Alright, now for the disclosure, I am a tax specialist with the goal of becoming an enrolled agent sometime next fall. However, none of the following is meant as tax advice and is purely informational and subject to change. It is very important to choose a qualified tax person such as an Enrolled Agent or CPA to help you with a potentially tricky tax return. If they do not know the answer to some of these questions you should run.
I also want to thank Rocketplayer and Nsidestrate for their input.
This will be the first version as I plan to add a few more detailed tidbits by the end of the year and update this as new info appears. I am also starting a thread in the off-topic forum for non-poker/gambling type questions regarding taxes.
Q. Will I have to pay taxes on my poker winnings?
Yes. U.S. tax laws state that all worldly income is subject to tax.
Q. Do I have to pay state income tax on my gambling winnings ?
In many states yes, however a tax professional in your state would be your best bet at these questions.
Q. Are rakeback and bonuses considered income for tax purposes?
Yes. Your paid rake should be included in your losses so rakeback that you receive from an affiliate or a site is income for tax purposes. Poker losses can also offset bonus or comp gains and it has held up in court (Libutti v. IRS).
Q. Can I deduct my winnings from my losses and report just my net winnings?
No. All gross winnings go on line 21 of the 1040 and all gross losses go on a Schedule A itemized deductions. This is clearly not fair for those who do not itemize but it is the only acceptable way to report the income and there are court cases to back that up. For additional information you should check out IRS publication 529 (Misc. deductions)
You can’t deduct any of the costs related to gambling unless you report your income on Schedule C as a business.
Gambling for almost ALL taxpayers is considered a hobby. Unlike other hobbies that you can deduct expenses against, gambling has its own rules which deny expenses related to earning the income.
Q. I heard something about having to report different sessions – what’s that?
Defining a session for a B&M visit is certainly a lot easier than an online session where a player may be playing more than one table or type of game at a time – or even more than one site! An online player can “net” his wins as long as he has played the same game continuously as part of his poker session. Russell Fox who is an enrolled agent wrote a great article on this subject, What is a gambling session, and it directly addresses the problem of internet poker sessions.
Q. What if I don’t itemize on my tax return, can I deduct my losses somewhere else?
Not unless you are a pro.
Q. If I leave my money in my poker account or my Neteller account then it is not income yet, right?
Once it hits your account, whether it be a poker account or Neteller, it is income earned on that day.
Q. I have a Neteller account. Do I have to report that I have a foreign account even though I earn zero interest from that account?
Maybe. Neteller is clearly a financial account as they describe themselves as a finacial institution and they offer a debit card. Whether or not the definition of foreign account fits for a “poker account” is up in the air. If the sum total of your foreign accounts has exceeded $10,000 at any time during the year, I highly recommend seeking the advice of a qualified individual, such as a tax attorney or CPA who is very knowledgeable in the field of foreign income, to guide you in your decision.
If you are certain that you have had $10,000 or more in your Neteller account at anytime during the year then you must:
- Answer yes to question 7a. on Part 3 of Schedule B and list where the account(s) are held.
- File form TD F 90-22.1 with the Treasury Department by June 30 of the next year (or roughly 75 days after your tax return is due). Failure to do this could lead to a fine of $10,000 or more.
Q. Will a poker site or Neteller send the IRS any information about my winnings?
Probably not, but the T&Cs of many online rooms clearly state that they reserve the right to release information about your account in response to a request by a government agency or regulatory body. There is also a lot of chatter about the EU making it more difficult to “hide" financial accounts due to the current climate. I read that as an attempt to help the U.S. gather information on potential terrorist accounts etc.
Q. What are the rules for filing as a “pro”?
First of all, the IRS is very skeptical of anyone using this status. Don’t let that discourage you pros though – just make sure you have everything you need to back up your claim.
There is nothing set in stone for poker players. Basic criteria would be:
- You must be able to show a profit and support yourself on that profit
- You must operate as a business does i.e. maintain books and records and other items that would indicate that a business is in operation
- You must show a profit in at least 3 of the last 5 years
Q. What is the difference between filing as a pro and filing poker income as “other income”?
- pros are able to “net” losses against wins on the Schedule C and report the earnings on the 1040 while recreational players must report all wins on the 1040 and can deduct losses (up to the amount of wins) on a Schedule A.
- pros will have a lower adjusted gross income but will be subject to Social Insecurity / Medicare Taxes (self-employment tax).
- pros can deduct expenses that are necessary and ordinary if they are directly related to poker/gambling.
- pros can defer income by contributing to certain retirement accounts. (Non-pros can do this to a lesser extent also)
Q. At what point does one need to file taxes quarterly?
If poker is your only source of income you should start filing quarterly payments right away. You can get instructions on how to file a 1040-ES here.
If you are not a full time poker player but have won a fairly substantial amount, you may also need to send in an estimated tax payment to avoid a penalty (although it is usually not a huge penalty).
Generally, you should make estimated tax payments if you will owe tax of $1,000 or more, after withholding and credits, and the total amount of tax withheld and your credits will be less than the smaller of:
1. 90% of the tax to be shown on your current tax return, or
2. 100% of the tax shown on your prior year's tax return, if your prior year's tax return covered all 12 months of the year. However, if your prior year's adjusted gross income exceeded $150,000, or $75,000 if you filed a separate return from your spouse, then you must pay 110% instead of 100% of last year's tax.
You may also need to file a state's estimated tax payment depending on your state specific laws.
Q. What type of record do I need to keep in case of an audit?
You need to keep a diary of wins and losses in either a notebook or on a computer and it should contain
- the date and the game played
- the site at which you played
- the amount(s) won or lost
the IRS also states that this diary may not be enough to substantiate and you may need other proof to back up your entries such as bank (neteller) deposits, hand histories or tournament summaries. Since the IRS didn’t anticipate online gambling there are no specific rules at this point and it is anyone's guess as to what will be sufficient documentation.
Russ Fox IMO is the best resource for information dealing with online gambling/poker tax topics. This series of articles is well worth reading.
The following links are good sources of information some of which I stole from so I hope that listing them here will give them their due credit.
Beginners guide to online Poker – Taxes
The tax guide for gamblers
Big Brother (the IRS) is Watching
Misc. articles on foreign accounts
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