Q: I thought Russ Fox was a cool guest to have on the show! I have played both live and online poker for many years. About 5 months ago I began to read, watch videos, and listen to podcasts related to poker strategy and have quickly become a winning online poker player. I think the information Russ gave about being certain to document wins and losses is valuable. Someone like myself, who plays poker as a serious hobby and only recently became a winning player and thus concerned with taxes and IRS related issues, never really thought to take those steps. However, due to the following scenario, I don’t know if it is necessary or fruitful.
I am a full time Chiropractic student in the US and play 5 days or so a week on Bovada and Carbon…
Say I were to cash out 12k in profit this year and had perfect documentation (which is likely impossible as I do not know where the checks really come from).
What is the situation with the current laws in the US. Does one file the income on their tax returns, or is that synonymous with claiming profit on heroin sales?
I am all for paying my dues as an American, but do not want to turn myself in at the same time. How do my fellow US grinders handle this?
This was probably more appropriate for a forum post, but thought it might apply to a lot of your listeners. I was keeping my fingers crossed Russ would touch on the subject. Perhaps others did too. Thanks for your time.
You guys rock, keep up the good work!
A: Thanks for the question and the kind words. I should say that I am not in any way a tax expert, and future questions like this would be better directed to Russ via his Taxable Talk blog or to a tax professional you’ve hired. That said, I’m pretty confident of the answer to this one, so I’ll go ahead and answer it myself, but all of this carries an “as I understand it in my decidedly non-expert opinion” disclaimer.
Unless you live in Washington state, you are not doing anything illegal by playing online poker from the United States, so you don’t need to worry about getting in trouble for reporting the income. There are laws that could be construed to make the operation of an online poker site illegal, or the facilitation of financial transactions on behalf of such a site, but there are no federal laws suggesting that individual players may not play on these sites, and no one has ever been charged with a crime for doing so.
You would, however, need to worry about getting in trouble for not reporting the income. Not only is it the right thing to do, but there can be serious consequences including high fines and jail time for not reporting it.
As a non-professional, your reporting requirements are different from mine, so I won’t comment on them directly. I will say though that I don’t think knowing exactly where your checks come from is necessary to meet your obligations to the Internal Revenue Service. You should, however, get advice from a professional about what information exactly you should be tracking. The beginning of a new tax year is the perfect time to get your record-keeping in order.
Lastly, I want to add that even income from illegal sources is taxable, as Al Capone found out. So while you have nothing to worry about, if you were an American owner of Bovada or Carbon Poker, you’d probably want to have a long talk with one or more professionals. Or more likely you would have done that already.
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Andrew’s answer is accurate and very good (as far as the aggregate knowledge of the 2+2 forums goes — I am also not a tax professional and this cannot be construed as professional tax advice or any sort of legal endorsement).
I’d also add that, when you file your taxes, all you’ll be writing on your return is “Gambling Winnings” and “Gambling Losses”. Not only is there any need to be more specific than that, but it is generally not permitted to write anything else; poker of all forms is treated by the IRS as homogenous with all other gambling activity.
Therefore, there is nothing on your tax return that will indicate or reveal that your gambling winnings are from internet poker rather than from some explicitly-legal and regulated form of gambling in your jurisdiction.
Mike and Andrew are correct in what they wrote. As Andrew noted, illegal income is just as taxable as legal income. Anyone who happens to be a bank robber, embezzler, or in a similar “occupation” should consult with a tax attorney; only attorneys have attorney-client privilege to discuss activities without having to divulge the information under subpoena. Even a bank robber must note his income on his tax return; it’s included as Other Income (line 21, Form 1040) without an explanation. (If someone in an illegal occupation notes that occupation on the tax return, the IRS can forward that onto other law enforcement agencies.)
As Mike said, your gambling income is noted on line 21 of Form 1040 (“Other Income”); your losses, up to the amount of your winnings, are a deduction on Schedule A (“Itemized Deductions”). An amateur gambler cannot net the two together.
The IRS dosn’t distinguish between types of gambling income. Poker, craps, and the lottery are all treated the same for tax purposes. Just note all your gambling income on the appropriate place on the return, and you will be fine.
Do be aware that some states do not allow gambling losses as an itemized deduction. You can find a list here.
Great informaiton. I initially wondered why winnings and losses were put in different places, as long as you CAN itemize it really make no federal differnce but the states have their own rules. Makes no sense to tax winnings when your net could be negitive!! Keep all your lotto and scratch off tickets!! Pros should be able to deduct room/travel and other expenses that an amateur can’t but net is net. I hope to have this ‘problem’ to deal with some day .. see you at the tables.
FWIW I’m fairly sure that the old advice about collecting losing lotto tickets / horse-racing tickets to offset wins is bad advice–not least because it’s fraudulent, but also because there is no magic rule that forces them to trust that any old slip of paper you can produce is yours.
Not saying that you were recommending such behavior, but it’s something you hear so frequently in cardrooms/on forums…