Tax Time: Filing Tips for Poker Pros and Hobbyists

by mitchell posted Apr 10th 2006 at 14:00PM

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I am up to my ears in alligators, so the expression goes. Tax season as a CPA is like being Lucy Ricardo in the chocolate factory – the chocolates keep coming too fast and you can’t keep up with them!!

Enough about my woes, I want to address a different kind of problem that affects poker players – what to do when you win money. It’s a good problem to have and a problem that I hope to have one day!

Let’s start with the Form W2G.

The W2G is the tax form that the casinos may or may not give you when you win money. The problem is that people have come to me complaining that they received the Form W2G when they shouldn’t have. So, what is the rule? Do the casinos have “carte blanche” on this? Well, I have some of the answers.

The requirements for reporting and withholding depend on the type of gambling, according to the instructions for Form W2G. It also depends on the amount of the gambling winnings and the ratio of the winnings to the wager.

Here is the REAL scoop: Gambling winnings are reportable if the amount paid (reduced at the option of the payer by the wager) is (a) $600 or more AND (b) at least 300 times the amount of the wager. Now this does not apply to winnings from bingo, keno and slot machines. The rules for these winnings are different so for our discussion, let’s stick with poker winnings.

Let’s do an example. I enter a Ladies tournament for $330. The cost is $300 plus $30 for the house. Let’s say a miracle from God occurs and I win this tournament. The top prize was $50,000. According to the IRS rules, the casino does not have to give me a Form W2G. Why? Because 300 times my wager of $300 equals $90,000. According to the rules, it had to be over $600 AND $90,000 or more.

So what if the Casino insists on giving you a Form W2G and refuses to release your money without your social? You have 2 choices. Take the money and the Form OR file a lawsuit and hope you have something left after attorney’s fees after many years of fighting it out in court.

Here is the bottom line and it’s an accountant’s opinion, not a legal one.

The rule from the IRS says that if you pay out reportable gambling winnings, you must file the Form W2G with the IRS and provide a statement to the winner. The casino has a right, however, to give you one anyway. It doesn’t say they cannot give you the Form if those conditions apply, it just states when the HAVE to give you one.

Every year I prepare the end of the year tax forms for my clients, mostly consisting of Form 1099 for subcontractors. The rule for receiving this particular Form is if you have someone who is not incorporated and makes over $600 then you are required to give them the Form. I have some clients that chose to give the Form to a Corporation and some that want to give it to people that just make a few hundred dollars. The worse thing you can do is go to the IRS and argue about it. How does that look? I will tell you – like you don’t want to report income.

My analysis? As more Poker Players win tournaments that are less than 300 times their bet, the more problems the casinos are going to encounter if they try to give you a form anyway – especially if the winners are armed with the Instructions for Form W2G from the IRS website (hint, hint).

FILING YOUR FORM 1040

So, what if you have poker winnings and also losses? You are supposed to report the income and the losses when you file your Form 1040 separate from each other. How this is reported depends on if you are playing poker for fun or as a professional. Getting into the differences is another article in itself so let’s just assume that you have a job and you play as a casual poker player. How are you supposed to file your taxes?

If you are not a professional gambler, your wins must be reported on the front page of your Form 1040, on the line that says “Other income. List type and amount.” This is called hobby income, specifically from gambling, and yes, you are required to report it.

Hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.

Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket (you may be subject to state taxes depending on where you live). That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.

Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $5,000 if you are single, over $10,000 if you are married filing jointly, then you may be able to itemize with just your gambling losses.

It is always best to seek the advice of a tax professional. Find one that will take the time to explain how all of this works and how it affects your situation without boring you to death. That may be harder to do than doing your own tax return!!

I hope that I have shed some light on this subject for you. Enjoy the beautiful weather and look for me at a table after April 15th!
Ann-Margaret Johnston is a practicing CPA in Cumming, Georgia. She is the author of the recently published book titled “How to Turn Your Poker Playing Into A Business”. Her website is
www.pokerdeductions.com where you can find answers to commonly asked poker tax questions.