This is an addendum to our existing Tax Q&A, written by Ann-Margaret Johnston, CPA, who is the author of How to Turn Your Poker Playing Into a Business.
Brief Overview – This is an update from the previous post on 9/11/07.
The
IRS is taking note of poker players now. They have taken the first
step to try to make sure poker players pay their taxes. This new rule
came out on 9/4/07. The rule states that any poker tournament sponsor
(including casinos) must withhold (and report) 25% on proceeds of more
than $5,000 paid to tournament winners. It defines proceeds as reducing
the amount received by the amount of the wager. There is an exception, so read below.
This rule is to take effect on 3/4/08, which is 6 months from the date
that they wrote the rule. This rule specifically targets poker
players.
I have spoken to
the person that actually drafted this rule for Congress. She and I
spent time in going over the intent of this rule and how it should be
interpreted.
I have taken questions
from the forum and then made up others as well so players may better
understand the impact this rule will have in the poker community:
Does this change anything from how things are now?
The intent of this rule
is to make sure that the casinos have a verifiable social. If the
casinos do not do this, then they need to withhold the 25%.
What is a verifiable social?
There is a form called a
Form W-9 where you are writing down your name, address and social. You
sign the form stating that under penalties of perjury, you have written
down the correct social. If you do not put the correct number, this
would be fraud.
So, if I sign this form, the casino will not take out the 25%?
According to my source
at the IRS, they say that if the casino or tournament sponsor has this
form in place, then they do not have to withhold the 25%. If you
refuse to sign this form, then they will take out the 25%.
If nothing really changes on this, they why is this rule in place and all the hype?
I was told by the IRS
source that the reason for doing this is that people were pooling
money, such as in tournaments, and trying to get out of having a Form
W2G and giving their socials. They basically are saying if you don’t
get the winner to verify with a signature regarding their social, then
the burden is on you that you have to withhold.
How does this affect online tournaments?
As we all know, at this
time the online sites are not located in the U.S. and are not under the
rules of the IRS directly. As things stand right now, the only way the
online sites could enforce this rule is if they have our social
security numbers on file, which they do not at this time.
Do they tax 25% of winnings or 25% of your profit from that tournament?
They report and tax the
profit. For example, you pay $10,000 as a buy-in for a tournament
event. You cash at $50,000. The casino will take into account your
buy-in and subtract this from your winnings. So, they would take out
25% from $40,000, which would be $10,000.
What kind of withholding is this, Federal or State?
They are withholding Federal Income Taxes from the net winnings.
How does this work, i.e. how do I get “credit” for paying this money into to the IRS?
The casino or tournament
sponsor is required to send this money into the IRS on your behalf.
You will receive a Form W2G which will have your name, address and
social security number. They will then report the net amount of
winnings in Box 1 and then the amount they withheld in Box 2. The IRS
will have a record based on your social security number and the amount
they withheld will show in your “account”, similar to when you have a
job where you are issued a Form W2.
What if they have my social wrong on the form? Do I get out of claiming the winnings?
Besides the legal
ramifications of doing this, it is very important that you make sure
they have the right number on the Form W2G. If you don’t, you won’t
get any credit for the 25% that they withhold.
Instead of taking my winnings, I want to donate them to charity? Can I do that?
Even if you want to
donate, the casinos and tournament sponsors are required to give the
winner, which is you, the form and take out the 25%. The best thing to
do in this case is to then take the money and donate it to a charity
that is listed as a non-profit with the IRS. Be sure that the charity
sends you a letter stating the amount you donated so that you have
proof to the IRS if you are audited. Most of the charities that are
non-profit can be found in a list on the IRS website. Go to www.irs.gov
and do a search for Publication 78. Any charity that is considered
non-profit should have a letter showing this that is from the IRS.
Always be sure about this or the deduction can be disallowed.
From what I have
read, the new law does not address if the winner is not a U.S.
Citizen. Is this only limited to U.S. Citizens and if not, are foreign
players able to have the 25% reimbursed at some point?
I put in a call to the
office that drafted this new rule and they were no help at all. Their
answer was that if the casinos/sponsors needed clarification on how to
handle foreign winners, they would need to pay the $10,000 cost the IRS
charges to get something called a Private Letter Ruling (PLR). Yeah,
thanks a lot. So, the bottom line is that this is not clear, the
burden falls on the casino and if they don’t do it the way the IRS
thinks they should, they will be fined.
So, here is my take on
this. I think that the casinos/sponsors will take the 25% out because
they have to and it wouldn’t be fair to the U.S. players. The problem
is that they cannot file a Form W2G, as required, without having a
social security number or an individual taxpayer identification number
(ITIN). If foreign players want to get some or most of this money
back, they need to apply for a ITIN.
I am not a U.S. Citizen but I come to the U.S. often to play in tournaments. What should I do in light of this new rule?
My recommendation is
that any foreign player that plays in a tournament, and would like to
try to recover part of the withholding, should obtain the individual
taxpayer identification number (ITIN). This number is for tax use
only. By having this number, you can give it to the casino (I would
keep the IRS document showing this number handy for their inspection)
and they will make sure the IRS credits the 25% to you. You then would
need to file what is called a non-resident alien tax return to recoup
some or most of the withholding.
How does a foreign player apply for a taxpayer number and how do they recover part of the 25% that was withheld?
You would need to fill out a Form W-7, which you can find on the IRS website at www.irs.gov.
Remember, if you are eligible for a Social Security number, this form
is not for you. You would want to fill out and submit this form asap.
The process to get your ITIN takes at least 4-6 weeks. You then would
file a tax return after the end of the year, due by April 15th, on a
Form 1040NR.
How could this new rule affect people that satellite into the events?
It shouldn’t matter –
the casino/sponsor should still deduct the actual tournament buy-in
from the total amount you won and then if its over $5,000, take out the
25%.
When it comes to
the end of the year and I am filling out my tax return, will I be able
to write off other forms of gambling (sports betting, pit games, etc.)
against my poker winnings?
Yes, you can add up all types of gambling income and offset it with all types of gambling losses, be it legal or illegal!
Can you clarify what types of records that you need to show for both wins and losses in poker, both online and in casinos?
The easiest way is to
use a spreadsheet and track your activity that way. I have an excel
spreadsheet that you can download that is on my website at www.pokerdeductions.com that will give you a good idea of what you need to keep track of.
I have an
accountant but they don’t seem to know a lot about this. How can I
know what is going on with poker players and the IRS as they happen,
such as this new rule?
To my knowledge, I am
the only CPA that specializes in poker players. I am on top of any new
laws that come about that target poker or gambling. For example, I had
the information about this new rule before you could find it anywhere
on the internet. If you would like to be on my list for any news,
email me directly at annm@johnstoncpas.com and put Poker as the subject line.
Being that I specialize
in poker players, and am a player myself, I can help anyone with their
situation. Please visit my website at www.pokerdeductions.com for any further information.
In the past, the casinos have paid me in chips when I cash in a tournament. Will that still be the case?
Possibly. The casinos
are just now learning of this rule and are going to have to work out a
lot of kinks on how they are going to handle this so that they are in
compliance with the IRS. It remains to be seen after March 4, 2008
what exactly happens. I am in contact with one of the larger casinos
and if I learn anything new about how they will handle this, I will
post this on my website at www.pokerdeductions.com.
What if I am backing a player or am being staked by another player?
It is more important
than ever to keep a Form 5754 handy to give the casino. This form
lists who all are splitting the money. This way, the W2G will reflect
everyone and not just one person that will be stuck with the tax burden
and the 25% withholding. The form and instructions for this can be
found on the irs website at www.irs.gov.
The instructions state very clearly that the casino is to split the
Form W2G. If anyone ever has a problem with this, please inform me as
the casinos are required to do this (they just might not want to!)