Another day, another tax question. And given the post-Moneymaker/Raymer explosion of online satellites to major brick & mortar tournaments, I expect this question may be important to a lot of players in the coming tax year.
If I win a local Super to WSOP that offers a seat PLUS flight , room and $1K spending $$ am I liable for the 10K buy in as far as the IRS is concerned? I am more than happy (lol) to pay taxes on my win (theoretically), but can I then use the 10K buy-in as a deduction?
Is my taxable amount only the above and beyond the buy-in? or the whole package?
Okay, Ubie. Let me start with some assumptions. For purposes of this article, I'm going to assume that you are a U.S. citizen, and that the buy-in will be paid out in the U.S.. You say it is a "local satellite," so I'm assuming it was B&M. But even if it was won through an offshore online site, it will still presumably be paid out in the U.S., such as by wire transfer into your account or directly to Harrah's or the cage at the Rio.
Now, those assumptions being set out, let me start with a simple proposition - one that is easily understood if you just take into account the motivations of the people who write the Tax Code:
Every single dollar of gambling winnings is taxable income.
Simple enough, right? And yet, you would be positively astonished at the number of people who manage to screw up this very simple proposition. They'll say things like, "No, you only have to pay if you're an overall winner for the year," or, "No, you subtract your travel expenses from your winnings, and only have to report the winnings over and above your expenses," or, "You subtract your net losses from your net winnings, and report the difference," or "You only have to pay taxes on it if the winnings were paid in gold." (Okay, that last one is a standard dodge that tax protestors try to apply to all forms of income, including wages, but you get my point.)
Now, while each of the above statements may seem to make intuitive sense, let me give you a different statement which, while it might not make as much intuitive sense, has the alternative virtue of being true:
Every single dollar of gambling winnings is taxable income.
To see how easy this rule is to apply, let's take a couple of examples. First, let's assume that you are wandering around on Fremont on January 1, and you see one of those casinos with the hot chicks out on the sidewalk dressed in outlandish costumes, urging all passers by to come in for a free pull on the billion-dollar slot machine. You wander in, you take your free pull, and the machine spits out a nice shiny new dollar. You are tempted to pull the arm again, and so realize that you have become a gambling addict. You run to the nearest phone, call 1-800-BETS-OFF, enroll in the support group, and swear off gambling forever. At the end of the year, you have engaged in no further gambling. You must now report that dollar on line 21 of your 1040 as Other Income.
It's January 1 of the next year. You decide that you took your gambling "problem" a little seriously last year (and abused a support group that really was probably intended for people with serious problems), and so you decide to un-swear off gambling. To celebrate this New Year's resolution, you hop a plane to Vegas ($211.00 round trip), grab a cab to the Fremont Street Experience ($38.00), realize that it's too late to catch a plane home that night, and so check into the hotel of the casino with the free pull ($47.50). Your sole purpose in coming to Vegas was to pull that free slot again, which you dutifully do at 9:00 the next morning. Two Cherries and a Bar, and suddenly you've won $334.50. You get back in the cab, pay another $38.00 back to the airport, and fly home. Again, you don't gamble for the rest of the year. Your expenses were equal to your winnings, so how much do you have to report? $334.50. "Ah," you say, "but can't I deduct the $334.50 in expenses from my winnings, since the sole purpose of paying those expenses was to win that money?" The short answer is: "No." The long answer is: "Hell, no."
It's year three, and you make your annual pilgrimage to Vegas. You don't bother to record your expenses, since you learned during last year's audit that they are not deductible anyway. As a seasoned veteran, you decide to stay on the Strip this year, and you bring with you a bankroll. It's $3.00. After Security escorts you to the high-rollers room, you invest 1/3 of your bankroll in a dollar slot machine (I know, I know, you'd always play all three coins, but humor me) and you win $2.00, for a net win of $1.00. You go to your room accompanied by the usual coterie of cocktail waitresses and other groupies, and go to sleep a winner. The next day, you shake off the cocktail waitresses, trundle down to the slots again, invest another dollar, and lose. You go back to your room and go to sleep. Next day, another dollar down the drain. Room, sleep. Day four, you lose yet another dollar. You go back to your room, terribly depressed about your run of luck, and go on a three-day drinking binge (sans cocktail waitresses, since they don't date losers). At the end of the three days, you emerge for one last try, as your bankroll is wearing thin. You invest another dollar, and you win another $1.00 net. You figure since you're almost even for the trip (you've had two winning sessions and three losing sessions), it's time to go home. You don't gamble for the rest of the year. Pop Quiz: how much do you report on line 21? Hint: go back to our Prime Directive:
Every dollar of gambling winnings is taxable income.
So you report $2.00 on line 21. But can you deduct the $3.00 you lost? Well, the answer is maybe, and yes, and no.
Maybe: You cannot deduct gambling losses from gambling winnings unless you have kept careful records itemizing your wins and losses, which must at a minimum include a diary recording each session, which includes the following information:
1. The date and type of your specific wager or wagering activity;
2. The name and address or location 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.
If you have kept such records, and "other documentation," such as "Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment," then the answer is:
Yes: If you are a U.S. citizen or permanent resident, then you may deduct your gambling losses on line 27, Schedule A of your 1040, subject to:
No: but you may not write off more than you have won, and you can only write off your losses if you itemize your deductions, thereby losing the standard deduction. All of the above is information derived from IRS Publication 529, which is available at www.irs.gov/publications/p529.
So, if you itemize your deductions, you can write off $2.00 of your $3.00 in losses, and you must claim your $2.00 in winnings. Which means that even though you are down a dollar, you broke even in the eyes of the IRS.
Final scenario: You go back in year 4, and you take a smaller bankroll of only $1.00. You sit stubbornly at your favorite slot machine for nine hours, feeding in your money. The machine gives you a hit for a for a dollar on the first pull, a miss on the second, a hit on the third, a miss on the fourth, etc., all night long. At the end of the night, you have pulled the handle 500 times, with 250 wins and 250 losses, for a net of $0.00. Do you have to report $250.00 on line 21, and only deduct the $250.00 in losses if you itemize? The answer, thankfully, is no. The single exception to our Prime Directive, is that the IRS had enough sense to require that you can net out your wins and losses on a per session basis. That is, at the end of any single gambling "session," (which is not defined in the Tax Code, but don't try to get cute about it) you figure out how much you have, and how much you came in with, and the difference is your win or loss for that session.
Applying the Law to the Satellite Situation
Now that we have a grasp of the basics, let's apply it to your satellite question. The most obvious thing is that your $11,000.00 win is a winning session, and has to be reported on line 21. Additionally, the fair market value (FMV) of the travel and accommodations are also taxable income. Let's arbitrarily set that FMV at $1,000.00 for purposes of this article, though you'll have to do some research to determine the real number. The next issue is whether you should itemize to allow you to take deductions from that income. Well, 12 large is a lot of money, and it's more than twice the standard deduction. So if you have 12 grand in deductions, you should definitely itemize. "But where the hell," you might ask in a reasonable and yet increasingly impatient tone, "am I going to get 12K in gambling losses? I don't play that big, which is why I satellited to the WSOP in the first place. My only loss for the whole year was the $80 buy in to that satellite." Ah, but remember, the $80.00 wasn't lost. You just net it out of the win, so instead of reporting $12,000.00, you only report $11,920.00 on line 21.
"What a relief," you say. "Now I only have to pay taxes on most of 12,000 skins, because I still don't have any other losses." Now, this is why it is extremely important that if you are going to attempt to satellite into a tournament, you must make sure that the satellite falls during the same tax year as the tournament itself. (This isn't so important for the WSOP, since those satellites have been tending to start after the New Year. But, for example, the WPO, which takes place in January, could cause real tax nightmares.)
The reason is that you will have a very difficult time convincing an IRS auditor that the satellite in December and the tournament in May (sorry, it's July now) are all part of the same gambling session. And gambling losses cannot be carried forward nor related back to a different tax year. So let's say that you win a satellite in December. You just earned $12k, and come April 15 of the next year, you have to cut your uncle a check for roughly a third of that. Now the WSOP rolls around in July. You lose. While your buy-in counts as a gambling loss, you can't deduct more in losses than you had in winnings for that year. So you are screwn for the 3 or 4 grand you laid out in taxes on April 15. If, on the other hand, your satellite win and your tourney loss are the same year, the deduction will offset most of the income. Remember, your travel expenses are not deductible, so you'll still have to pay taxes on that. So your winnings (assuming these are your only two sessions for the year) are $12,000.00 - $80.00 = $11,920.00. Because your loss of $10,000.00 exceeds the standard deduction by a bunch, you'll itemize and deduct the $10,000.00 buy-in, along with all your other itemizable deductions (like for example, mortgage interest) on Schedule A, line 27.
And if you should, let's say, win the whole shebang, then the 10K buy-in will not be deducted as a loss. Instead, you'll pay taxes on the 10 grand that you won, but subtract it from your session winnings of $2 trillion (or whatever the Championship ends up paying this year), to get your net winnings for your July session ($2 trillion - $10,000.00). Adding all three together and subtracting your initial investment, you get your 2005 poker winnings, which goes on line 21:
$1,999,999,990,000.00 + $10,000.00 + $1,000.00 (travel expenses) + $1,000.00 (spending money) - $80.00= $2,000,000,001,920.00. Now, if your gambling losses for the year exceed the standard deduction, you will itemize your deductions and subtract those losses on schedule A.
A couple of caveats. First, nothing that I've written in this article applies to pros. If you are a professional gambler in the eyes of the IRS, there is a whole different set of rules that applies. Some of these are good, some bad. (You can deduct travel expenses, for example, but you have to pay 15% self-employment tax.) And it's not as simple as just saying you're a pro because you make money at poker. The IRS is very stingy about handing out professional status to part-time players, for obvious reasons (they can't take as much of a rake).
Second, if you are one of those unlucky people who won a satellite in one tax year and lost the tournament in a separate tax year, it's not hopeless. I would recommend that you consult a tax professional (either a CPA or a tax attorney with experience in this area) and try to determine whether you can make a plausible argument that the money was not income to you until the time it was paid into to the tournament cage on your behalf. If the money was sent to you directly in the earlier tax year, this argument is not even colorable. But if it was paid to the cage at the time of the tournament, and you would not have been allowed to cash it out earlier, nor transfer your win, you probably have a decent shot at deducting the loss.
John Fahle is an attorney licensed to practice law in Texas and various federal United States Courts. His general advice given in this column is neither intended as the practice of law in other jurisdictions, nor as a solicitation of clients in any particular case. The views expressed by Mr. Fahle in this column are intended as general information, and are general answers to specific questions. Such statements are intended only to make the reader aware of possible issues that could be involved in any given legal situation. Laws vary from jurisdiction to jurisdiction, and the application of any law is heavily dependent on the facts of a specific case. Therefore, you should not rely on the statements made in this column as legal advice in your own situation, but should instead seek out qualified legal counsel licensed in your jurisdiction, who can address the specific facts of your situation, and apply the specific laws of your jurisdiction. If you need a referral to a competent lawyer in your jurisdiction, you may contact John Fahle at firstname.lastname@example.org, or by telephone at 210.212.7272.
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