More From the Mailbag

Question: When you win a satellite, you get a slip or lamer that is transferable to other people. In this situation, it seems like logic would dictate that you can easily establish the fair-market value for the win and will need to record the amount for tax purposes. In other cases, you win a nontransferable entry into a tournament. The alternative is that you count the satellite and the tournament as one "session." If you win money in the tournament, it is netted against the entry to the satellite. If you don't, you count your "session" as the loss of the satellite entry. Is this correct?

Answer: Good question, you obviously have thought of all the possibilities. A satellite is basically a "parlay" bet. You have to win the satellite and win money in the tournament to have a win. We recommend that you treat the satellite buy-in as a loss, regardless of the outcome of the tournament. Should you win money in the tournament, you report it as a win, or if you sell the entry, you report the proceeds as a win. Remember, you are required to keep track of wins and losses separately, and to report the total wins separately from the total losses on your tax return.

Q: I won a $1,800 jackpot in one of the slot machines in Atlantic City. The casino people gave me the money and a W2-G form. I heard that up to $1,200 of a winning amount isn't taxed. Now, regarding my scenario, what amount do I need to pay tax on – $600 of the $1,800 or the whole amount ($1,800)?

A: Unfortunately, all gambling winnings need to be reported regardless of the amount (as well as all losses). So, in your case, the full $1,800 is a taxable win, and the money you spent on that machine (not including play from credits that you built up in the machine) is a loss that can be used to offset winnings. Properly accounting for slot play is a complicated issue, and we recommend the session method, which is discussed in our book. The session method basically allows you to report the slot machine winnings with which you leave the casino as a win, and the money you put into the machines "out of your pocket" as a loss. This is best done by using a spreadsheet with columns for W2-G payouts, cash that you pulled out of your pocket to play, checks cashed at the casino (which you used to play), cash played from markers, cash with which you left from payouts, the amount of credits you played off, and the amount you won or lost during the session. The amount of credits played can be calculated from the other numbers. It sounds complicated, but we can attest that it has held up under IRS audits.

Q: If I won $25,000 playing Internet tournament poker, what are my tax consequences? Does the government consider Internet poker tournament gambling legal? In other words, if I claim the $25,000, will the government be happy or try to arrest me for using a phone to place a bet? Or, better yet, do I have to claim it at all?!

A: At the risk of sounding redundant, be advised that the federal government taxes all worldwide income, whether reported by the payer to the IRS or not. Winnings do not have to be "significant." You are required to report any gambling winnings and losses to the extent of winnings. This goes for Internet gambling, legal or illegal gambling, and poker cruises in international waters; the IRS does not care. Your chance of being arrested by the government is extremely remote. I. Nelson Rose wrote an enlightening column on this subject in the Oct. 10, 2003, issue of Card Player, and we suggest you refer to it for a comprehensive discussion of being arrested for placing bets on the Internet. In that column, he makes the point that the IRS cannot reveal information on your tax return to law enforcement agencies. It is not necessary to report on your tax return where you won or lost, just the amounts. The only time you have to get into detail of where you gambled is when you are audited be the IRS. The odds of this are also very low. We know that several years ago, the IRS computer selected at random 500 returns with gambling income filed for examination, as part of its revised compliance program. We do not know what number the IRS is using now or if it is still doing it. It may not have been fruitful enough for the IRS to continue this program. In either case, its resources are limited and it has to allocate its manpower to examinations that yield a significant amount of increased tax collected. So, to quote I. Nelson Rose, " … probably 20 million Americans make technically forbidden wagers each year. With odds like that, you are more likely to be elected governor of California than charged with illegal gambling."

We recently attended a three-day IRS conference to learn the latest changes and how to handle a number of aspects of the tax requirements. We are Enrolled Agents licensed by the Treasury Department, and are required to earn a number of continuing education "units" each year to keep our license. This is also required of CPAs, attorneys who want to practice before the IRS, and preparers licensed by a number of states. The "theme" of the conference was compliance. IRS representatives emphasized that they want licensed preparers to play a bigger role in the compliance program by asking taxpayers for more proof in a number of areas. It is not mandatory, but we think it is a trend that may get worse. So, if you are not keeping adequate records, now is a good time to start.

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, mail or e-mail them to us ([email protected]). We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) 829-7271. R.B.S. will prepare your return without your having to leave the comfort of your home, no matter where you live.