Paying Taxes On Poker Winnings In The US
Many players may think that they can get away with not paying taxes on winnings because it was not won in a traditional casino. This could not further from the truth. Just as the technology for online poker has advanced over the years, so has the technology that helps the US Government monitor banking transactions. This is not just true for money that you deposit into a bank account. It goes well beyond that.
While depositing a check or receiving a wire from an online poker room may draw some scrutiny from the IRS, the government has other ways of tracking your online poker winnings down too.
The Neteller bust in 2007 was the first time it became obvious to online gamblers that the US Government could monitor their transactions. Many players thought that the IRS would never gain access to this information. They were proven wrong. Many players were forced to scramble to pay taxes on their winnings before they got a dreaded tax bill. Many players learned a lesson here, while others did not.
Neteller was just one of many US facing ewallets to fall. The government seized UseMyWallet, QuickTender, eCheckUS, eWalletXpress, PrePaidATM and many fly by night processors that processed US online gambling payments. The Department of Justice even created a bogus processor called Linwood Payment Solutions and received countless information about player payments that passed through their processing center. This gave the feds unlimited access to online poker player s transactions that were once thought to go under the radar.
Ewallets were not the only companies handing over their player records to the US Government. Busted online poker rooms and other online gambling companies were doing the same thing. PokerStars, Full Tilt Poker, Absolute Poker and Ultimate Bet are just a few of the names that were forced to turn over player records to federal authorities. The lesson learned here is that there is always a chance that the information that you thought was private can fall into the hands of the IRS.
Brick and mortar poker taxes
Brick and mortar wins are a bit it easier to hide, but there is still an obligation to report your winnings. Each cash game session must be logged. The IRS does not define what a session is. Keeping a daily journal of wins and losses should suffice. Tournament players should log each tournament entry. A poker room will be happy to give you a receipt for any tournament entry upon request. Large tournaments will automatically provide one.
A casino will issue a W2G any time that a player nets $5,000 or more in a brick and mortar tournament. A W2G is a tax form that will be submitted to the IRS with the player s Social Security Number and other personal information. Players can refuse to provide this information. If they do, the casino is required to automatically withhold taxes on the win.
Brick and mortar players should also be aware that a casino is obligated to create a Currency Transaction Report any time a player crosses more than $10,000 through the casino cage in a 24 hour period. Poker players should also know that the casino may report any transaction that they consider to be suspicious as this is required by federal law.
Should you file as professional or recreational gambler?
There are two ways to declare poker winnings. One way is to enter the income under miscellaneous income. This is what most players will do. A player that files as a recreational player will pay their standard tax rate on this money, but will not have to pay Social Security or Medicare taxes on these winning. Most players that have full time jobs will file this way.
Players that have demonstrated a pattern of winning can claim their winnings as a professional gambler, regardless of whether the player has a full time job or not. A pattern of winning is not defined by the IRS, but many believe it means the player has gambling wins in two of the last three or three of the last five years. This is where it gets complicated, as this type of filing requires a Schedule C tax form. This is the same tax form used by self-employed business owners. There are many advantages to filing this way and one large drawback.
The drawback is that a player that files as a professional player must pay the self-employment tax on that money. When someone has a standard job they pay 6.2% of their income for Social Security and their employer matches this. This means that since you are filing as self-employed, you pay both sides of this tax because there is no employer to pay the other half. The percentage for the employee side was 4.2% in 2012, but it went back up to the traditional level of 6.2% for the 2013 tax year. There is also a 2.9% Medicare tax. This means that you will pay 15.3% in taxes placing poker income under a Schedule C, where adding it on a 1040 as Other Income will not trigger this tax. The total percentage in 2012 was 13.3% due to the Social Security tax reduction during the recession. Schedule C filers will be able to deduct 6.2% of the tax as a business expense. This adds some tax relief.
Professional poker player tax deductions
The good news is that professional players that file a Schedule C may deduct all expenses that are related to their poker business. Travel expenses tend to be the largest for professional poker players. The mileage expense for 2012 was 55.5 cents per mile. That number will be 56.5 cents in 2013. This includes miles driven to and from any casino or other gambling establishment in your personal vehicle as long as your intention was to win money. Players that think they may file this way should keep a log of how many miles that are driven to and from any poker game, even if the game was not in a traditional casino. You will need this information to decide which way to file at the end of the year.
Other travel expenses may be deducted as well. This includes airfare, hotel and rental car expenses when you take a trip where your primary purpose is to win money playing poker or some other gambling game that requires skill.
Online poker players may also have other expenses related to their work. Computers are deductible as a business expense. If you bought a computer with the sole purpose of using it for your poker business, then it qualifies as a tax deduction. So does that monitor setup needed to 24-table.
There are also some expenses that get overlooked. Your internet connection may be deductible up to the percentage of its use that is used for online poker. If you bought a computer desk, chair, floor mat or anything else office related, then that is deductible too.
You can even take the home office exemption, although this may start to push the limit. A business owner can deduct a percentage of their rent that is based on the percentage of their apartment or home devoted entirely to their business. This can be risky though. First, this has been known to send a red flag to the IRS. Second, people that do not rent may find problems down the road when they sell their home. It may create a taxable event when the home is sold if the home is considered to be a primary residence.
State income taxes
Many states tax gambling winnings. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming have no state income tax. Players in other states should expect to pay taxes to their state beyond what is paid to the IRS.
How should a poker player tax plan?
If a player has a net cash win of $5,000 in a poker tournament in a brick and mortar casino they will receive a W2G. A player will also receive a W2G for a $1,200 gross slot win. A player has the option of having an amount withheld from their win of up to 39.6% to cover taxes in 2013. If you are the type of player that has bankroll management problems, then having the casino withhold a percentage of your win is probably a good idea. This will prevent a nasty surprise when tax time comes in 2014. There is nothing worse than owing the government money that you do not have. Do not let yourself get into that situation.
One exception to asking for a tax withholding is if you are a net losing or break even player. Even then, there is still a disadvantage to receiving a W2G.
A player can write off their gambling losses up to the amount that they won. Gambling losses are an itemized deduction though. A player that typically takes the standard deduction will not be able to write off all of their losses. Most people that do not have a home mortgage interest deduction or donate a lot of money to charity will take the standard deduction. The standard deduction for 2013 is $6,100 for single filers and $12,200 for married couples filing jointly. If you do not itemized deductions normally then you will end up getting taxed on the applicable amount, even after itemizing gambling losses, because you could already deduct the standard deduction amount.
Tax planning for 2013
It is too late to plan for 2012, but it is not too late to plan for 2013. There are several phone apps that track sessions. These include Poker Journal and Poker Income Pro. Keeping an old fashioned paper notebook with poker sessions works too, especially for people that are prone to losing phones. Make sure to back up sessions entered into the app in case your phone should break or get lost. These apps may be used for online and brick and mortar poker sessions.
Poker players should also keep a mileage log for their car. A trip requiring long distance transportation should also be tracked. It may seem like a waste now, but it will not be if a big tournament win should come later in the year. You will then be prepared to demonstrate the expenses incurred to get you to that big win.
Disclaimer
This article is meant as an informational tool to help poker players. This article does not take the place of professional tax help. There are many tax attorneys that handle gambling winnings, especially in Las Vegas. Consult one of these tax specialists before filing your taxes if you have gambling winnings to make sure that your deductions are proper and you are filing your taxes correctly.
Poker Winnings and Taxes: A Definitive Guide for New Winners
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When you started playing poker, you were probably playing with friends, and money was never involved. Now, though, you ve come to a point where you honed your poker prowess and have decided that you want to start making money from it. However, real poker with real cash winnings is not as simple as a casual game with friends.
Tax laws that apply to poker winnings can be confusing, but it doesn t excuse you from paying those taxes. Without understanding these laws, you could be in deep trouble before you even start your journey to become the next Antonio Esfandiari.
First just a disclaimer: I do not provide tax, legal or accounting advice. Information on my site is for informational purposes only.
Before we dive into this guide on poker winnings and taxes, let s get something out of the way: different countries have different tax laws.
Some treat poker winnings as taxable income, while others are taxing companies that take bets. It s important to know the difference and understand how your country interprets it.
So before you put your poker face on, and start raking that poker bread, let s figure out which is which, and find out everything about poker winnings tax laws in both the UK and the US.
Poker Winnings Tax in the UK
If you re crushing tables in the UK, then you re better off than most poker players. Money that you earn from any form of gambling in the UK is tax-free. This exemption aims to encourage gamblers to spend their winnings onshore rather than try to be creative with their filings. Meanwhile, the HMRC collects 15% to 50% of the gross gaming yield as gaming duty on all companies that accept bets, operate or make money in the country.
The UK started its journey to become a top destination for poker players around the world in 2001. Then-Chancellor Gordon Brown announced that instead of taxing gamblers, the HMRC would collect 15% from the bookmakers gross profits. The amendment of the Gambling Act of 2005
However, it becomes a different story if you re a British citizen who plays poker in the US and has won more than $5,000 in a single session.
In this case, 30% of your winnings will be subject to income tax withholding by the company. Fortunately, due to the US-UK Tax Treaty, the tax laws of the United Kingdom will apply to all earnings made in the US.
- Fill out a W8-BEN form.
- Fill out the W2-G form (US Wage & Tax Statement).
- File a W-7 form and get your ITIN (US Taxpayer ID).
- Present your passport as proof of citizenship.
Although there are some exceptions to this law, it won t affect most poker players in the UK. For example, any form of payment made to professionals is taxable, and this may include free seats at tournaments.
If a professional makes money from that seat, the HMRC can consider it as an extension of the payment. This law is ambiguous, but most poker players, even professionals, won t be affected by it.
Poker Winnings Tax in the US
The US is notorious for thorough gambling tax laws. The IRS doesn t leave any gray areas or parts that are ambiguous. Everything that you receive from playing poker is subject to taxation. It may vary based on the amount won and the country where the player resides, but everything must go through these tax laws.
Time and time again, we ve seen how failure to report income to the IRS has turned the biggest winners into losers in an instant. As a poker player, it s your responsibility to self-report your poker winnings. We know that it can be overwhelming, so to make it easier for everyone to digest, let s start this guide by categorizing different types of players.
Different Types of Poker Players in the US
- Recreational players only play for entertainment, and they don t depend on poker winnings as a source of income.
- Amateur players have a day job, and playing poker is their secondary source of income.
- Professional players rely on playing poker as their main source of income.
- Online / Off-shore players are US residents but are receiving their winnings from an off-shore or online casino.
- Nonresident players are not US citizens but receive their winnings from a casino that operates within the US.
Do Recreational & Amateur Poker Players Pay Taxes in the US?
Any amount that you earn from gambling is taxable income. Being either of the two does not exempt you from your obligation to file your winnings as income tax.
It doesn t matter where you received your winnings, as long as you re a US citizen, you need to report all winnings from poker as Other Income when filing your income tax return.
The process depends on the amount that you received in one session. The term session is ambiguous, and the IRS doesn t provide enough guidance to define what it is. But for the sake of simplicity, let s refer to one session as a continuous play at one table, and switching games is a new session.
If you ve made less than $5,000 in one session on top of the buy-in, you must include it in your income tax return. The casino won t provide you with a W2-G, but this doesn t exempt your winnings from taxes.
If you ve reached the threshold of $5,000 in one session, the casino will withhold 25% of your winnings, and 28% if you didn t provide your payer tax ID number. They will then provide you with a W2-G form that you need to include when filing your income tax return.
The IRS also considers non-cash prizes, such as trips and cars, as taxable income. It s your responsibility to determine the fair market value of these prizes, and include it when filing your tax return. High-roller prizes don t usually concern amateur poker, but it won t hurt to keep your coast clear.
Do Poker Pros Pay Taxes in the US?
The IRS considers poker pros as self-employed and poker as their profession. The IRS will treat all your winnings as a regular earned income and impose a tax based on the normal effective income tax rate.
Instead of a flat-rate tax of 25%, your taxes will be progressive, so you should be more diligent in keeping a record of all your poker activities. Every prize or pot won, including tickets that you received, either paid for or awarded, should be itemized. You also have the option to include all the expenses you incurred in pursuit of making money. These are expenses that you need for your business, making it eligible for a tax deduction.
Are Winnings on Foreign Soil Taxable?
The USA is one of the only two countries in the world that enforce taxation based on citizenship. It means that all winnings made by US players on foreign soil are subject to US taxes, and the IRS requires every player to self-report all off-shore winnings before the end of the year.
The process for filing will differ between amateurs and professionals, but one thing is for sure there s no gray area when it comes to taxes on poker winnings.
If you re a US citizen, who s crushing tables on a country that puts taxes on all poker winnings, then prepare yourself for double taxation. For example, you received $10,000 from playing poker at an off-shore casino.
Let s say that the IRS counterpart in that country imposed a 25% tax on your winnings. When you file your income tax return, back in the Us, you must self-report that $10,000, subjects your winnings to another 25% tax.
Double taxation may be unfair for a lot of poker players, but it is the law. It also encourages poker players to play inland to avoid double taxation.
Are Online Poker Winnings Taxable in the US?
Just like poker winnings on foreign soil, players who received their winnings from an online casino must include it in their income tax return. The IRS may not have the capacity to trace winnings from playing online poker, but the government has improved its monitoring of banking activities.
When declaring winnings from online poker, you should report the income earned, when you receive the money in your account, not after you withdrew the money to your bank account. Even if you don t plant to encash your income from your account, you should still self-report it to the IRS.
What are the Tax Laws for Nonresident Alien Poker Players?
- If you are from a country that has an existing tax treaty with the United States, your winnings won t go through tax withholding. Instead, the tax laws in your country will apply to your income.
- Poker players, both amateurs and professionals, who are from countries without an outstanding tax agreement with the US are subject to a 30% income tax withholding. You ll be required to file the US Nonresident Alien Income Tax Return to the United States IRS at the end of the tax year to get your withholding back.
If you re a nonresident, it would be best to always have your passport with you. Having your passport makes the process faster and easier for the casinos, especially when determining whether they should withhold your winnings or not.
Can You Deduct Poker Losses in the US?
Yes, you can deduct poker losses to offset your payable taxes. However, it s not as simple as deducting all your losses against your winnings. If that were the case, the IRS would only be subsidizing most poker players in the United States.
As a recreational or amateur player, you need to report all your losses as itemized deductions on your Schedule A. When filing for itemized deductions, you can never have more losses than wins.
If, for example, you ve reported total wins amounting to $10,000, and your reported losses sum up to $15,000, you cannot write off the remaining $5,000 or have it carry over to the next year.
Professional players should file their poker losses on Schedule C, together with all the expenses that are related to playing professional poker. These inputs will help determine their income tax bracket for the taxation year.
Can You Recover The Tax Withheld On Poker Winnings in the US?
The short answer is, yes, you can recover tax withholding, either in full or partial. The process of claiming withheld earnings may seem daunting, but it s not different than filing your income tax return.
The IRS allows you to deduct all poker losses from your reported wins, helping you reduce the amount that you need to pay for the taxes.
After filing your income tax return, and your tax liability is less than the amount withheld, you will get a partial refund. If your tax liability is more than the winnings withheld, you ll have to pay the difference.
Getting your winnings withheld may be upsetting, but it s in place to protect you from the nature of the source.
Since playing poker with real money is a form of gambling, and a lot of gamblers lose a huge chunk of their money, it s a lot safer to have a part of your winnings withheld. It prevents you from owing money that you don t have and saves you from the penalties that come with it.
How Do You Calculate Poker Taxes in the US?
Knowing how to calculate your taxes will prepare you for the tax season, and will help you avoid surprise charges after filing your income tax return. It ll also help you make detailed plans, in case you decide to start playing professionally.
Recreational and amateur poker players may have a straightforward process when it comes to filing taxes, but you won t believe how many poker players are clueless in calculating their taxes.
Always keep tabs on your wins, losses, and income tax withheld because these are the inputs that you need when filing your income tax return.
When calculating your winnings, always deduct the buy-in amount from the money you received. Your losses, on the other hand, can only be the buy-in.
Let s say you played at a Sit N Go table with a buy-in of $300 and received a total of $5,200. Your gross winnings didn t reach the threshold, so it s not subject to income tax withholding. Still, you re responsible for reporting the $4,900.
If you, however, have accumulated $2,000 but lost all of it before you end your session, you can only declare your losses at $300.
As a professional poker player, you have the option to include all business expenses on Schedule C. These expenses include everything related to your pursuit of making money, such as hotel, food, and airfare.
Poker pros usually have their travel expenses as the biggest chunk of their business expense, because the miles driven to and from any establishment where the intent was to win money, is also eligible for a tax deduction.
People who play online poker and are paying their taxes as self-employed can also list all of their business expenses for a tax deduction. It includes everything related to their business, such as a new computer, setups for the workplace, an internet connection, and even your floor mat.
These expenses are eligible for a tax deduction, as long as you purchased everything with the intent of making money.
You need to put all of these expenses in your documentation and compare it with all of your wins. Being diligent in keeping tabs will help you determine your tax bracket and the accompanying tax percentage that you owe the IRS.
Do State Income Taxes Apply to Poker Winnings in the US?
Most states enforce a state tax on winnings from gambling. If you re in one of these states, you re required to report your winnings and pay the state income tax.
- Alaska
- New Hampshire
- Texas
- Florida
- South Dakota
- Washington
- Nevada
- Tennessee
- Wyoming
Tips to Handle Poker Taxes
Taxes on poker winnings may be confusing, but you have to practice due diligence in documenting everything that has to do with all your activities.
You also need to know the difference between recreational, amateur, and professional poker because these different levels of play determine the process of filing your taxes. We know that it can be complicated at first, so we have compiled some tips that can make it more manageable.
Keep Records of Wins and Losses
Even the dullest pencil is better than the sharpest mind, and the same is true in keeping tabs on your poker activities. In fact, the IRS recommends every poker player from recreational to professionals to keep a record book that has every detail of all the wins and losses.
This record should include when and where you made your bet, buy-ins, and the amount you won or lost. Since losses are tax deductibles, it will come in handy when filing your income tax return and will help offset the amount that you owe the IRS.
If you have ten poker sessions throughout the whole tax year, where you ve won a total of $45,000 and lost a total of $10,000, your taxable income will drop down to $35,000. This deduction makes it vital for every poker player to record every win and loss. As a professional, you can use this to determine your tax bracket when filing your income tax.
Keep Receipts, Tickets, and Documents
When playing poker, regardless of your gut feeling, it is important to keep all the documents that you can use to verify inputs on your tax return. Doing this will make it easier for you to organize everything, and save yourself from headaches when filing tax deductibles.
Having an app or tracking software is nice, but when tax season comes, having your buy-in tickets, canceled checks, and credit card records in place will save you a lot of time. For professionals, keeping the receipts of everything that you used to make money is an important part of running a business.
Even players who are making money from playing online poker should have their records ready for verification. Although logging into the account will give you a quick view of all the transactions made, it won t hurt if you re keeping a separate manual record of all your activities.
Pros Should Treat Poker As Their Business
Being a professional poker player has more advantages when it comes to taxes, but a lot of professionals don t make good use of it.
As a poker pro, all expenses that were necessary to win money, and everything that you paid for at a tournament, are qualified for a tax deduction.
However, these benefits also come with bigger responsibilities. For example, if you re a poker pro, who makes a killing at the tables, the IRS may subject you to estimated quarterly payments.
If you re missing out on keeping tabs of your wins, losses, and expenses, you re making yourself vulnerable to uncomfortable visits from the IRS.
If you re an amateur and has a pattern of winnings, you might want to start playing professionally. It offers a lot of advantages, so much so, that even tax experts like The Bauer Law Office recommend amateurs to consider.
Save a Chunk for the IRS
If you re consistently raking poker bread amounting to more than $5,000 in every session, it ll be easier for you to pay your taxes because of the tax withholding. You may have cursed a casino for withholding a sizeable amount from your winnings on a big night, but you ll soon thank them for making sure that you ll never owe money that you don t have.
If you re trying to stay low and fly under the radar by winning less than $5,000 in every session, it would be wise to stash away a chunk of all your wins.
Unless you reside in a state that doesn t impose state taxes, setting aside half of all your winnings saves you from a lot of trouble when tax season comes. There s nothing worse than filing your taxes and finding out that you owe the IRS and your state more than what you have in your bank.
Always remember that unpaid taxes will result in penalties and interests. These consequences are the epitome of negative EV, which is something that you don t want on your name. It s always better to prepare for the worst, so make it a habit to stash half of your winnings.
Consider Moving to Another State
No one can get away from taxes, and no one should even think of trying to finesse their tax obligations. Sure, it ll take away a sizeable amount from your wins, but there are a few things that you can do to reduce your taxes, such as moving to a different state.
A lot of states are enforcing state taxes, which is a tax that you need to pay on top of the one that you paid the IRS.
Some states like California and New York have higher state taxes, while states like Connecticut, Illinois, Massachusetts, and Ohio don t accept losses as tax deductibles. These states are not as friendly for poker players as the nine states that we have mentioned earlier in this guide.
Moving to another state doesn t exempt you from taxes, but using existing laws to your advantage can increase your take-home cut from all your winnings. If you want to pursue poker as a profession, moving to another state is worth considering.
File Your Taxes!
The last tip, and probably the most obvious one, is to file your taxes diligently. You ll be surprised by the number of poker pros who don t take taxes seriously, and if you re one of them, it can have a massive impact on your career.
Having your taxes filed and settled, makes you prepared for the big night. Nobody wants to take home boatloads of winnings, only to find out that it s not even enough to cover the money they owe the IRS. You can be creative with taxes, but it is something that you cannot evade.
Conclusion
Death and taxes are the only two things certain in life, and this is especially true even for poker players.
The laws may be confusing at first, but knowing how to categorize yourself as a poker player is the first step. It s also important to understand that the IRS isn t leaving any part of the tax law to different interpretations.
If you are a US citizen, the IRS won t care where and how you ve made your money; it s subject to taxation, and it s your responsibility to self-report all of your income.
In closing, here s a thought that might give you more motivation to familiarize yourself with the US Tax Laws: the IRS charged Al Capone with tax evasion for not declaring the income he generated from his illegal operations! Just think about that.
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