Ed Miller's Tax Article

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I busted my ass last spring working to comply with IRS guidelines that gambling income be reported on all winning sessions (as opposed to in aggregate). PokerTracker does NOT make this easy for anyone who multitables, moves tables, or takes very short breaks during a given session. In fact, the term 'session' does not have a tried and true definition for these purposes as far as I can tell, though Russ Fox has a good discussion of the matter on his web page.

Here's my question: for those of us careful enough to make a good faith effort to comply, is there an easier means of culling through PT data to aggregate our winning sessions (which we'll add to our AGI when filing) and losing sessions (which we may or may not be able to utilize as a deduction depending on how much the total is and whether we prefer to take the standard deduction). I gather that those users with a better understanding of database queries might be able to come up with a means of doing this in an automated fashion.

The way I did it in March was to print out my sessions from 2004 and go through them by hand linking the table entries that were from the same "session." I defined "session" as any poker playing that was immediately continuous with other poker play (e.g. I started at one table at 2pm and then added another at 2:15 while still playing the first table), or any poker play within 10 minutes of prior poker play (e.g. I started at 2pm, played one table until 2:45, took a 10 minute break to go to the john, and then resumed play at 2:55). Once I'd linked the sessions, I used a calculator to add up the total for each session. I aggregated all the winning sessions and all the losing sessions separately, and had my numbers. Then I did it all again to make sure it was right. This process SUCKED and was very time consuming.

The aggregate of the winning sessions was almost 200% of my net win if I recall correctly. High variance play will do that to you -- you often have big winning sessions and big losing sessions, so the delta between the two will be large. A player with lower variance might have aggregate winning sessions of maybe only 150% of his actual net win. So a high variance player who has a net win of $10,000 might actually owe more taxes than a low variance player who has won $12,000. Yuck! Lesson: if there are ways to maintain EV while lowering variance (and I know usually trying to lower variance is a folly), you may actually profit by doing so because your tax liability is reduced. Keep that in mind.

So, has someone come up with a better approach for adding up winning and losing sessions? As an aside, I'm a small fry in terms of the amount of money involved in my poker play -- I didn't have more than 2K hands at any level above 3/6 in 2004, and my overall winnings/aggregate session winnings were fairly deminimus relative to the salary from my real job... less than 10%. I gather this is a much bigger problem for online pros who make the big bucks.

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I'd really like to hear an answer to this and to the question about whether it is best to have a local CPA versus an out of state CPA. I really do not play enough yet for what I do to make a difference but I want to inform myself and begin doing the right thing as early as possible.

Thanks in advance and thanks for the great topic.

[51cards]

I'd like to know if I have the correct understanding of this tax business. Suppose a player plays 200 sessions in a year. In 100 of them he is up $300 and in the other 100 he is down $200. He is supposed to report $30,000 in "winnings"? Even though he only nets $10,000. You can even set up numbers that don't seem implausable which result in a profit before taxes but a loss after tax.

What about a player who has a winning 9 months but loses it all in the last quarter? Is he liable for taxes on poker winnings in a losing year?

If I start winning consistantly I may just feel the need to do it in a different country.

Thanks for any replies.

[tipperdog]

Pretty much yes. You must report your total winnings. However, you can deduct your total losses up to the amount of your total winnings, in most cases. What you CANNOT do is report a "net" win and leave it at that. You also cannot claim more losses than winnings.

For example, you play 1000 sessions and win $100 in 550 and lose $100 in 450, you must report total winnings of $55,000 and deduct total losses of $45,000. What you cannot do is simply report winnings of $10,000.

It is an enormous pain in the ass.

[Ed Miller]

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Pretty much yes. You must report your total winnings. However, you can deduct your total losses up to the amount of your total winnings, in most cases. What you CANNOT do is report a "net" win and leave it at that. You also cannot claim more losses than winnings.

For example, you play 1000 sessions and win $100 in 550 and lose $100 in 450, you must report total winnings of $55,000 and deduct total losses of $45,000. What you cannot do is simply report winnings of $10,000.

It is an enormous pain in the ass.

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If you can prove that you approach poker as a business rather than as a hobby, you can file a Schedule C and treat poker winnings and losses slightly differently (as if they were business revenues and costs). That will often be the superior option for a serious player.

[tipperdog]

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If you can prove that you approach poker as a business rather than as a hobby, you can file a Schedule C and treat poker winnings and losses slightly differently (as if they were business revenues and costs). That will often be the superior option for a serious player.

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This is absolutely correct and I should have mentioned it in my OP. I was not thinking of professional players.

However, anyone considering this route should be aware that the IRS imposes very high standards for filing as a professional gambler. You really ought to get professional advice before persuing this path.

[mmcd]

the IRS imposes very high standards...

Read my original post again. The IRS doesn't "impose" anything. They don't have the authority. They offer their interpretation of the law and do so in a light that is most favorable to them. Just because they say it doesn't make it so.

[broiler]

The reason that the poker tournament winnings is on the IRS radar is because they want the fixed dollar limit to apply, instead of the multiple of amount wagered. The problem is that the IRS issued a private letter ruling back in 1984, which set up the rules in their current form. The IRS priority is to get a law change in order to get rid of the private letter ruling that they don't like any longer.

[Mr.K]

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the IRS imposes very high standards...

Read my original post again. The IRS doesn't "impose" anything. They don't have the authority. They offer their interpretation of the law and do so in a light that is most favorable to them. Just because they say it doesn't make it so.

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Well, this is a very important question -- when using Schedule C is acceptable and when it is not. Ed, you commented that "if you treat poker as a business" Schedule C might be an option. My impression prior to your comment was that poker had to actually be your primary source of income to utilize Schedule C. Any chance you guys could delve further into where the line is drawn?

For those of us that approach poker as "a great part-time job" -- e.g. a business but not our primary enterprise -- I take it we might be out of luck on Schedule C.

Knowing what little I do about this, some considerations about whether a particular player approaches poker as a business or not:

- Does the player log long hours on weekends and weekdays playing? If the player plays only on weekends, that would hurt his/her ability to make the case, but perhaps not be fatal.

-If a player could show that they've dedicated 20 hours or more per week over a sustained period of time, I believe this would be a step in the direction of business and away from entertainment.

-The very fact that those of us who use PT (and have therefore PAID for PT) to collect careful records means we are taking a serious, profit-driven approach to the game rather than just flinging some chips around over beers with our pals.

- Has a player invested in improving his ability to win more money? Buying books/videos, or attending training sessions would bolster this argument, and in doing so further solidify the business argument.

- Does the player travel and incur other expenses in order to conduct his/her poker business? If you want to argue that playing live is important to 1.) your bottom line, and 2.) your continued improvement to win money while playing poker as a "business," you should save all receipts from trips to B&M casinos for parking, food, gas, room, etc. This will surely help show that you're treating the game as a business.

Hell, I could go on but there's really a lot of material to cover here.

The thing I keep going over and over in my mind that I just flat out don't get is why the US tax law makes almost every American that walks into a casino a tax evader. I have to say that there's just no way 95% of people who sit down and gamble a few hundred on their Vegas trip with friends know the law re: winning sessions. They sure as hell aren't keeping contemporaneous records with the table number, amount won, time and date. They aren't reporting the winning sessions, in part because most Americans lose when they play blackjack or whatever, they figure "hey, I lost money, what the hell do I owe taxes on?" if they think about the tax implications at all. The tax code badly needs a safe harbor for recreational players who have winnings under $5,000 in a year or something along those lines. Maybe $1,000 -- who knows. Point being, the rules should be clear and are not, and capture far more people than could reasonably have ever been intended by Congress.

[Ed Miller]

The IRS has their "standards," including a multi-year history of profit, but as mmcd said, they can say what they want, but ultimately they have to convince a tax court that they are right.

Basically, I would say that if you see poker as a "business" for you.. i.e., you study and play with the intention of sustained long-term profit.. then you should be eligible to file a Schedule C. That's the qualification. Having many postings on 2+2 should support your claim if it should come to that.

EDIT: I wanted it to be crystal clear that I am neither a CPA nor an attorney, and any opinions I express are my own and not intended to be legal advice.

[mmcd]

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The IRS has their "standards," including a multi-year history of profit, but as mmcd said, they can say what they want, but ultimately they have to convince a tax court that they are right.

Basically, I would say that if you see poker as a "business" for you.. i.e., you study and play with the intention of sustained long-term profit.. then you should be eligible to file a Schedule C. That's the qualification. Having many postings on 2+2 should support your claim if it should come to that.

EDIT: I wanted it to be crystal clear that I am neither a CPA nor an attorney, and any opinions I express are my own and not intended to be legal advice.

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I also just like to note that there is a difference between what the IRS says their "standards" are and what they are willing to litigate. Especially in cases that don't have very large amounts of money at issue.