Do Poker Pros Pay Taxes
Last week I noted that, in general, a taxpayer cannot simply net all gambling winnings and losses from the tax year and report the resulting amount. Instead, a taxpayer must separate gambling winning sessions and gambling losing sessions.
Online poker players do, in fact, have to pay taxes on anything they may win. However, the rules are different for recreational and professional gamblers and the kind of tournament that was won. Call Today: 877-825-1179. Mar 06, 2010 As April approaches, poker forums begin to clog with questions regarding taxes. For people who back other players or who are themselves backed, the questions can be even more complex. In this article, we offer an overview of what poker players, at a. Dec 24, 2019 I can say from first hand experience that appealing something after one has filed proper taxes (assuming your future appeal will be declined) is a LOT easier that fighting a situation where you are being told you did not pay proper taxes, and I think the fight these guys are in for, or have already had, is not going to be fun, even if they try. Better odds for pro gamblers' business deductions Tax Court rules Sec. 162(a) expenses can exceed gross receipts from wagers. BY WEI-CHIH CHIANG, DBA AND RANDY REED, DBA. A couple of questions. Our LV Trip is fast approaching, and I mainly play Low Stakes, Limit Texas Hold 'em. We live near Tunica and the last few times over there I've gotten into some (around $70 buy in) No Limit Tournaments, and I'd like to do the same in Vegas. Is there a list on the internet somewhere that shows what casino's offer what tournaments and on what days?
Mar 27, 2019 Why Do So Many Poker Pros Die Broke? Don’t Cheat On Your Taxes. As well as years of data of poker player results and casino poker tournament pay-outs. Gambling and Taxation. A recent case has tested this principle. In Hakki v Secretary of State for Work and Pensions 2014 EWCA Civ 530 Mr Hakki was a professional poker player who made a living from his poker winnings. An order for Mr Hakki to pay child maintenance was applied for through the Child Support Agency by the mother of his children (Mrs Blair).
Takeaway #1: The Internal Revenue Code permits the deduction of gambling losses only to the extent of gambling winnings.
A taxpayer with an overall loss from gambling for the year cannot use the net loss to offset other income, create a net operating loss carryback or carryover, or be carried to a previous or future tax year to offset gambling winnings in such year.
Takeaway #2: Casual gamblers report total gambling winnings on line 21 of Form 1040 (Other Income), and report total gambling losses as an itemized deduction on Schedule A.
There are several possible tax consequences from separate reporting of winnings and losses. I will mention a few.
First, if a taxpayer’s total itemized deductions are less than the standard deduction, then the gambling losses have no tax benefit. Second, gambling winnings are included in a taxpayer’s Adjusted Gross Income (AGI), but gambling losses are not. An inflated AGI can further limit a taxpayer’s ability to take other deductions. For example, medical expenses, an itemized deduction, can be deducted only to the extent they exceed 7.5% of the taxpayer’s AGI. Third, a taxpayer’s gambling losses may trigger the Alternative Minimum Tax.
A certain type of taxpayer, however, treats gambling winnings and losses differently from above: The professional gambler.
Takeaway #3: The professional gambler reports gambling winnings and losses on Schedule C, Profit or Loss From Business.
A professional gambler is viewed under the tax code as engaged in the trade or business of gambling. The taxpayer “nets” all gambling winning and losing sessions, and reports the result (either zero or greater) as gross receipts on the Schedule C. The limitation on deducting gambling losses still applies.
Because the professional gambler is viewed as self-employed, the taxpayer may also deduct “ordinary and necessary” business expenses incurred in connection with the business. I’ll expand on business expenses for professional gamblers in next week’s post.
The professional gambler is also subject to the self-employment tax, which is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. For the 2011 tax year, the self-employment tax was 13.3% for the first $106,000 of business income, and 2.9% thereafter. A taxpayer may deduct one-half of the self-employment tax as an above the line deduction.
Takeaway #4: The professional versus amateur gambler status for tax purposes is a facts and circumstances determination.
A taxpayer cannot choose the status that produces a lesser tax bill. There is Supreme Court of the United States precedent governing this issue. In Commissioner v. Groetzinger, 480 U.S. 23 (1987), the Court established the professional gambler standard (emphasis added):
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[I]f one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned.
Despite receiving other forms of income in 1978, Mr. Groetzinger was held to be a professional gambler for the year because he spent 60 to 80 hours per week at dog races gambling solely for his own account. Gambling was his full-time job and livelihood. Notably, Mr. Groetzinger had a net gambling loss in 1978. Thus, actual profit is not a requirement for professional gambler status.
Since Groetzinger, the IRS and several state tax agencies have challenged the professional gambler status claimed by many taxpayers. There’s a common theme among losing taxpayer cases that go to trial: Substantial time was devoted to generating non-gambling income.
In addition to applying the standard established by the Supreme Court, the U.S. Tax Court and state tax courts sometimes apply the following non-exhaustive nine factor test found in the Internal Revenue Code regulations:
- Manner in which the taxpayer carries on the activity;
- The expertise of the taxpayer or his advisers;
- The time and effort expended by the taxpayer in carrying on the activity;
- Expectation that assets used in the activity may appreciate in value;
- The success of the taxpayer in carrying on other similar or dissimilar activities;
- The taxpayer’s history of income or losses with respect to the activity;
- The amount of occasional profits, if any, which are earned;
- The financial status of the taxpayer; and
- Elements of personal pleasure or recreation.
The burden of proof is on the professional gambler to prove such status. Again, whether one should file as a professional gambler is a facts and circumstances determination. In most cases, it should be pretty clear where the taxpayer falls.
Author’s note: I must remind all readers that it is impossible to offer comprehensive tax advice on the internet. Information I write on this blog is not legal advice, and is not intended to address anyone’s particular tax situation. Should you seek such advice, consult with a tax professional to discuss your facts and circumstances.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, I inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.
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Parts one and two of this series explained that arrogance was the primary cause dying broke, and discussed nine mistakes poker players make along the way. This column will recommend the steps you can take to avoid that grim fate.
Start A Retirement Savings Program Now
Don’t think, “I’ll save money someday.” Regard retirement saving as an expense, just like your rent or car payment. If you start now, relatively small, regular contributions plus compound interest will build the funds you need.
For more than 80 years the federal government has forced and encouraged people to save for retirement. Social Security forces people to save, and many programs encourage saving. Because these programs let you deduct your contributions from your taxable income, the government essentially adds money to your account.
The government increases its subsidy by not taxing your interest, dividends, and other profits until you retire. Since your income tax rate will be much lower then, you’ll pay less tax. You’ll also get the money when you need it much more than you need it now.
These programs usually include severe penalties for early withdrawal. These penalties will discourage you from raiding your program when you run short of cash.
The government wants to give you money. Take it!
Get Professional Financial Planning Advice
Good retirement planning is like good poker planning. “It depends on the situation.” There are many retirement savings programs, and the government constantly modifies them. The right program depends upon your income, net worth, age, family situation, and other factors that only a professional can apply skillfully.
You also need professional advice to select investments. You couldn’t succeed as a pro if you weren’t very smart. But poker is your game, not investing. Stick to the game you play well.
Don’t Play Other Casino Games
The principle of sticking to the right game applies even more forcefully inside casinos. Even if you make some investment mistakes, saving regularly should build an adequate retirement fund. If you play the wrong casino games, you’ll probably go broke, and you may do it again and again.
Many poker pros lose heavily at craps, sports betting, and other games. They know these games are negative EV, but can’t accept that reality They arrogantly believe they can beat unbeatable games, and their pathological need for action overwhelms their logical brains.
The same craving for action causes some great tournament players to be huge cash game losers. Instead of waiting for the right tournament, they need action now, and it costs them dearly.
Keep good records. Whenever you feel an intense need to play a game you haven’t beaten, don’t lie to yourself and pretend you’ll beat it now. Leave the casino IMMEDIATELY.
Don’t Cheat On Your Taxes
Cheating is tempting, but extremely stupid. You think, “The IRS can’t know how much I win in cash games.”
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Wrong!
The IRS knows immeasurably more about how to how to catch cheaters than you can ever know about how to cheat. You can probably get away with cheating, but the risks are so huge that it’s extremely -EV. You may pay massive penalties and fines, and you could spend years in prison.
I don’t like paying taxes any more than you do, and I take every legitimate deduction. But, if I hadn’t paid taxes and Social Security and contributed to tax-sheltered retirement programs, I wouldn’t have a comfortable income from my Social Security and IRA, nor would I be eligible for Medicare.
If you don’t pay Social Security for ten years, you don’t get Medicare. As you get older, your medical costs normally increase enormously. Without Medicare you’re not just risking going broke. You’re gambling with your health and life.
You may believe you won’t get Social Security or Medicare because the programs will go broke. That fear is correct actuarially, but naive politically. If current trends continue the system will go broke, but the politicians won’t let it happen.
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Why?
It would be political suicide. Old people are a large and ever-increasing percentage of the population. They and their children would vote against any politician who didn’t protect their pensions and Medicare.
Buy Health Insurance
Medical costs have destroyed the bankrolls of many pros, and these costs aren’t the only reason to buy insurance. Insurance companies and Medicare will help you to stay healthy because it’s much cheaper than treatment.
They will pay for checkups and other actions that you wouldn’t take if you had to pay for them. If you have health insurance, you’ll be healthier, play better, and live longer.
Switch To A Healthier Lifestyle
Many pros neglect their health. They eat too much of the wrong kinds of food and don’t exercise enough. So they have higher medical costs and don’t feel well enough to play their A-game. They win less money and die too soon.
You have absolutely no excuse for an unhealthy lifestyle. There are hundreds of books and articles, and you don’t even need them. You already know what you should do. You just won’t do it.
Stop denying reality about your health. Commit yourself to eating wisely, exercising regularly, and seeing your doctor twice a year, even if you feel great. Routine health screenings have saved countless lives, and they could save yours.
Get A Straight Job
Every well-trained financial planner recommends diversification. And you don’t need that advice. You’ve repeatedly been told, “Don’t put all your eggs in one basket.”
That principle applies to any basket, but it’s especially true for poker. Swings and losing streaks are inevitable. If you depend too much on your poker profits, several bad things will happen:
- All of your income and assets will always be at risk.
- You’ll increase your psychological vulnerability. When you’re running bad, you’ll feel much worse than pros with more balanced lives. The worse you feel, the worse you’ll play. You can easily go on tilt and lose everything.
- You can’t be as selective about where and when you play. If you need money for your expenses, you’ll play when the games too tough or you don’t feel well enough to play your A-game.
- Your effective bankroll will be smaller. You’ll have to take the risks of playing above your bankroll or reduce your profits by playing in smaller games.
When I suggest taking a straight job, many pros are horrified. They think it’s admitting they don’t play well enough to make it.
Nonsense!
Some very successful players have straight jobs, including Bobby Baldwin, Dan Harrington, and three of my friends: Linda Johnson, Jan Fisher, and Roy Cooke. Despite being excellent players, they all recognized the danger of being totally dependent upon poker. They continue to play winning poker, but have solid incomes from other sources.
Conclusion
Stop pretending that you’re so special that you’re not in danger. Too many pros have died broke. Don’t become one of them. Start preparing for a comfortable retirement NOW.
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