Broken Tax Code Contributes to Regulated Poker Headaches

John Mehaffey July 7, 2014 990 Reads

Unlike many countries throughout the world, the U.S. taxes gambling winnings. Not only does it tax these winnings, losers often still end up paying taxes due to the broken tax code. This situation is helping to cause friction in the regulated online poker and casino industry.

Social Security Number Causes Friction

One of the biggest complaints from players looking to create an account at a regulated site is the requirement to supply a Social Security Number. There are multiple reasons for this. One is to help verify the player’s personal information and background. It also connects a winning player to a number for taxation purposes.

Gambling is Taxable in U.S.

The connection of a Social Security Number to a player’s account helps determine tax liability. The sites are not required to report each and every transaction, though this may become a requirement in the future. The ability to do so already exists. It just depends on the level of electronic filings a state would want to require. A future federal bill could also address this issue.

Americans are required to pay taxes on all winnings, even if a W-2G is not required for the win. For poker tournaments, a player receives a W-2G for a net win of $5,000 or more. Slot wins require a W-2G on a payout of $1,200 or more. Cash game winners do not receive W-2Gs. It is up to the player to properly keep logs to help determine tax liability.

Some States Have Broken Tax Codes

Another factor that could hurt the future of online gaming is broken state tax laws. There are 13 states with problematic gambling tax codes, according to Taxabletalk.com. Some are worse than others. The issues stem from not being able to deduct gambling losses properly, creating the potential for massive tax liabilities for players that lose their big score back in the same calendar year. Online gaming transactions are traceable to the point that one could argue all players would lose to taxes in these states, depending on how a session was defined.

These tax laws must be addressed or else players in these states would be on the hook for tens or even hundreds of thousands of dollars in tax liability without posting a net win.

Federal Gambling Tax Laws

The issue of deducting gambling losses is not exclusive to states. Federal tax laws make gambling losses an itemized deduction. About 70 percent of taxpayers take the standard deduction because they cannot claim enough in itemized deductions. This number would seem to be higher for poker players as that demographic is less likely to carry a large mortgage, often the largest itemized deduction.

The standard deduction for 2014 is $6,200. Married couples filing jointly have a $12,400 standard deduction.  This essentially means that, absent other deductions, a player is going to pay taxes on the first $6,200 ($12,400 if married) of gambling winnings this year, even if there are losses to offset it. That is because this deduction could already be taken.

Get IRS Out of Gambling

One of the draws of offshore sites is the anonymity. Sites do little to verify identities and this creates a potentially false sense of security for players that dodge paying taxes. One easy way to fix this is to get the IRS out of gambling winnings. At the very least, states should not consider online gambling winnings through regulated sites taxable income.

Many states that otherwise tax gambling winnings already do this for lotteries. It would give players a reason to choose licensed sites over illegal ones, at least until this country can fix its broken tax laws.

Changing the tax code would prevent the IRS from being the biggest winner at the World Series of Poker.  The poker rooms already tax players in the form of rake, which goes towards state gaming and federal income tax.  There is no reason for there to be double taxation of these funds put into action.

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