The only things that are certain in life are death and taxes...
Whoever said this was clearly not a small-stakes poker player. For if he was, he'd surely have included bad beats in his universal rule. But I digress... this post is to talk about a topic most of us have no zeal whatsoever to delve into: paying taxes on your poker winnings. We've all got to do it, and frankly the nascent world of online poker isn't an easy one to navigate when it comes to what we owe Uncle Sam, and how we pay him.
My aim is to help, at least a little. Before you read on, however, please realize that I am *not* an expert on tax law. I am *not* an attorney, and I give absolutely no guarantee as to the suitability or accuracy of what I've written. Use this information at your own risk, and please know that it is provided "as-is." I hate writing this kind of disclaimer, but you can never be too cautious, right?
In plain English, I'm just a guy who likes to play poker, and who, after having a winning year in 2004 (notably the first year I've had any poker income whatsoever), is now trying to figure out how to be honest about it with the government. If nothing else, this post is intended to get the "marketplace of ideas" going amongst us competent and energized bloggers to really drill down what we need to do tax-wise. If I'm wrong, maybe debate that follows can help show why and get the *right* info out there... I won't be the least bit offended if you look at it this way and call me out where I've messed up.
Who Needs to Pay?
For starters, any United States taxpayer that gambled in 2004 and had even a single winning session needs to pay taxes on those winnings. Lets say you walked into a local casino, placed one $5 wager on 1:1 payout blackjack, won, pocketed the $5 in winnings, and left... you'd owe taxes on that $5 in "winnings."
Furthermore, lets say you went to that same casino, and instead placed ten $5 wagers in the same blackjack game on ten different occasions, winning only one wager and losing the other nine, for a net total of -$40. Guess what? You would still owe taxes on the single $5 "win" you had. You could claim the $45 in losses separately if you wanted to, but only if you take the itemized, rather than standard deduction. And strangely enough, if you had played all ten wagers together during the same visit on the same day, you would owe no taxes at all! Same outcome for you, but the circumstances change whether you owe or not. Confused? The simple answer is that "winning sessions equal paying taxes."
To re-emphasize the point, the trigger as far as who owes gambling taxes and who doesn't is clear: if you had one continuous gambling session that concluded with you having more money than when you began the session, you owe. This certainly isn't user-friendly, but as far as I can tell, the IRS doesn't want it to be.
The only ones who can take a simpler approach to paying taxes on their poker winnings are actual poker pros, and they face an enormous burden of proof in showing that they are in fact professionals. Suffice to say that unless your main source of income is poker, and you spend most of your time pursuing that income, you're not a pro. The link, in case you're wondering, is to a 2+2 discussion on the subject peppered with useful and not-so-useful comments and articles.
Ok, I Get It. But How to Define A Session?
I had this question myself. Do "sessions" consist of individual hands? That would suck, since I logged tens of thousands of hands in 2004. Or is a "session" an uninterrupted stint at one single table? This wouldn't be good either, considering how most poker players tend to change tables while playing the same game, either because they didn't like their initial table, or because their table broke and they wanted to continue playing. Additionally, online players like me often multi-table, meaning we're at two or more tables at the same time.
Fortunately, it looks like the law and common-sense interpretations derived from it point to a different answer -- they indicate that continuous play in a particular poker game is what constitutes a "session" for tax purposes. So playing a 10-20 hold'em "must-move" game in a B&M casino would be one session even if you played at several different tables. But playing 3-6 Omaha, cashing out, then playing 4-8 Hold'Em, then moving your chips over to 1-2 No Limit Hold'Em at the same casino would be three sessions.
From the online perspective, a "session" seems to track the same meaning we use in a B&M environment: continuous play in the same poker game. Four-tabling 2/4 Hold'Em for an hour and then signing off should be considered, for tax purposes, a single session. Please note that this is merely an educated interpretation made by Gambling-Law-US.com's Russell Fox. He gets further into his reasoning here, stating that:
"We, thus, have a rule: a player can net his results in two (or more) different games/tables if they were the same poker game played continuously as part of the same session...
Now, what about an online player playing multiple games at the same time? Take Player E, who plays at one online site. He plays simultaneously at four different virtual tables: Tables 17 & 18 in $1/$2 Texas hold’em games and Tables 19 & 20 in $1/$2 Omaha games. E wins $10 at Table 17, loses $20 at Table 18, wins $30 at Table 19 and loses $5 at Table 20 while playing these tables simultaneously during the same one-hour period.
There are no rules created by the IRS to treat online gambling differently than gambling in a bricks & mortar cardroom. This means that we can apply the above rule. [Player] E has two sessions, a loss of $10 in hold’em and a win of $25 in Omaha.
What if a player were to keep himself logged into the online site 24 hours a day? Would he be able to say that his play over the entire year was one long session? This fails the smell test – you are not playing continuously over that year. As long as your play is continuous and in the same game it can be counted as one session even if it spans more than one calendar day. In conclusion, determining what constitutes a 'session' is not as easy one would think on first glance. The common-sense definition, though, of playing the same game continuously should stand up to IRS scrutiny."
So that pretty much settles what a "session" is.
So I Had Winning Session(s) in 2004 -- Now What?
You need to have records, but not just any records will do. Again, Russell Fox comes to the rescue:
"IRS Publication 529 (Miscellaneous Deductions) provides general guidelines:
You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information.
1. The date and type of your specific wager or wagering activity.
2. The name and address or locations of the gambling establishment.
3. The names of other persons present with you at the gambling establishment.
4. The amount(s) you won or lost.
For specific wagering transactions, you can use the following items to support your winnings and losses….Table games (twentyone, blackjack, craps, poker, baccarat, roulette, wheel of fortune, etc.): The number of the table at which you were playing….
Before we try to determine what constitutes a “session”, let’s take a brief look at documentation requirements for gamblers. You must keep a log (diary) of your results. Courts have held that the log should be a “…contemporaneous daily log”and that the records be permanent. If you are audited you have the burden of proof of showing that you have maintained good records. “[T]he taxpayer should not be allowed to avoid paying income taxes simply because he keeps incomplete records.”
The simplest method to comply is a written log. You can use a small pocket paper notepad or diary and write down the date, cardroom name, game, table number(s), time you played (e.g. 1:00pm – 3:00pm), and your result (amount of win or loss). This is the method that the IRS suggests.
Alternatively, you can use a computer system. IRS Publication 552 describes the requirements for a computerized system: “If you use a computerized system, you must be able to produce legible records of the required information. In addition to the computerized records, you must keep proof of payment, receipts, and other documents to prove the amounts shown on your tax return.” Back-up records for tournaments are your tournament receipts. For live (cash) games, though, it’s just your word. The IRS likes written records because it believes they are less likely to be forged.
The final record-keeping requirement is that the data be entered contemporaneously. While there are no specific standards for gambling expenses, similar requirements exist for other types of expenses. For example, travel expenses must be entered “…at or near the time of the expenditure.” Thus, you should enter your results in your log daily, or as quickly after playing as possible. The burden of proof of records is on you, not the IRS."
The funny thing here, is that I had no idea I needed to keep "contemporaneous" logs of my poker play. PokerTracker does the job for you when playing online, which is nice. But what about live play? Really you'd need to keep some kind of running journal, or stat sheet, or... BLOG!! Yes, you heard it right. I bet that poker blogs are, in an indirect but significant way, a means of satisfying the IRS' reporting requirements. And if you've played live in 2004, but forgotten the details, may I admonish you to look back in your own archives to see if you can find the details there. I found enough in my archives to fill out the required details over 80% of my 2004 B&M poker sessions.
My advice: digitize your handwritten or other notes on live play from 2004 in a Microsoft Word document, print it, and then save the file somewhere secure. Think of all the casino visits you had in the last year, and go back to your blog for those dates if you forget what you played, how much you won or lost, who you played with, or any of the other required bits of info. For some (ahem, AlCan'tHang) this may be a useless exercise given the amount of alcohol normally consumed on such casino ventures -- but its still worth a try.
Once you've compiled this listing, export your PokerTracker session log to Excel, trim off the sessions from years other than 2004, and then print. You'll have to go through and group your results together by hand, combining wins and losses while multitabling into consolidated groups that constitute "sessions" for tax purposes (see above).
With live and online records in hand, you're ready to crunch the numbers and pay your taxes...
Crunching the Numbers.
Take your B&M records, and total up the winning sessions. Write that number down somewhere, then repeat with your losing sessions. Next, do this process for your online play. When you're done, add the two winning numbers together, and write it on a post-it note. Same goes for the losing numbers. Now take your printouts (one B&M printout, one Excel printout), put them in a folder, and slap the post-its on top. Keep digital versions of your B&M log, and your PokerTracker databases on a CD somewhere dry and safe. You now have the operative numbers you'll need to report your poker income, along with ready-made records in case anyone starts asking questions.
Lets File, Baby!
This is where it gets kinda sticky. I'm struggling right there with ya, truth be told. It looks like us non-pros really don't have an option: we need to sum up our winning sessions from 2004, and report that number as "other income" on our 1040. Russ Fox lays it out like this:
"...winnings over the course of a year, on a session-by-session basis, are added up to determine the amount reported for federal income tax purposes. Losses for that year, again on a session-by-session basis must also be summed to determine the maximum amount that can be entered as an itemized deduction on the tax return in which the winnings are reported. The deduction of losses is limited to the amount of winnings reported in the return."
In a different article, Fox also states that:
"U.S. taxpayers... [must] report the total as income (part of ‘Other Income,’ line 21 of Form 1040.) Losses in any year may be claimed, but only up to the amount of winnings reported that year, and then only if the taxpayer elects to itemize deductions rather than taking the standard deduction."
So now you know where to put the dollar total you got when you added up your winning sessions. Far be it from me to know how this will affect how much you pay in taxes, but I do know this -- adding in your poker winnings WILL bump your Adjusted Gross Income (AGI) up, and therefore *could* bump you up a tax bracket or two, depending on how much you're winning. Here's one of those rare situations where small-timers like me can breathe a sigh of relief that we're not big time online sharks.
You'll then need to go about the business of deciding whether your're going to take the standard deduction, or an itemized deduction. If you do take the standard, which I've always done, you can't report your losses. If you itemize, you can -- though you may still not be as well off as if you'd gone standard. I have no clue which I'll be better off with, and am so unqualified on this subject that I won't say any more. Any info from readers on this would be tres welcome.
Then, you pay your federal taxes. After that fun experience, you get to do it all over again for state and local taxes. And when it comes to those areas, I gotta tell ya, I'm not even going to try to feign any kind of knowledge. Crap.