His words rang true as advice for every poker player. Whether you’re a reg at a local card club, a top touring pro or someone in between, you need to consider your tax obligations when you play poker.
All winnings are taxable
First and foremost, all gambling winnings are taxable — no matter the amount.
“Just because a taxpayer doesn’t receive a tax form does not make the winnings tax-free,” Rigley said. “Taxpayers still have a responsibility to report their prize on their tax return as ‘other income.’”
Those winning a larger amount at a casino are likely to receive a tax form, and the IRS will also receive that form. Not reporting it can have some ugly consequences, including:
Don’t leave anything to chance and don’t try to conceal. Report those winnings to avoid a lengthy, and uncomfortable, visit with the IRS.
Keeping records helps in the long run
The IRS recommends gamblers keep an accurate diary or records to substantiate wins and losses on a tax return. For poker players, that includes sessions at the tables, buy-ins and amount won or lost.
You read that correctly; record losses because you can be deduct them against winnings. Winners can deduct losses, but only as much as the amount won.
For example, a player who wins $200,000 in a big Sunday tournament online must report those winnings to the IRS. Let’s say that, in the same year, that same player lost $32,000 worth of tournament buy-ins, but profited $9,000 at cash games.
Altogether, this player will have total taxable winnings of $177,000 ($200,000-$32,000+$9,000). So, losses can help players send less of their cash to the US Treasury.
Planning is important
When it comes to tracking wins and losses, here’s what Rigley recommends to include in gambling records:
- Date and amount wagered, including tournament buy-ins
- Name and location of betting or tournament
- Amount won or lost
Obviously, online poker makes this task easier. Players can review buy-ins and wins and losses easily.
However, don’t merely rely on the poker software to keep your records. It is beneficial to review often and keep track independently.
Bettors should also keep verifiable documentation of losses and expenses including:
- Buy-in tickets
- Canceled checks
- Credit card records
As a Boy Scout, when it comes to taxes, be prepared.
This year, tax filers have some new rules. For poker players, the Tax Cuts and Jobs Act changed many aspects related to itemized deductions.
That includes the elimination of miscellaneous deductions that were subject to a 2% floor of adjusted gross income.
“This has been impactful for many taxpayers,” Rigley said. “Luckily, the deduction for gambling losses, though a miscellaneous deduction, was not subject to this floor.”
So, poker players can continue to claim gambling losses as an itemized deduction toward their gambling income. However, it is important to stay abreast of any changes to the tax code each year.
Are there differences in sports betting, poker, and other gambling?
To the IRS, there generally is no difference in various forms of gambling. The only difference may be if a taxpayer treats gambling as a sole means of earning a living.
Bear in mind, however, that the IRS is not a law enforcement agency. Even those who wager where it may not be legal are still expected to report winnings in their tax returns.
“Income from illegal gambling is treated exactly the same as those who participate in legal gambling,” Rigley says. “Gambling doesn’t make the winnings tax-free. Taxpayers who make illegal wagers and win still need to report the income on their tax return. If the taxpayer itemizes deductions, they can still deduct the loss to the extent of gain.”
Pros should treat poker as a business
Full-time players or those who view the game as more of a career have some different benefits and requirements. For instance, a pro player may be able to file as a business with a Schedule C form.
These players can also deduct expenses like a business or someone who works for himself. So, things like travel expenses, meals when at tournaments, and other business-related expenses may qualify as deductible for tax purposes.
However, filing as a business also has some additional requirements. Notably, players are potentially subject to self-employment tax and possible quarterly estimated payments. So, keeping good records and receipts is important.
There’s one additional requirement under the new tax reform. Players can no longer deduct non-wagering business expenses in excess of net wagering income. That keeps players from claiming a loss.
Save a chunk for the IRS
Players who score big in an event are advised to set a big piece of that cash aside for future taxes.
“We always suggest that the first check they should write is the IRS for an estimated payment on the taxes they will owe on those winnings,” Rigley says. “This is essentially a deposit toward your tax liability.
“The reason we suggest this is that it helps to avoid any underpayment penalties for failing to deposit enough taxes throughout the year, and psychologically it seems easier to write that check when the income is new rather than be hit with the balance due down the road when the return is filed.”
A player may also want to consider investment vehicles such as a Roth IRA or other options to lower their tax burden. An IRA also helps players plan for retirement and possible lean times.
Filing your taxes and writing a check to the IRS is never fun. However, making a concerted effort throughout the year can help take the sting out of the process.