Published in February 21st, 2006
CardPlayer Magazine

Well, it is that time of the year once again that is dreaded by not only CPA’s everywhere but every true American – Tax Season. Everyone loathes doing their taxes, myself included. I am the classic Oct 15th filer, running to the post office as if I hadn’t had 9 months to prepare my return. I’ve just been busy preparing everyone else’s returns!

With the success of poker, this tax season may be worse for some poker players than it has been in the past. If you were one of the thousands (or more) of poker players that happened to get lucky in a tournament, you also were probably the “lucky” winner of a Form W-2G showing the amount of money you won.

Sharing the Wealth
Many poker players who enter tournaments, especially the “big” pay-ins, are swapping or selling action. This means that the poker player agrees to share his winnings if people will help with his tournament buy-in and/or other costs associated with playing in the tournament. These are usually players that have proven themselves either on-line or in other tournaments and are strapped for the cash necessary to play in the tournament.

This is where many poker players make a mistake that can cost them a lot of money in taxes. If you are swapping or selling action in a tournament and you win, you need to give the casino a Form 5754. You can find this Form along with the instructions on the IRS website at www.irs.gov. Believe it or not, this is a simple Form to understand and complete. All you do is complete Part 1 with the amount you won, your name, social security number and address. You then complete Part 2 showing each person that you are sharing your winnings with, along with their name, social security number, address, and the amount that you are paying them.

Seems like you are a bit of a snitch but really you are helping everyone. If you decide not to prepare this Form, (or didn’t know about it until now) the entire amount that you won will have to be claimed on your tax return. This can be a really big problem for several reasons. First of all, if your poker playing is something that you do for fun, i.e. a hobby, the entire amount you won will show up on your Form W-2G and will have to be claimed on the front of your tax return on Line 21 as “Other Income”. The only way to offset the money you won during the year is with the money you lost during the year and with the money that you “payback” to others that back you. The only place to do this is on a Schedule A which is for itemized deductions. The bad part is that if you cannot itemize, you technically cannot offset those gambling winnings at all. It’s not fair but it’s the rule. Whether or not you can itemize can be determined fairly easily by looking at the instructions for the Schedule A.

Warning for Internet Poker Winners
There has been a lot of bad advice going around in chat rooms as to what to do when you win money on an internet site. People are telling each other that as long as you don’t move over $10,000 from your account on the internet gambling site to your bank account, you don’t have to claim it with the IRS. We all know that the internet gambling sites are in foreign countries that are not governed by the United States laws, especially by the IRS. However, the poker player who is playing on that site at home in his pajamas certainly is. I think there is confusion with a couple of laws.

When you are traveling out of the United States and come back in through customs, you have to declare if you are carrying $10,000 or more in cash, bonds, checks, etc. Also there is a law that you have to declare to the IRS if you deposit $10,000 or more in cash at a financial institution. This is where I feel players are misled.

The rule stinks but it is this. If you win money on the internet or anywhere else for that matter, you are supposed to claim the income on your tax return. As we know, the on-line casinos do not give out government forms. It’s basically on the honor system at this point. Be aware of this – if you get audited, the first thing the IRS will want to see is your bank statements so they can look at the deposits going into the account. If the front page of your tax return does not closely resemble the deposits going into your return, you will have a lot of explaining to do.

So, you think your answer to this may be to just leave all your money sitting in your internet account to avoid all these problems. Not so fast - here is another consideration. There is a rule that states that if you have $10,000 or more in a foreign account, you must check box 7A on the Schedule B of your tax return. The bad part is that by doing this, you are almost assured to be audited. So, if you keep that money in your account, you need to check box 7A on the Schedule B AND you had better report your winnings on the front of your return.

Necessary Evil
Accountants always seem to bring you the bad news as above but remember, we really are trying to keep you out of trouble with the IRS. The best advice is to consult a CPA or tax preparer as you begin your poker hobby or career to avoid future tax problems. A client once told me that I am a necessary evil – taxes being evil and his accountant is necessary in helping to lessen the pain.

Take care and try to get through the season.


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