income and then tax derived there from? After all, that is what it is, additional income.
Well, its not good news here. The problem is that many gamblers think that because you have enough losses to offset winnings, there is no reason to report either to the IRS. YOU CANNOT NET THESE TOGETHER AND NOT REPORT THEM! You also cannot net them together either. They, unfortunately, have to be separated.
There was a court case about this exact situation involving a judge that was a hobby gambler. The judge testified in tax court that he thought he could “net out” his gambling wins & losses and if losses exceeded wins, nothing needed to be reported on the return. The end result is that the jury found that he willfully failed to report both gambling income and gambling losses. The Court of Appeals upheld the conviction. (US vs. Scholl, No. 97-10143, 97-10248)
A little harsh, yes, but my opinion is that the IRS was making an example out of him for other gamblers. Unfortunately it set a precedent.
-I haven’t kept track of anything. I've won a good amount but as far as how much I've lost vs how much I've won, I have not a clue. What do I do if my record keeping absolutely stinks?
It is best to try to re-create what you did as best you can. Believe it or not, the IRS requires you to keep a set of books and records for what you have listed on your tax return. Without SOMETHING, the IRS could disallow your expenses in an audit.
-Do we really need to do all this session tracking? Lets say I withdrawal 10% of my online stack each month, or, lets say I withdrawal everything over a certain limit.
No, you have to report what you made, not what you withdrew. You have to analyze your wins and losses as separate components. This sounds harsh but if you make money and don’t report it, you are committing fraud in the eyes of the IRS. It would be the same principal as if you made money and you wanted to not report it because you haven’t spent it yet!
ON-LINE AND HOME GAMES
-If I am an 18 year old non-professional poker player, am I obligated to pay taxes for online poker winnings? Also am I obligated to pay taxes on home poker games winnings?
Yes, you are required to report any income on your tax return, whether you are a professional or not.
Remember, it becomes a criminal offense to sign a tax return that is incorrect and untrue. If the IRS can prove that you had intent to violate the law, this is considered fraud. Then life gets really ugly for you with the government. If they determine fraud, there is no statute of limitations. What this means is that the IRS can look back to the first day that you ever filed a tax return.
-Can home game losses be used on your tax return against your winnings? Obviously there is no paper trail of home games, so will an entry in the spreadsheet be sufficient? This same question can apply to casino cash games, since there is no receipt or paper trail.
Yes, home game wins and losses should be reported, regardless of legality. Remember, the only thing they got Al Capone with was tax evasion! The IRS doesn’t care if what you do is illegal or not, whether its playing on-line poker or drug smuggling. They want any income reported on your tax return.
Home games, as well as any other cash games should be kept up on a spreadsheet. It is important to get into the habit of keeping up with your poker play. I have told people that if they are doing it as they go, its easier than if you have to try to re-create it later.
Because there isn’t a paper trail, it is more of a reason to keep good records. Remember that the IRS looks at your backup if you are audited and the more thorough that you are, the better off you will be if they question your play.
-If I win a satellite for a tournament entry, do I have to declare it to the IRS? How should I do that if I don't get the cash, but only get an entry ticket? What if the package includes the entry fee, transportation and spending money - are these treated differently? Are the rules the same for all satellites, or does the size of the prize matter.
Ok, this one will sound unfair but if you think about it, it will make sense.
Let’s say I pay $30 and after all is said and done, I win a seat to the WSOP valued at $10,000. If I play the WSOP and do not finish in the money, I basically won $10,000 and then lost $10,000 and am at a total loss of $30. The cost of the entry is the $10,000 that you won. When you receive the transportation and spending money, unfortunately this is also considered income. You can offset this (if you are a pro) with the ACTUAL expenses that you incurred. Think about it this way. If they give you spending money of $500 and you go and buy clothes, this is income to you and not used toward poker. If you took the $500 and used it for a hotel room during the tournament, then you can offset (if you are a pro) this against the money you received. The rules are the same no matter what.
Income from any gambling, whether Poker Stars, Party Poker, etc., has to be claimed as income on your tax return.
TOURNAMENTS
-What are the rules for sharing tournament action?
If you are swapping or selling action in a tournament and you win, you need to give the casino a Form 5754. You can find this Form along with the instructions on the IRS website at www.irs.gov. Believe it or not, this is a simple Form to understand and complete. All you do is complete Part 1 with the amount you won, your name, social security number and address. You then complete Part 2 showing each person that you are sharing your winnings with, along with their name, social security number, address, and the amount that you are paying them.
Seems like you are a bit of a snitch but really you are helping everyone. If you decide not to prepare this Form, (or didn’t know about it until now) the entire amount that you won will have to be claimed on your tax return. This can be a really big problem for several reasons. First of all, if your poker playing is something that you do for fun, i.e. a hobby, the entire amount you won will show up on your Form W-2G and will have to be claimed on the front of your tax return on Line 21 as “Other Income”. The only way to offset the money you won during the year is with the money you lost during the year and with the money that you “payback” to others that back you. The only place to do this is on a Schedule A which is for itemized deductions. The bad part is that if you cannot itemize, you technically cannot offset those gambling winnings at all. It’s not fair but it’s the rule. Whether or not you can itemize can be determined fairly easily by looking at the instructions for the Schedule A.
-I play poker as a hobby. I was lucky and won a $12,000 package which included my $10,000 buy-in in addition to $2,000 to cover my plane ticket, hotel room and food. How does this work on my tax return.
Let’s assume that this is all you made for the year. You would claim the $12,000 as income and then you would deduct the $10,000 as gambling losses (assuming you weren’t “in the money” in the tournament). Unfortunately that is it. Even if you spend the $2,000 or more for your expenses, there is no way to write this off. You can ONLY do this if you consider your poker play as a business.
-Using the same example, meaning that I won the $12,000 package but I am a pro, how would I treat this now?
In this instance, let’s assume this is all your income and expenses for the year. We will assume that you played the tournament and did not make any money. Let’s also say that you ended up spending $1,500 for your hotel and plane trip and $500 for your meals. It looks as if you can write off the entire $12,000 income against $12,000 in expenses and gambling losses but here is the twist. Yes, your income that you would claim on your Schedule C is $12,000. Your expenses, however, are only $11,750. Why? Meals are only ½ deductible. Remember also to keep your receipts so that you can prove you spent the money. Otherwise, it would all be considered income.
FOREIGN ACCOUNTS
-What do I need to know about declaring foreign accounts?
You have to answer the question on the Schedule B of your Form 1040 if you have “an interest in or signature or other authority over a financial account in a foreign country…” You have to list on the Schedule B what the foreign country is.
The best way is to go on the internet and type in what specific law you are interested and try to find a “free” link. Its all out there, it just depends on specifically what you are looking for.
-Is NETeller considered a foreign bank account? I know from the emails I have received from NETeller they certainly do not consider themselves a bank.
This is a really good question – almost too good! Even after doing some research on this, I am not sure. I know that if you earn interest on your money, and a bank is holding more than $10,000, you have to answer the question on the Schedule B of your Form 1040 if you have “an interest in or signature or other authority over a financial account in a foreign country…” Netteller may just be a holding company and we really don’t know where it is operated from. I know that you have to list on the Schedule B what the foreign country is. If you don’t know, how can you answer that? If we cannot find this out, then we really cannot truthfully answer the question on the schedule.
MISCELLANEOUS
-Reporting poker income properly per the Federal requirements seems to cause a problem on my State income tax. If I report Federal Income properly (gross poker winnings or inflows reported as 'income', poker losses or outflows then taken as a 'deduction'), then the gross amount of poker revenue hits the top line of your State return and since you cannot deduct poker losses you must pay tax on poker revenue and not just your winnings. Netting your winnings on your Federal return solves this problem for the State return, but reporting only net winnings is not permitted on your Federal return.
Tax law states that you cannot net your wins and losses – plain and simple. The problem is that many gamblers think that because you have enough losses to offset winnings, there is no reason to report either to the IRS. YOU CANNOT NET THESE TOGETHER AND NOT REPORT THEM! You also cannot net them together either. They, unfortunately, have to be separated.
Although this hurts you on the State Return, there is really no other way around it.
-What are some links to the actual tax laws so that I can look up specifics about these rules?
You have the main IRS website at www.irs.gov. Then you have www.business.gov.
Unfortunately most of the tax laws with opinions are in research packages. Such companies are RIA and TaxTools.
EXAMPLE – FILING AS A PRO VS. HOBBY ON YOUR TAX RETURN
Let’s try to break this down so that you can see how it works on your actual tax return. It’s important to realize what a difference this can make in your tax situation.
Here is the scenario: Your poker is a hobby. You are single without children. You made $40,000 in winnings, $20,000 in losses and spent $10,000 for your other expenses such as hotels and plane tickets (let’s don’t assume any meals in this example). This is all you had.
For your 2005 Tax Return, your income is $40,000, reported on line 21 as Other Income and the $20,000 would go on your Itemized Deduction sheet under Gambling Losses. You would get a personal exemption for yourself of $3,200 so your taxable income is $16,800. The Federal tax on this is $2,159, which is what you would owe the IRS.
Now, lets take the same scenario above except now you are a poker pro and treating your poker playing as a business. Here is how it looks now.
For your 2005 Tax Return, you report all of the information on a Form called a Schedule C, Profit or Loss from Business. You would show $40,000 as income, the $20,000 of wagering losses on the line for Cost of Goods Sold, and then claim the $10,000 as Travel expense. This gives you net income of $10,000. This $10,000 is subject to self-employment tax which is Form SE.
So, $10,000 shows up on the front of your Form 1040 on line 12, which flows from the Schedule C that you prepared. You will have to pay self-employment tax of $1,413. This is calculated on Form SE as the $10,000 less 7.65%, and then you multiply that number by the self-employment tax rate of 15.3%. The IRS gives you a deduction of ½ of this number, which is $707 on the front of your return on line 27. Now your income is $9,293. You get a standard deduction of $5,000 since you are single, and you get the exemption for yourself of $3,200. Now your taxable income is $1,093 and your Federal tax on this is $109. Remember that you now have to add your self-employment tax to this of $1,413 which goes on Line 58 (this comes from the Form SE). Now you owe the IRS $1,522.
See the difference in claiming as a pro versus a hobby. With this very basic scenario, your tax savings is $637. Believe me this amount is nothing compared to the larger numbers you will probably have. The more money you make, the more the tax savings as a professional poker player. Being able to write off expenses besides your wagering really makes a difference.
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