For all poker players but a fortunate few, July 16th marks a bittersweet day in the poker community. After 61 bracelet events (and one still to be decided), the World Series of Poker came to an end when only the November Nine remained in the Main Event. It also brought an end to our time at the WSOP as we were operating a vendor booth in the halls of the Rio for the past six weeks. Although we have been providing support for professional gamblers for over 10 years, this was our first year at the World Series of Poker, and it was an overwhelming success.
We caught many players by surprise since they are accustomed to seeing vendors selling books, sunglasses or IPhone accessories. Suddenly, there was a full-service CPA firm offering advice to players throughout the tournament series. Hundreds of people, from bracelet winners to people supporting their friend’s deep run, stopped to discuss their tax situation, an issue a friend was having, or to find out which services we provide. We compiled a list of the most frequently asked questions and provided the responses below:
How do I become a professional gambler?
As with other professions, there is no certification or job title that classifies someone as a professional gambler. Under the IRS definition, a professional gambler is someone who devotes a substantial amount of time to gambling and treats it as a business. For instance, attending poker seminars or academies, reading poker books and discussing hand histories with fellow players all count as time invested into this profession. However, you must also treat it like a business and keep a detailed log book of your cash game and tournament play as well as any miscellaneous gambling sessions. A proper log book should include, at a minimum, the amount of the wager, location, date, duration and type of game played. Although this does not have to be submitted with your tax return, you should retain your log book for seven years in case you are audited in the future.
What are the benefits and drawbacks of classifying as a professional gambler?
The main benefit of filing as a professional gambler resides in the deductions available. Recreational gamblers can only reduce their gambling income up to the amount of gambling losses, whereas professional gamblers can further reduce their gambling income using write-offs. If you have gambling-related expenses such as airfare, lodging, ground transportation, out of town meals, health insurance and certain other items, you are able to deduct these on Schedule C of your 1040. It is important to keep all of your receipts from gambling trips to help track and substantiate expenses throughout the year. Additionally, filing as a professional allows you to deduct contributions to a personal pension plan.
Although there are many benefits to filing as a professional, there is one potential drawback. Since you are filing as a business, you are subject to self-employment tax which consists of Social Security and Medicare (approximately 13% in 2012). This is one of the numerous factors we consider when helping clients decide on their filing status.
The casino automatically withheld 30% of my winnings, what should I do?
This is standard procedure for all non-U.S. residents who receive Form 1042-S, signifying that they have gambling income within the U.S. Whether you are Canadian, Brazilian or Australian, the government requires casinos to withhold 30% of your net winnings if you are issued a 1042-S. If this is the case, you need to file Form 1040-NR (nonresident) in order to be refunded any tax that you overpaid. Depending on which country you claim residency, you can reduce your gambling income by your gambling losses as well as qualified expenses! This further reduces the tax burden, resulting in a larger refund in most cases.
I need to pay my backer, what is the proper way to handle this situation so I don’t overpay my taxes?
In order to ensure the taxes from your winnings are shared with your backer, you should provide them with Form 1099 at the end of the year. This form provides evidence that you paid your backer his percentage of your winnings and transfers the tax responsibility of that portion of the income to your backer. For example, you are backed 50% and enter a $500 tournament in which you end up receiving a W2-G for $20,000. After reducing the $20,000 pay-out by your initial buy-in, you will be required to report total winnings of $19,500 on your tax return. However, you need to pay your backer half of that amount per your agreement. In this situation you would pay your backer 50% and provide him with Form 1099 stating the amount of income transferred from your share of the winnings. You should keep track of the exchanges between you and your backer throughout the year in order to ensure the correct amount is listed on Form 1099 at the end of the year. If you do not track all of the exchanges, you will most likely be charged with a higher tax burden since the burden to report the transfer of income falls on you because the W2-Gs link the income to your name.