We Get Letters

It is that time again. Three or four times a year, we answer questions from readers. Although many of you may already know the answers to these questions, please remember that we were all novices at one time. However, even you poker veterans might learn something, as nothing stays the same. The first question, please.

Question: If over the course of the year I win an arbitrary amount of money – say, $20,000 – playing poker, and I also realize a loss of $25,000 in the stock market, can I use this loss in the stock market to offset the gambling winnings? Would it make a difference if I qualified as a day trader?

Answer: In either case, whether you are a day trader or not, the IRS does not consider day trading as "gambling" for tax purposes (although many consider it gambling).

Q: Are professional gamblers required to report estimated quarterly earnings, or do they pay taxes at one time annually?

A: Professional gamblers are subject to the same rules as everyone else regarding estimated payments. To provide for current payment of income taxes not collected through withholding, the law requires individuals in some instances to pay a portion of their taxes currently. The general rule is that at least 90 percent of an individual's final income tax is to be paid through either withholding or estimated payments. If at the time you file your taxes, your tax liability is less than $1,000, you are not required to make estimated payments. If you owe more than that when you file, you will have to pay an underpayment of estimated tax penalty. The estimated payments are due in four installments, the first of which for the current year is due on April 15 of the current year. The second is due on June 15, the third on Sept. 15, and the fourth on Jan. 15 of the following year. So, how do you know on April 15 of the current year what your total taxes will be for the year? There is no real answer, and that is why they are called estimated tax payments, but by the end of the year, you should have a fairly good idea of what you made that year. There are exemptions: If you paid no tax in the prior year, you are not required to make estimated payments. Also, if you are retired and, under certain circumstances, disabled or under a hardship, you are exempt. There is a "safe harbor" of sorts to avoid the penalty: (1) if your estimated payments total 90 percent or more of the tax shown on your return for the year, (2) if your estimated payments equal 100 percent of the prior year's tax, and (3) you use the annualized income installment method to make estimated payments (this is rather obscure, so we have chosen not to explain it at this time).

Q: If I file as a professional poker player, can I write off the tuition for poker school online as a business expense or continuing education expense?

A: This question is evidently bouncing around the poker world due to webcasts and online poker schools. At this point, we decline to offer an opinion due to the complexity of the issue. That is, what constitutes a school? Is it accredited, and so on? We suggest asking the IRS, but as we all have heard, you can ask 10 different IRS agents the same question and get 10 different answers.

Q: You have probably already answered this question several times, but how does money in Internet gambling accounts apply to income tax? Is it taxable while in the account or does it have to be withdrawn for income tax to apply?

A: Yes, we get many questions regarding the taxability of offshore gambling winnings. A win is a win as long as you can withdraw it; it is yours and it is taxable. You should be recording wins in your account as wins in your diary. U.S. income tax applies to worldwide income, whether legal or not. They nailed Al Capone on income tax evasion, and they could nail you.

We hope you found these questions and answers educational; however, should you have a problem with the IRS, seek professional help. Do not take a copy of one of our articles to the IRS to defend your position, as this is an informal discussion. To defend your position, you need to know the code sections, regulations, and revenue rulings, and the court cases that apply to your situation.

Editor's note: Roger did his undergraduate studies in accounting at Vanderbilt University. Yolanda earned a B.S. in finance at the University of California. Roger became a California CPA in 1974. Both have done graduate work in the field of taxation. As Enrolled Agents, they are licensed by the Treasury Department to represent and defend clients before the IRS nationwide, in addition to tax preparation. Their book, The Tax Guide for Gamblers, is the most comprehensive book available on the subject. See their website, www.rbstaxes.com, for more information regarding their practice, articles, and useful tax links. They do business as RBS Tax Services, are located in Las Vegas, Nevada, and can be reached at (800) 829-7271.