As gambling in general and poker in particular spread across the land, here's some advice for neophyte players: Not only do you gotta know when to hold 'em, know when to fold 'em, you gotta know how to put it all on your tax return.
Gambling winnings, as most people know, are taxable income. But gambling losses, as many people don't know, aren't necessarily deductible. And the widely held assumption that you simply subtract your losses from your winnings and report only the net income, if any, is not the way it works.
In fact, the taxation of gambling -- or "gaming," as the Internal Revenue Service calls it -- is structured in an unusual "heads the government wins, tails the taxpayer loses" way. And because of that, a person who loses as much as he wins can sometimes end up owing higher taxes.
One of the few things going in the gambler's favor, at least until recently, is the difficulty the IRS has in tracking that income. Now the agency wants to change that.
"It's time to take a look at poker, which has become very, very popular, and see what sort of guidance we need to be starting here," IRS Chief Counsel Donald L. Korb said Friday.
The first step, he said, will be to work out an improved system of withholding rules covering poker tournaments, and later on, perhaps broadening its reach.
Right now, the agency's reporting rules are not designed with poker in mind.
In general, IRS rules specify that the payer of your gambling winnings must send you a Form W-2G only if you win $600 ($1,200 from bingo and slot machines, and $1,500 from keno) or more and your winnings are at least 300 times the amount of the wager. In addition, if you win more than $5,000, the payer may be required to withhold 25 percent of the total -- and if you don't give your Social Security number to the payer, withholding is 28 percent. The IRS needs to decide, among other things, where poker tournaments fit in this scheme.
The current rules work well for horse racing, lotteries and similar high-payoff games, but "I can't imagine an instance where you would get [a W-2G] from poker," said Jeffrey Kelson, tax partner at the accounting firm BDO Seidman LLP in New York.
But just because the payer doesn't report the income doesn't mean the gambler doesn't have to, Kelson cautioned. He said he has found the IRS increasingly doing "root canal" audits in which the taxpayer is required to account for every bank deposit. These and other tactics can enable the IRS "to stumble over your gambling winnings," he said.
So, if you win and want to avoid trouble, you'd better include the money on your return.
In 2002, the most recent year for which figures are available, 1.5 million taxpayers reported total winnings of $18.7 billion, while 906,000 taxpayers reported $11.8 billion in losses.
