I’m guessing most of you wonder whether online or offline poker winnings are reportable to the IRS, and if yes, what are the requirements. I’d like to give you some answers.
Directly from the tax code: You must report the full amount of your gambling winnings for the year on line 21, Form 1040. You deduct your gambling losses for the year on line 27, Schedule A (Form 1040). You cannot deduct gambling losses that are more than your winnings. You cannot reduce your gambling winnings from your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction.
The worst part about U.S. tax law regarding gambling is your gross gambling winnings count as gross income, while your gambling losses count as deductions. The IRS considers each gambling session separately when computing the numbers. Therefore, all of your winning sessions add up as gross income, and then your losing sessions add up as a potential deduction.
This is true even if you are a net loser for the year. Also, the amount of losses you can deduct is limited by the amount of your wins, so if you have a losing year you can’t claim a net loss. The only exception is if you file your taxes as a professional gambler. Filing as a professional gambler involves a level of complexity that is best handled by a professional accountant.
For example, let’s say you play poker once in January and win $1,000. Then you play again in July and lose $1,500. The win counts as part of your gross income. It goes on the first page of your 1040. If you want to itemize your deductions, you can claim $1,000 (not $1,500) on Schedule A.
It gets worse. Let’s say you are a serious recreational player and play five four-hour sessions every week, two $5-$10 tables at a time. Depending on how you count your sessions, this could be five or 10 sessions per week and the IRS is not clear on the definition of a session since it did not consider online play when these regulations were written.
Say you count 250 sessions per year. Suppose you win 130 of them with an average profit of $1,000 (that’s $130,000 in winning sessions) and lose 120 of them with an average loss of $1,000 (that’s $120,000 in losing sessions). It is great that you have won $10,000 for the year. The bad news is, the $130,000 you must declare in gross income is going to cost you.
Here’s how: The total amount of your deductions will reduce what other deductions you can make.
An example is medical deductions that are limited to an amount exceeding 7.5 percent of your income. Your income is now your $130,000 in poker earnings. So you have lost 7.5 percent of $130,000 or $9,750 of potential deductions. Deductions like mortgage insurance are also reduced based on income levels.
Every online and live player should keep a poker diary. Here are the minimums that should be included according to the IRS: (obviously written for brick-and-mortar casinos)
• The date and type of your specific wager or wagering activity.
• The name and address or location of the gambling establishment.
• The names of other persons present with you at the gambling establishment.
• The amount(s) you won or lost.
The IRS goes on to say your diary is not enough and you must have other proof of your wins and losses. The IRS would like you to also use a Form W-2G, Certain Gambling Winnings.
What documentation could be used to prove online poker wins and losses? Hand history and tournament result emails, and the IRS might accept these as supporting documentation. However, please ask your accountant. Unfortunately, the writers at the IRS didn’t anticipate online poker and so, in the end, nobody knows what documentation is sufficient. Seek a professional accountant to be safe.
— John Lanier plays as “WildHare” on most poker sites.