Tax Strategies for Poker Players

Well, it is that time of the year once again that is dreaded by not only CPAs everywhere, but every true American; it's tax season. This tax season may be difficult for some poker players who do not understand the rules and laws that govern poker winnings.



If you were one of the thousands of players who won a sizable tournament, you also were probably the "lucky" winner of a Form W-2G, showing the amount of money you took home. But reporting poker winnings isn't that simple.



Sharing the Wealth
Many poker players who enter tournaments, especially big buy-in events, are swapping or selling action. This means that the poker player agrees to share his winnings if people will help with his tournament buy-in and/or other costs associated with playing in the tournament.



This is where many poker players make a mistake that can cost them a lot of money in taxes. If you are swapping or selling action in a tournament and you win, you need to give the casino a Form 5754. You can find this form, along with the instructions, on the IRS website at http://www.irs.gov/. Believe it or not, it is a simple form to understand and complete. All you do is complete Part 1 with the amount you won, your name, social security number, and address. You then complete Part 2, showing each person with whom you are sharing your winnings, including name, social security number, address, and amount being paid.



That may seem like you are being a bit of a snitch, but you are really helping everyone. If you decide not to prepare this form (or didn't know about it until now), the entire amount that you won will have to be claimed on your tax return.



This can be a big problem for several reasons. First of all, if your poker playing is something that you do for fun as a hobby, the entire amount you won will be shown on your Form W-2G and will have to be claimed on the front of your tax return on Line 21 as "Other Income." The only way to offset the money you won during the year is with the money you lost during the year and the money that you "paid back" to others who backed you. The only place to do this is on a Schedule A, which is for itemized deductions. The bad part is that if you cannot itemize, you technically cannot offset those gambling winnings at all. It's not fair, but it's the rule. Whether or not you can itemize can be determined fairly easily by looking at the instructions for Schedule A.



Warning for Internet Poker Winners
There has been a lot of bad advice going around in chat rooms as to what to do when you win money on an Internet site. People are telling each other that as long as you don't move more than $10,000 from your account on the Internet gambling site to your bank account, you don't have to claim it with the IRS. We all know that Internet gambling sites are in foreign countries, which are not governed by United States laws, especially by the IRS. However, the poker player who is playing on a site at home in his pajamas certainly is.



When you travel out of the United States and come back in through customs, you have to declare if you are carrying $10,000 or more in cash, bonds, checks, and so on. Also, there is a law that you have to declare to the IRS any deposit of $10,000 or more in cash in a financial institution. This is where I believe players are misled.



The rule stinks, but it is this: If you win money on the Internet – or anywhere else, for that matter – you are supposed to claim it as income on your tax return. As we know, online casinos do not issue government forms. It's basically on the honor system at this point. Be aware of this: If you get audited, the first thing the IRS will want to see is your bank statements, so that it can look at the deposits going into your account. If the front page of your tax return does not closely resemble the deposits going into your account, you will have a lot of explaining to do.



So, you may think the answer to this may be to just leave all of your money sitting in your Internet account to avoid all of these problems. Not so fast – as here is another consideration: There is a rule that states that if you have $10,000 or more in a foreign account, you must check box 7A on Schedule B of your tax return. The bad part is that by doing this, you are almost assured of being audited. So, if you keep that money in your account, you need to check box 7A on Schedule B, and you had better report your winnings on the front of your return.



Necessary Evil

Accountants always seem to bring you the bad news, but remember, we really are trying to keep you out of trouble with the IRS. The best advice is to consult a CPA or tax preparer as you begin your poker hobby or career to avoid future tax problems. A client once told me that I am a necessary evil; taxes are the evil, and an accountant is necessary in helping to lessen the pain.



Take care, and try to get through the season.

Ann-Margaret Johnston is a practicing CPA in Cumming, Georgia. She is the author of the recently published book, How to Turn Your Poker Playing Into a Business. Her website is http://www.pokerdeductions.com/, where you can find answers to commonly asked poker tax questions.