"Render therefore unto Caesar the things which are Caesar's." Except, of course, for those things you lost to Caesar in his Las Vegas palace or Atlantic City resort.
Taxes – the less morbid of those two certainties that permeate the world in which we live – are a subject of such appreciable complexity that reformation of the Internal Revenue Code has earned a unique spot atop the pantheon of politicians’ bait-and-switch campaign promises over the past several decades. Certified public accountants and tax lawyers are no longer a fringe cottage industry subsumed within the American core of professionals – they have, for better or worse, become as much a part of our April tradition as those showers that proverbially beg May flowers.
And, to be absolutely clear, this article is not nearly a substitute for the advice and assistance those individuals can furnish you when it comes time to make an annual accounting to Uncle Sam. Nor does this article come anywhere close to discussing the myriad of issues surrounding a) foreign nationals filing US income taxes; b) gaming winning derived from overseas casinos; or c) state taxes. But it is important to do your homework (or, as it is, keep stubbornly contemporaneous records) before inking your name to a federal income tax return, and herein may be found a few tips that can pay appreciable dividends come tax time – especially if your cards have been running cold.
All Winnings Are Taxable
One basic premise, albeit a notion fraught with exceptions, worth observing at the outset: all gaming winnings are taxable. Whether you find yourself signing paperwork with your right hand while hoisting a World Series of Poker bracelet in your left hand, or you are just lucky enough to win a single hand of $5 blackjack before calling it quits, the United States expects you to regard the spoils as income. On line 21 of the ubiquitous Form 1040 is space for you to declare “Other income,” while listing “type and amount.” This is where you are to relive the three hours you spent holding the dice in Tunica, dodging sevens like the deadly sins they are.
Indeed, as noted with uncharacteristic simplicity by the IRS itself, in "Publication 525" (a veritable page-turner, I assure you), "You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings."
For the casual gambler, who happens to fall into the roughly one third of taxpayers who itemize deductions, this is an important caveat: losses can be deducted from your taxable income. This is not, as a horrendously misbegotten urban legend spread through one too many craps pits periodically suggests, a deduction from your tax debt – but, rather, a deduction from your taxable income. So if you have taxable income of $100,000, including $5,000 in Kentucky Derby proceeds, and dropped $2,500 in an ill-advised game of $2/$5 PLO, with itemized losses you suddenly have a taxable income of $97,500. You would still be better off if you did not repeatedly cry "pot" while holding a mid-sized pair with a flush and straight on the board (since the IRS would only have taken a fraction of your lost chips), but at least you do not have to pay taxes on your contribution to a pot scooped by a drunken tourist donning a souvenir t-shirt.
An important side note, as you doubtlessly contemplate the various ways to manipulate itemized losses: remember, as discussed above, that you also have to report your winnings, and your deduction of losses cannot exceed your winnings. Concealing certain winnings and itemizing your losses is not creative accounting, an en vogue "hack," or the exercise of some mythical right to selective disclosure – it is what is colloquially known as tax fraud, and, under certain circumstances, can lead to you posting the big blind in a not-so-friendly penny ante game in a federal prison.
If you plan on itemizing your losses, it is important to have good records of those losses, or your tax return will send up more red flags than a May Day parade in Tiananmen Square. The good news is that if you are a slot or video poker player, many casinos will track this for you – Caesars Entertainment provides complimentary win/loss statements to its Total Rewards players. The bad news is that the reliability of casino tracking tends to diminish appreciably when it comes to table games, and diminish almost entirely when it comes to the poker table.
So keep a journal of your wins and losses. Where possible, supplement it with ATM receipts. If you wager on sports, keep your losing slips. If you wager at the track, make sure your losing slips do not have footprints on them. If you cash out in excess of a certain amount (and that figure varies by locale), the casino may well give you paperwork that can serve as a de facto record. And try to imbue your journal with indicia of its entries being substantially contemporaneous, and not the fictitious jottings of an angry taxpayer who wants to see a refund come April (without naming any brands, there are various smartphone apps that will do this for you.)
Before treading into the waters of professional gambling (remember, everything thus far has been aimed at those who play on a casual basis), one other myth worth debunking. There has, for years, been a maliciously trendy scam whereby casual high rollers (disturbingly, not a contradiction in term) will take markers with casinos, cash out their profits, and then settle up days later via check or wire. The theory has been that the belated settlement somehow evidences a complete loss of gaming monies, and will furnish the IRS will prima facie evidence of massive gaming losses capable of fully offsetting gaming wins.
Again, this is what we refer to as tax fraud, and if you do not believe that the IRS has wised up to this scam, you have a stunning lack of faith in what is essentially the largest collections department in the world. This is tantamount to wagering your freedom on a spin of the roulette wheel, praying it comes up red. Sure, you might win, but you might also end up in an orange jumpsuit with a bunkmate who made his fortune running uzis for a Colombian cartel.
Profit vs. Entertainment
Now, as promised, some exploration of the painfully more complex world of professional gamblers – those esteemed citizens who, at the end of a beating-rich year, can actually deduct the entirety of their net losses, without regard to whether or not they exceed gross winnings. And that painful complexity starts with the titular designation itself, since the IRS treats with skepticism the claims of nearly anyone whose self-described professional pursuit does not involve a W-2 or a 1099.
Section 183 of the Internal Revenue Code prohibits the taking of deductions for activities "not engaged for profit" (like almost everything in this article, there are enough exceptions to this rule to consume more text than a TwoPlusTwo forum on the merits of check-raising). So if you want to take a deduction in excess of your gross winnings, you need to show the IRS that your marathon hold'em sessions were undertaken for profit and not mere entertainment.
Predictably, the naked suggestion that you would not have raised with pocket fives unless you expected to profit off of pocket fives is woefully inadequate to clear this hurdle. Likewise, just because you go on tilt and start playing razz hands in a traditional stud game, you might still be a professional engaging poker "for profit." A greater contextual analysis is needed.
Section 1.183–2 of Title 26 of the Code of Federal Regulations (and, really, I implore of you: do not try to read these passages – they are as arcane as they are mind-numbing; call or e-mail me if you have specific questions) provides further insight on what is "for profit," and what is, instead, "carried on primarily as a sport, hobby, or for recreation." There are nine specific factors outlined by this regulatory framework:
- 1) The manner in which one undertakes the activity (i.e., do you regard your local casino as an office or do you treat it as somewhere to blow off steam when the work week is over?);
- 2) your expertise (i.e., do you have your own methodical Super System, complete with facial reads, or are you raising with 6/7 in the hole because you were born on June 7?);
- 3) the amount of time and effort you put into your play (i.e., are you grinding 40 hours a week, or do you make a cameo at the Venetian when your friend’s bachelor party gets out of hand?);
- 4) your expectation that assets will appreciate in value (i.e., do you play with the aim of growing your bankroll, or are you just throwing down whatever cash is in your pocket on any given day?);
- 5) your success with "similar or dissimilar activities" (i.e., are you a champion Omaha player taking a deduction because the hold ‘em learning curve has been steeper than anticipated?);
- 6) your history of income or losses (i.e., if your tax returns for the past several years have all contained the phrase "I had him until the river...," you may not be a pro after all);
- 7) the profits earned, relative to losses (i.e., do your good years reflect a sustainable income, or are you just harboring ambitions of not going into debt when you tip the cocktail waitress?);
- 8) your general financial status (i.e., are you paying the bills with a steady day job, or did you tender the down payment on your home using racks of high society?); and
- 9) "elements of personal pleasure or recreation" (i.e., does it feel like work?).
Burden is on the Taxpayer
Importantly, the burden is on the taxpayer to prove he or she is a professional. So if the IRS challenges your net deduction of gaming losses, you need to be prepared to explain – with as much documentary evidence as possible – why your pursuits generally jive with these rigors, and it is undoubtedly well-advised to not wait until such a challenge is mounted. If you plan on taking a net deduction and claiming your gaming ventures are for profit and not for recreation, you are well served to preemptively consult with counsel – whether it be myself or one of my peers.
Finally, if not somewhat whimsically, when deduction cases go to court, one of the more interesting standards is that while "expectation of a profit need not have been reasonable, [the taxpayer] must have had a good faith objective of making a profit*." And this matters a great deal because while poker players, sports bettors, and advantage players may commonly be thought of as the only people capable of truly carrying on a profession, the IRS does recognize that even a slot player with the proper contextual delusions of grandeur may qualify for a nearly-inevitable deduction after a year of muggings by one-armed bandits.
*That quote is courtesy of a recent tax court decision.
Maurice “Mac” VerStandig, Esq. is the managing partner of The VerStandig Law Firm, LLC, where he focusses his practice on counseling professional poker players, sports bettors and advantage players across the United States. He is licensed to practice law in Maryland, Virginia and Florida, as well as in nearly a dozen federal courts, and regularly affiliates with attorneys licensed in numerous other states and jurisdictions. He can be reached at email@example.com.