Luckyhacks

Taxes on Poker Winnings. The advantage of filing as income is that you can also deduct related expenses - but you have to pay social security taxes as well. Each person has to work out which method is best for them. There probably are a lot of people who don't claim their cash game winnings - but you are supposed to.

1. Taxes On Winnings By State

For those of us who have turned a love for video poker into a steady source
of supplementary income, learning the ropes of the federal tax code is almost as
important as studying your basic strategy tables.

That’s because video poker machines differ from blackjack, baccarat, and
other table games in one major way: formal tax reporting.

• In short, gambling and poker winnings are not taxed in the United Kingdom. This is a simple rule that protects poker players that play both online and off. Having said that, the government still collects tax revenue from the gambling industry by taxing the companies that.
• Jan 26, 2013  Poker winnings are taxable whether they are from cash games or tournaments. This is true for brick and mortar, as well as online poker rooms. Even if a player lives in a state where online poker is explicitly illegal there is still a responsibility to pay taxes on those winnings.

When you drag a big pile of chips after a successful double down in
blackjack, nobody heads over from the cashier’s cage to hand over tax forms. It
doesn’t matter if you take down $1,000, $10,000, or even more in a single hand –
table games don’t require any documentation with the Internal Revenue Service
(IRS).

You’ll still need to self-report those winnings of course, but the process
doesn’t require any paperwork or signatures at the actual casino.

But everything changes for us video poker enthusiasts.

Because video poker falls under the same classification as slot machines and
bingo games, at least according to the tax code, players who win large jackpots
and hand pays are obligated to complete a specific tax form which covers
gambling winnings. That form, known officially as the W-2G, will become a common
sight for any successful video poker player – so it’s best to know exactly how to
handle this situation when it inevitably arises.

The following page was put together to provide video poker players with a
handy guide to the tax laws and procedures that govern big wins. With that said,
we must state here and now that we’re not tax experts, nor are we qualified to
dispense legal advice. The information contained here is simply an introduction
to paying taxes on video poker winnings, based on our own anecdotal experience,
and a careful review of publicly posted IRS information.

On your end, we advise conducting further research to supplement what you
learn here. Check out the IRS
website’s section on gambling winnings,
or head
over to TurboTax to see what they have to say on the subject.

Now that we’ve included all necessary disclaimers, let’s tackle the process
for paying taxes on video poker winnings.

What the Law Says

Whenever you’re dealing with a federal agency like the IRS, it’s important to
apprise yourself of the rules and laws which pertain to you.

Flying blind isn’t advisable when you’re faced with a close drawing decision,
is it? Thus, pursuing big-time jackpots without learning how those wins will be
taxed is not the optimal play.

To begin our own crash course on video poker taxes, way back in the 1980s
when we started playing this great game seriously, we turned to the actual tax
code itself. We know, poring through dense legal language and tax instructions
can be a chore – and trust us, this was – but thankfully we can boil it all down
to the nuts and bolts here.

Under the provisions of Revenue Procedure 77-29, Section 3 – which was added
to the tax code in 1977 – video poker winnings of $1,200 or more must be
reported via the W-2G form:

“Temporary regulations section 7.6041-1 (T.D. 7492, 1977-2 C.B. 463),
effective May 1, 1977, require all persons in a trade or business who, in the
course of that trade or business, make any payment of $1,200 or more in winnings
from a bingo game or slot machine play, or $1,500 or more in winnings from a
keno game, to prepare Form W-2G, Statement for Certain Gambling Winnings, for
each person to whom the winnings are paid.”

As we mentioned already, this W-2G form – also known as the Statement for
Certain Gambling Winnings – will become a regular part of your video poker
journey. After all, you can’t claim any hand pay of $1,200 or more without
completing a W-2G right there on the casino floor.

For readers who are just beginning to climb the video poker ladder, sticking
to $0.50 machines and the like, a big score of $1,200 or more is quite rare. At
those stakes, the odds of triggering a royal flush are approximately 1 in every
40,000 hands – at least according to legendary video poker expert Bob Dancer.

Because of those enormous odds, we recognize that not all of our readers have
had the pleasure of experiencing a hand pay, so we’ll run through those
procedures in the next section.

How to Handle a Hand Pay

When you finally connect the perfect combination of cards, landing a royal
flush, straight flush, or four aces with a kicker, you’ll trigger the machine’s
largest jackpot payouts.

For players at the quarter stakes, max-betting at $1.25 per hand and landing
the 800 to 1 payout for a royal flush brings back $1,000 – so you’ll be in the
clear* for W-2G reporting purposes.

*While W-2G forms are required for reporting wins of $1,200 and up, you’ll
still need to report wins like the $1,000 example jackpot to the IRS. We’ll
cover those reporting procedures in the Additional Reporting Rules section later
on.

But when you up the ante to $0.50 stakes and max-bet at $2.50 per hand, that
same 800 to 1 payout for a royal flush brings your hand pay amount to $2,000
even. That’s well above the W-2G reporting requirement, so the casino attendant
will head over with your cash in hand – along with the all-important form.

After they’ve congratulated you on the big hit, the attendant will
immediately ask to see your government-issued identification. It takes a
foolhardy gambler to enter a casino without their ID, so we’ll assume you’re
always packing a driver’s license (or equivalent form of ID) when playing.

Once they’ve confirmed that you’re of age and eligible to play, the attendant
will then ask for your social security number. This aspect of the process is
optional, but we recommend forking over the nine-digit number – and here’s why.

If you decline to provide your social security number to the casino, they’ll
be forced to deduct an amount equal to between 28 percent and 31 percent of your
total win. That deduction is passed over straight to the IRS, so from a certain
perspective this approach is a bit easier, but we like taking home all of our
hand pay winnings.

Of course, the taxes will eventually be levied and you’ll wind up paying the
IRS its “due”, but this way allows you to hang on to the cash throughout the year
until tax season draws near.

Even better, you get a slight break when reporting through the W-2G form
directly from the casino. This method incurs a flat 25 percent tax on your
reported winnings, while declining to offer your social security number and
reporting later bumps the rate to 28 percent.

When the attendant has your ID verified, and your social security number safe
and sound, the next step is to fill out the W-2G form. This is simple and
straightforward, and should only take a minute or so to complete.

From there, the attendant will hand over your winnings in crisp, clean $100
bills – before heading back to the cashier’s cage to make a copy of the W-2G.
The casino will keep the original form, while you’ll receive a copy to take home
for recordkeeping purposes.

That’s it and that’s all, so from the time you land your winning hand to now
you’ll be occupied for about 10 minutes. After that, you can get back in the
game, or head back to the room to celebrate.

Scoring a hand pay when playing at the lower stakes is a rare event indeed,
but if you grind patiently and play well, you’ll eventually run into a big
winner. And when you do, you’ll be fully prepared to handle your first hand pay
situation.

But what about players who max bet at $10, $25, or even $50 per hand? The
higher bets obviously entail bigger wins, and it stands to reason that
high-stakes video poker specialists trigger several payouts of $1,200 or more
per session.

Indeed, when you move up in stakes and begin attacking the larger max-bet
denominations, you’ll find that hand pays become just a humdrum part of everyday
life. Bettors at the $25 max-bet level need only a straight flush to trigger a
50 to 1 payout – and 50 times $25 comes out to $1,250.

Obviously, taking 10 minutes to complete a new W-2G form several times per
session would inconvenience high-volume players, so the casinos have taken steps
to prevent this waste of time. The following section will guide you through tax
reporting as it pertains to high-stakes players who score hand pays on the
regular.

Hand Pays at the Higher Stakes

Once you’ve established yourself as a high-stakes video poker specialist,
here’s how your typical session begins.

You’ll head over to the casino’s high-limit area, find a friendly employee,
and ask them for a “session log.” They’ll know exactly what you mean, and within
seconds you’ll have a blank W-2G form ready to fill out.

By completing the basics of the form in advance, you’re now free to grind
away to your heart’s content, free of any distractions caused by hand pay
requirements. When the cards align and you trigger a big win of $1,200 or more,
the casino staff will simply enter the time and dollar amount into the form.

When you’re done playing, those individual wins will be totaled, and you’ll
be asked to verify the form’s accuracy before signing and initialing on the
dotted lines. This method turns several separate tax-eligible hand pays into a
single figure encompassing the entire session – which saves valuable time and
paperwork for all parties.

But there’s always paperwork involved in any passion worth pursuing, so even
if you don’t plan on playing the high-stakes machines anytime soon, be prepared
to track your daily sessions through a personal video poker diary.

Track Your Play

If you’re a regular casino player, you should always invest in a Player’s
Club Card, or the preferred method of player-tracking used by your venue of
choice.

When you’re in the system, every second of every session you play will be
monitored, tracked, and recorded for posterity. Dropping $100 on the first
machine, winning $300 on the next, then spew $50 more back before heading to
dinner is standard practice for most players – but unless you have a
photographic memory, calculating your true win/loss rate for the night can be
difficult.

The casino takes care of all that for you when you’re in the system, and
you’ll even receive an annual Win / Loss report which contains precise
calculations for the past years’ worth of play. Contained on the Win / Loss
report is a detailed accounting of your video poker sessions, so you’d be able
to look back and see that the example session above produced a modest profit of
$150.

You’ll be saving those W-2G forms as they accumulate throughout the year, but
when tax season rolls around, it’s time to dig them out and see where you stand.
With your W-2Gs in hand, the final step in the reporting process involves the
old Form 1040 we’re all familiar with.

Scan your Form 1040 for the section labeled “Other Income” (on Line 21) and
enter the win figures from each W-2G you’ve earned.

That does it for the big winners, but the IRS isn’t satisfied just yet. They
also want to know about your smaller winnings throughout the year – even a hit
for just $5. This may seem like a big burden, but in reality, the IRS is
offering to give you a break here – which is quite rare in the world of federal
tax collection.

Unlike table games and keno, video poker losses reported via W-2G forms only
cannot be written off as deductions against wins. In other words, as the video
poker hand pays pile up – along with the taxes applied to them – the times you
lost don’t come into play.

But by using Form 1040 to list itemized smaller (under $1,200) wins, you can
then list the associated losses to balance out the tax bill. This can be huge
benefit for video poker players, because as we all know quite well, it takes a
ton of losing hands before the jackpot payouts arrive.

In order to take full advantage of the Form 1040 deductions, you’ll need to
have thorough and accurate records of all wins and losses. That’s where the Win
/ Loss reports provided by the casino come into play, as this data allows you to
confidently scribble in exact figures for wins and losses without fear of
fouling up the numbers.

According to Publication 529 issued by the IRS, players are free to deduct
losses up tothe amount of their wins, a system which is described below:

“You must report the full amount of your gambling winnings for the year on
Form 1040, line 21. You deduct your gambling losses for the year on Schedule A
(Form 1040), line 28.

You can’t deduct gambling losses that are more than your winnings. Generally,
nonresident aliens can’t deduct gambling losses on Schedule A (Form 1040NR).”

The IRS is also wise to many of the tricks used by gamblers hoping to game
the system, so don’t try to get one over on them. One of the most common
attempts involves listing only big W-2G wins plus a series of itemized smaller
losses to help “balance things out.” Of course, this is a dishonest way of
accounting, because you naturally piled up a series of smaller wins along with
those loses.

Trying to report selected information, while concealing the rest, is a
surefire way to draw the IRS’ ire, as evidenced by their straightforward rules
on the matter:

“You can’t reduce your gambling winnings by your gambling losses and report
the difference. You must report the full amount of your winnings as income and claim your
losses (up to the amount of winnings) as an itemized deduction.

Therefore, your records should show your winnings separately from your losses.”

Finally, while the Win / Loss reports sent by the casino are largely
accurate, mistakes can always be made. Let’s say you forget your Player’s Club
card at home, or the machine fails to read the card’s code, leaving an entire
session of wins and losses untracked.

In this case, a few swings in either direction can severely impact your tax
obligation, so it’s best to keep your own records on the fly. The IRS offers
similar advice, directing gamblers to keep a “diary” of their video poker play.

This private recordkeeping can take any form you wish, so long as you keep
track of the pertinent information. Where you played, the date and time, the
stakes, and even the machine’s serial number or code are all useful data points
when keeping a video poker diary.

As soon as you receive the casino’s official Win / Loss report, be sure to
check it against your own records – and in the case of discrepancy, your diary
will prove to be invaluable.

Conclusion

Additional Resources

That just about does it for our personal advice for paying taxes on video
poker, but like we said in the introduction, we’re far from certified tax
professionals.

With that in mind, here are a few sources to check out as you continue your
video poker tax tutelage:

• Tax Help for Gamblersby Jean Scott and Marissa Chien
• Gambling Is My Business: A Financial Organizer for Professional Card
  Players & Other Gamblers by KiKiCanniff
• The Gambler’s Guide To Taxes: How to Keep More of What You Winby Walter
  Lewis
• All In Against the IRS: Every Gambler’s Tax Guide by Stephen Fishman

It’s a scene many poker players dream about. One lucky player has outlasted thousands of others and now sits in front of a mountain of poker chips as his friends gather around posing for pictures and celebrating a six-figure score. Champagne will flow and the smiles will go on for hours. Clubs and bars might be visited on Sin City’s famous strip as the celebration continues.

But the most important visit for a poker player coming off a big score might be to an accountant, as the tax implications from a win like this can hurt if not handled properly.

The card-playing world is rife with overnight millionaires — young savants who win it big on the poker felt or grind away at cash games earning a nice living. Unfortunately, there are just as many players who see their fortunes plunge after living the high life. In the poker world, the cash can come easy, but keeping it is a different story. With the U.S. tax filing deadline on April 18, PokerNews takes a look at the unique challenges facing gamblers and the best ways to plan for the future.

THE TAX MAN

It’s another scorching day in the Las Vegas desert, but cool inside the Rio as thousands of players battle it out. In the halls of the Rio convention space, CPA Ray Kondler mans a small booth as a couple players ask him questions about their tax liabilities and how best to prepare. Kondler has been in the same location for the last six years — working with players and promoting his firm and its specialization in helping poker players and gamblers. Plenty of players utilize his service and expertise in all tax-related poker matters.

“I love it – it’s so much fun being here. We have a ball,” Kondler says of his time at the WSOP each summer. “We meet so many people. It’s an interesting niche because they’re an interesting group. They’re all the nicest guys, they just need some education. People come up to us and want some free advice and that’s what we’re here for.”

Taxes On Winnings By State

After graduating from Seton Hall and working at Arthur Andersen, Kondler began his own firm 26 years ago in New Jersey working with businesses and individuals. Kondler then bought a practice in Las Vegas, which already had some gambling clients. A poker player himself, Kondler saw the explosion in the game’s popularity in the 2000s and saw an opportunity to grow his firm and help players.

“I play poker and in some World Series of Poker events and realized that there was a good need for a good taxation guy in poker and gambling,” Kondler says. “Now every year it just keeps expanding.”

His firm now boasts several major winners including the Main Event (the most famous tournament in poker) winners and numerous players who have won $4-5 million. The practice, which now also has offices in Las Vegas and San Diego, now also serves as the auditor for seven Las Vegas-area casinos. The firm serves hundreds of professional gamblers (including sports bettors and daily fantasy sports players) that range from $2-5 cash game grinders to WSOP bracelet winners to high-stakes online players.

First and foremost, Kondler’s role is to educate players. Most don’t realize all the opportunities within the tax code to help them in reporting. They don’t know how to keep records, Kondler says, and don’t know which forms to use and when to file. Many players are more focused on their winnings and their next stop on the poker tournament scene than how best to prepare for filing with the IRS.

“Sooner or later, they’re going to need somebody,” Kondler says. “Even the people that cashed today for $2,000. They won’t get a W2G, but because they do have $2,000 in winnings they’ll have to report. But anything over $5,000 they’ll get a W2G, so then they come to us and say, ‘What do we do?’ We also get the random guy who says, ‘I started a business, what do I do?’ so it’s pretty interesting.”

Randy Cowdery is president of Thoroughbred Tax Service and has been a tax accountant in Las Vegas for 15 years. Crowdery also brings a unique insight into the industry. When he was 18 in the mid-1970s, he started counting cards playing blackjack to earn spending money in college. After graduating he only played recreationally, but became a full-time advantaged video poker player for three years after moving to Vegas in 1999. He then decided to put his accounting minor in college to use and become a tax accountant in 2004.

“From the beginning I specialized in gamblers’ tax returns and I now have clients throughout the country and still a few internationally that left the U.S. because of Black Friday (the day in the U.S. when the feds shut down online poker),” he says. “My recreational and professional gamblers include poker and video poker players, horse bettors, sports bettors, and blackjack players. Professional poker player returns have increased slightly in recent years.”

Cowdery says the IRS has never looked favorably at gamblers and they face some unique disadvantages. Because recreational players cannot write off expenses and professional players have to pay self-employment tax, he says, the IRS would like to see losers file as recreational players and winners file as professional gamblers.

“The tax code treats recreational and professional players less than fairly in my opinion,” he says. “Recreational players are supposed to report all their winnings as income before considering losses. The losses are then reported as an itemized deduction on Schedule A. This means their adjusted gross income is artificially high on their tax return. For filers that do not normally itemize they can lose part or all of their standard deduction. If your gambling winnings push your income high enough, you can pay additional Medicare tax and the net investment tax along with having exemptions and deductions phased out.”

Cowdery says all of these “taxes” were meant for households with income above $250,000, but recreational players with income far below that threshold and who actually lost money gambling can be subject to them. Additionally, those on Medicare can see their premiums go up more than triple the standard rate even when they’ve actually lost money gambling.

Professional gamblers are also not treated like all other businesses due to gambling losses — they cannot show a business loss on their tax return.

“So where Donald Trump can write off his billion-dollar loss over 20 years of tax returns, if a professional gambler loses a million dollars one year and wins a million dollars the next he has to pay taxes on that million dollars without consideration that he lost that the year before,” he says. “What many professional gamblers and even many tax professionals do not know is that the IRS will allow a loss on the Schedule C for business expenses. Just be sure losses do not exceed wins.”

MAKING A PLAN

'In order to be a successful gambler you have to have a complete disregard for money.'

While that saying by 10-time WSOP winner Doyle Brunson is fitting for many players at the tables, it also describes many players’ spending habits away from the casino and mental approach to taxes and record keeping.

Sadly, stories of players hitting it big and then going broke are common and many somewhat view “going broke” as a rite of passage in the world of poker. In recent years, stories in the news have included WSOP champions selling bracelets or big-name players owing other players hundreds of thousands of dollars. No doubt, being in arrears to the IRS is a problem some may also face, and some simple planning could helps players avoid some major headaches.

Brunson, who now lives in Las Vegas and has only had two losing years in 61 years playing poker, still plays at some of the biggest buy-in cash games in the world even at age 83. Brunson has made tax preparation and financial management a key part of his life in the game. Many players are extremely leery about discussing taxes, finances, and the IRS, but Brunson offered his general philosophy on the matter to The Accountant.

“The best advice was given to me by Johnny Moss,” he says, referencing another famous Texas poker player who won the first two WSOP Main Events. “Moss said: ‘pay your taxes and invest a small part of your bankroll. Money sitting in lockboxes does you no good, so bite the bullet and pay your taxes.’ That is sound advice and I recommend the same thing. Good luck!”

For poker players and other gamblers, Kondler offers two main points of advice to his clients. First, track everything and leave a paper trail. Whether it’s tournament buy-ins receipts, cash game log books, ATM receipts, or credit card purchases, a player must make sure he or she can prove losses and expenses because it is extremely difficult to piece together an entire year two or three years later in a potential audit.

Second, Kondler notes a bit of common sense — that taxes do not go away. If someone owes money to the IRS, state, or international tax agency, that burden will not go away if ignored. Players must properly plan each year to ensure they can make the necessary payments if necessary.

“Documentation is the main issue faced by players,” Kondler says. “Many of our new gambling clients come to us and have very little in the form of documentation for wins, losses, expenses, money they lent out, et cetera. It is challenging to address IRS notices or even potential audits without proof that any of these things occurred. It is critical to document your play in order to prevent any future hassle.”

Cowdery agrees and notes that it is important for professional gamblers to keep track of every expense and expenditure. Players must treat their “action” more like a business to satisfy taxing agencies in case of an audit or inquiry.

“The biggest problem with gamblers during audits is not having logs,” he says. “The IRS loves logs. They want mileage logs and gambling logs. A mileage log is the best method for a professional gambler to substantiate those miles related to gambling. They also want your mileage for the whole year, so jotting down your odometer at the beginning of every year is important. Of course maintaining a mileage log can be a real pain which is why so many people don’t keep one.”

A gambling log is the primary record that the IRS considers when determining wins and losses. For taxes, this log is important for both recreational and professional gamblers. The log should be contemporaneous – meaning it is updated it at least daily when gambling – and should show date, time, place, wins, losses, and any other information such as a person’s name, machine, or table number to substantiate the log. Cowdery notes that ATM receipts, markers, and win/loss statements are good secondary items.

Another obstacle faced by professional gamblers is that the IRS says mileage to a player’s first location and from his or her last location is considered commuting miles and not deductible.

“There is a way to get around that for professional gamblers,” Cowdery says. “When a taxpayer does not have a regular business location, and typically gamblers do not, then if the taxpayer has a home office that qualifies as your principal place of business and all mileage to and from business locations, casinos, become deductible. But be careful, the IRS considers a home office as a place that is used both regularly and exclusively for business.”

Some players also have unique income possibilities exclusive to poker. Many players often “back” other players in tournaments and even in cash games by buying a percentage of their action. Any winnings derived from the other players’ performance must be included in tax filings. Other considerations include sponsorships and other new types of betting income such as daily fantasy sports, which has become more popular in the U.S. and in other countries.

Beyond tax filing and documentation, Kondler attempts to do more for players by helping them establish long-term saving goals through traditional savings and investment accounts. He also helps highly successful players set up corporations to better work within the tax system. The firm also determines if a player is a player is a pro or an amateur to best file the player’s tax return.

“We try different strategies with players. I have all my investor licenses so we have millions of dollars that we manage every day in the stock market,” he says. “I try to get the guys into 401(k)s and pension plans and things like that. A lot of players win and they don’t keep the money, they go and buy into other guys. We tell them, ‘Hey, I can put the money away for you and manage it.’ A lot guys who theoretically make a lot of money, when we ask them to pay taxes, they don’t have it anymore. Anybody can do a tax return, but our job as a CPA is to teach them other things like how to save money for the future.”

GLOBAL CHALLENGES

Poker is a global game now, and the 2016 WSOP featured players from 107 countries looking for their chance at poker glory. But winning big money can turn into a tax nightmare for some foreign-born players.

A foreign player who cashes in an event will receive an IRS 1042-S, which is used to report money paid to foreigners in the U.S. that are subject to income tax withholding. The form must be filed even if nothing is deducted and withheld from the payment because of a treaty or if any amount withheld was repaid to the payee.

The problem, Kondler notes, is that U.S. tax treatment for players from other countries completely depends on the country of residence/citizenship. The U.S. has tax treaties with certain European countries that state gambling winnings won in the U.S. are immune from U.S. taxation. The money won must be claimed in the country of residence/citizenship, but no taxes are due in the U.S. However, there are only 28 countries worldwide that benefit from gambling-based tax treaties with the U.S., so the rest of the world will automatically have 30 percent withheld from their winnings, and many do not know how to get those refunds returned.

“This is where we can provide assistance to players,” Kondler says. “We can prepare U.S. tax returns for players that net their total winnings against their total losses. For instance, if a player wins $100,000 in a tournament they will automatically have $30,000 withheld by the U.S. government.

“However, let’s say the same player actually had $50,000 of U.S.-based tournament buy-ins, losses, or expenses in the same year. We will file a return that shows the correct net win of $50,000 and the player is only taxed on that amount at the applicable U.S. tax rate, instead of being taxed on the entire $100,000 win. The player is then sent a refund in the form of a check when the process is completed.”

Many players may not realize that this is an option to get back some of those withheld funds. And with so many players making their way to Las Vegas from other countries (last summer’s WSOP featured more than 107,000 entries), this is a tax situation affecting more and more players.

Planning and keeping records are so important for players, Kondler says. A bit of preparation can not only help save money that should not be going to taxing authorities, but save some headaches.

“Do your research,” he says. “Reach out to a tax professional if you have any questions about your tax situation. Do not wait until the end of the year because there are things you can be doing now that will end up saving you money in the long run.”

Sean Chaffin is a freelance writer in Crandall, Texas, and writes frequently about gambling and poker. If you have any story ideas, please email him at [email protected] or follow him @PokerTraditions. His poker book is RAISING THE STAKES: True Tales of Gambling, Wagering & Poker Faces and available on Amazon.com.

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