Poker Articles

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!)