Ed Miller's Tax Article

[Ed Miller]

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I don't know about Phil Ivey, but Barry Greenstein, Matthew Hilger and Phil Hellmuth have all stated in interviews that I have seen/read that they file a Schedule C for their gambling income.

I think you missed the important sentence in the first paragraph in the decision:

In redetermining respondent's tax deficiency, the Tax Court held that he was in the "trade or business" of gambling, so that no part of his gambling losses was an item of tax preference subjecting him to a minimum tax for 1978. The Court of Appeals affirmed.

The Supreme Court upheld the decision, therefore gambling can be a trade or business.

Self employment taxes would be calculated on the net. In this case, the IRS was not trying to collect SE tax. The goal here was to hit the taxpayer with AMT because of the gambling deductions.

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They're saying it can be a business as long as you don't lose money. That's a big caveat.

Most businesses lose money in their first year. They can deduct their losses. A "professional" gambler can't.

The IRS seems to be saying that it's ok to call yourself a pro-gambler, file a schedule C, pay the 15% SE tax, but don't expect to write off losses when you have a losing year.

IMO that's not a business.

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You're right, it's not. But it's entirely preferable to declaring an $800,000 AGI and then trying to deduct $700,000 in losses on a net $100,000 gambling income.

The tax code really sucks for gamblers who follow the rules. That's why many don't. But the Schedule C route is still superior to the hobby route for many, despite the SE tax you have to pay.

[Ed Miller]

I'm really happy you guys are taking this tax topic seriously. I'm not the tax expert by any means, so my goal isn't to educate, per se. Instead, I just wanted to bring this topic to people's attention so that ignorance doesn't kick their asses down the line.

If you don't learn the tax rules and stick your head in the sand, then you are being foolish. If you learn the tax rules, and then you make an informed choice about how you want to treat your taxes, then I've achieved my goal.

[Mr.K]

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I'm really happy you guys are taking this tax topic seriously. I'm not the tax expert by any means, so my goal isn't to educate, per se. Instead, I just wanted to bring this topic to people's attention so that ignorance doesn't kick their asses down the line.

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I know I personally appreciate you raising the issue, Ed. As you mentioned in your piece, there are a huge number of new part-time poker players that are playing online and in casinos -- more than recreationally but less than professionally -- who have no idea that they've gotten themselves into a quandry with the tax code. Some of the more profitable among that bunch may choose to devote enough time and energy to poker to cross the boundary from recreational to semi-professional or professional. Getting all the way to the bottom of the question of where the line between those classes of poker players lies -- between the amateurs and the pros/semi-pros -- is of huge importance and despite the great discussion here in this thread I still do not see a bright line rule emerging. I'll volunteer my own time to help anyone interested in a more authoritative, comprehensive investigation.

As an aside, I think authors of books for advanced beginners (SSH) and intermediate players probably have a sort of player-to-player (rather than legal or formal) responsibility of sorts to point out the tax issue, at least in passing, in their texts. If SSH is the path towards winning "much more than minimum wage," then the book (or others like it) should say something about the fact that you're going to owe taxes on those tidy winnings.

Final point: someone above mentioned that good faith will likely go a long way in any audit. I'm inclined to agree but wonder what those with a greater knowledge of either audits or IRS process might think about that. I mean, for any type of poker player, a conscientious process of documenting play and attempting to adhere to the rule of law (even if we make errors along the way) would seem to be enough to avoid major penalties should we be hit with an audit and find we messed up.

[broiler]

I believe that a good faith effort will keep you away from the big penalties because the documentation that you give as an example isn't going to get you to a number far from that of the IRS. If you are documenting reasonable sessions, then you would only be looking at a small audit change, if any.

Documentation is the key to avoiding the large penalties because the IRS would have to prove that your records are incomplete or incorrect. If you have no records, then the courts have allowed the IRS to use any "reasonable method" to determine the correct tax liability. My understanding of "reasonable method" (from a sports betting former client that was unaware of bank reporting of transactions) is that the IRS finds the worst person in the same business and extrapolates their numbers onto your return. The IRS has access to every return, so they will find that guy that grinds out at .25BB/100 and has no business expenses. Incomplete documentation will always get you in trouble under audit and is the biggest money maker for the IRS in my opinion.

[Russ Fox]

As Ed Miller and others pointed out on this thread, anyone who is considering filing as a professional gambler should discuss this with their tax professional. Here are some general answers to your questions:

- To file as a professional, the IRS believes (and has argued this position in court) that you must be a full-time gambler. If you are working at a job, and you also file a Schedule C as a professional gambler, there's a strong likelihood that the IRS will challenge you.

- You must include all of your income on your US tax return, be it from illegal sources, overseas income, etc. One client tried to convince me that because his gambling was on overseas sites and that he hadn't repatriated the money, it wasn't taxable. Wrong.

- Even a professional gambler who has a losing year can't use a tax-loss carryforward for his business (gambling). Courts have ruled that the Tax Code prohibits this.

- Keep a logbook for your live play. If you don't, and you're audited, you will lose all your gambling loss deductions that have no other back-up.

- Whoever said that the IRS can't share information with other law enforcement agencies is plain wrong. If you voluntarily disclose that you're (for example) a drug runner, the IRS absolutely can tell the FBI or the DEA. The prohibition is when you involuntarily disclose such information to the IRS. Be careful for what you put down as your profession on your tax return. There's a famous case of a bookmaker putting down his occupation as "bookmaker." The IRS told the FBI, and he ended up in jail and lost his appeal.

If you want to read more about the rules for online gamblers, I wrote a series about this on my tax blog at http://www.taxabletalk.com/posts/1123805977.shtml

-- Russ Fox, EA

The Tax Code is anything but fair to gamblers.

[NajdorfDefense]

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According to a lawyer friend of mine, part of the ridiculous "USA Patriot Act" requires financial institutions to report all transactions of $2000 or more. I don't know which agencies, etc. ... Naturally, it is also being used to catch tax evaders and in the equally absurd "War on Drugs".

Your money is very visible to the US Government. It is foolish to assume otherwise.

Jim

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The limit is $10k, and has been for some time, all transactions that size or higher are reported to the UST/IRS.

If you systematically deposit/withdraw slightly less than that - say 9.5k, you are breaking the law and committing a crime known has 'smurfing.' {yes.}
http://en.wikipedia.org/wiki/Smurfing_(crime)

These laws have been in effect since the 1980s, they were passed to hinder drug runners.

FWIW, if you are depositing money back and forth in your overseas poker accounts, and not reporting your gains and losses seperately on your tax return, don't be surprised if you get audited and accused of money laundering. Because that is exactly what you are doing.

As Ed Miller said, "I am not a tax lawyer" so do not construe this as advice, but the bar is very high to file as a professional player, basically you have to do it full-time and hold no full-time job, demonstrate skill, keep meticulous records, deduct SE tax, etc, etc. The rules are very similar to filing as a 'professional trader [stocks, etc] and it is a high bar to meet.

US citizens are taxed on their income worldwide, also.

Find a good CPA.

best,

Naj

[Ed Miller]

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The limit is $10k, and has been for some time, all transactions that size or higher are reported to the UST/IRS.

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But don't assume that if you transact under $10k, you are flying under the radar. There are two forms... one for ALL transactions over $10k:

http://www.fincen.gov/fin103_ctrc.pdf

And one for "suspicious" transactions, in aggregate, over $5k:

http://www.fincen.gov/fin102_form_only.pdf

Note that both are casino-specific. Casinos and card clubs are targetted. You might want to read the instructions to this form to educate yourself about the rules for filing Suspicious Activity Reports:

http://www.fincen.gov/fin102a_instructions_only.pdf

Also note that the feds are leaning on casinos to file these SARCs, and it's somewhat common to be questioned at the cage when cashing out even a few grand.

Also, what you called smurfing, the documents officially term "structuring." Just so you know what that term means if you see it.

[NajdorfDefense]

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The limit is $10k, and has been for some time, all transactions that size or higher are reported to the UST/IRS.

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But don't assume that if you transact under $10k, you are flying under the radar. There are two forms... one for ALL transactions over $10k:

http://www.fincen.gov/fin103_ctrc.pdf

And one for "suspicious" transactions, in aggregate, over $5k:

http://www.fincen.gov/fin102_form_only.pdf

Note that both are casino-specific. Casinos and card clubs are targetted. You might want to read the instructions to this form to educate yourself about the rules for filing Suspicious Activity Reports:

http://www.fincen.gov/fin102a_instructions_only.pdf

Also note that the feds are leaning on casinos to file these SARCs, and it's somewhat common to be questioned at the cage when cashing out even a few grand.

Also, what you called smurfing, the documents officially term "structuring." Just so you know what that term means if you see it.

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Actually, they are two similar but seperate crimes [agreed on the reporting of lower amounts if suspicious]:

"Smurfing"
The Emerald Snow indictment says that on February 12, 1997, defendant Francisco Diaz deposited 13 money orders totaling $5,732 in an account at City National Bank of Florida controlled by Ciro Martinez, a Miami businessman. Later the same day Diaz deposited 12 money orders totaling $5,563 in that account. It is alleged that the money orders were purchased with drug proceeds.

Multiple deposits of low-value monetary instruments purchased from banks or money services businesses with criminal proceeds constitute a money laundering scheme known as "smurfing." <font color="blue"> Smurfing can be conducted through your institution by one or more persons making deposits to one or more accounts during several visits. </font>
Several persons arriving at an institution together and going to different tellers, or several going to different branches, to make deposits to one or more related accounts is a tell-tale sign of smurfing.

Smurfing can also involve the deposit of multiple monetary instruments into accounts at several different financial institutions. The Emerald Snow indictment charges Eddy Marin with depositing five money orders totaling $2,500 into a NationsBank account one week prior to the deposits made by Francisco Diaz at City National Bank. It also says that on March 12, 1997, Suyapa Elmady deposited 160 Travelers Express international money orders totaling $79,320 in an account at International Bank of Miami. The U.S. alleges that the deposits of Diaz, Marin and Elmady, all of which were made to accounts controlled by Martinez, were part of the same money laundering scheme.

The U.S. Suspicious Activity Reporting regulations, among other things, require U.S. banks and other depository institutions to report "suspicious transactions," which include any transaction involving $5,000 or more that is Aconducted or attempted by, at, or through the bank... and the bank knows, suspects, or has reason to suspect" involves "funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities… as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation" (31 CFR 103.21). Smurfing falls under this definition of suspicious activity.

Keep in mind that multiple deposits of low denomination monetary instruments or small amounts of cash are not always a sign of money laundering. Some businesses, including rental management companies that accept money orders for rent payments and restaurants that do a high volume of cash business, have a legitimate reason for conducting such transactions.

A tell-tale sign of smurfing is the deposit of multiple monetary instruments with consecutive serial numbers, signifying that the instruments were purchased by one person at one time. Similarly, the deposit of cash wrapped in currency straps stamped by other banks can be a sign of smurfing.

Structuring

The Emerald Snow indictment says that on February 12, 1997, Martin del Barrio laundered $9,500 in cash by depositing it in an account at Citibank Federal Savings Bank. del Barrio allegedly returned to the bank twice in the next two days to deposit $9,600 in drug cash in the same account.

The U.S. Bank Secrecy Act, under which the Suspicious Activity Reporting regulations are issued, makes it a crime to "structure" currency transactions "for the purpose of evading the reporting requirements" of the BSA (Title 31, USC Sec. 5322 and 5324). Structuring normally involves multiple cash deposits or withdrawals at amounts below the $10,000 currency transaction reporting threshold prescribed by BSA regulations (31 CFR 103.22). Structuring can also involve conducting a transaction in a way that causes the filing of a report that contains "a material omission or misstatement of fact."

"Bank Secrecy Act/Structuring/Money laundering" is one of the 17 crimes listed on the U.S. Suspicious Activity Report form as a type of suspicious activity that must be reported.

Structuring transactions and smurfing are similar types of suspicious activity.'

[oxymoron]

What about the "professional" gambler that also makes money from promotions, books and other areas. Because they have other means for money are they no longer a "professional"?

Also, where is the best place to find a CPA? I do not think I need one this year but I might need on next year. Rather than finding someone local I would prefer someone who has handled gambling issues already. Would it be a big deal to hire someone from NV when I am in WA? I have no idea how I would find someone local with experience in gambling tax issues.

[Russ Fox]

What about the "professional" gambler that also makes money from promotions, books and other areas. Because they have other means for money are they no longer a "professional"?

If their other activities relate to their gambling (i.e., a poker player who writes a book, a gambler getting promotional fees, etc.), these are part and parcel part of their gambling business. What the IRS believes to be incorrect under the Groetzinger decision is for John Smith, who works for Acme Inc. (and receives a W-2 from Acme) to also be a "professional" gambler and file a Schedule C for his gambling business.

Also, where is the best place to find a CPA? The best method of finding any professional is to get a referral. Check with your friends who use a tax accountant. CPAs are licensed by each state, but can prepare returns for other states. Not all CPAs have a tax practice. Enrolled Agents (EAs, what I am) specialize in tax, have a federal license and can prepare tax returns for any state. There are only a few tax preparers in the US who specialize in gambling. With today's technology (email, scanning documents, and FedEx), most tax preparers prepare returns for individuals who reside outside their own locale.

-- Russ Fox, EA