Well, luck, skill, or a roll of the die was with me: I did win that free trip to the Bahamas. Come early January I’ll be winging my way 2,492 miles to Nassau and then on to the Atlantis Resort on Paradise Island. I’ll be given $1000 in spending money (to buy the airline ticket), a hotel room, and an entry into a poker tournament. I will not be sent a Form 1099-MISC. So how should I account for this on my tax return?
First, I do need to include these items. All income is taxable unless Congress exempts it. Congress has not exempted contests and sweepstakes. So the value of any prizes you win must be included on your tax return. [1]
The easiest item to account for is the $1,000 in cash. That’s Other Income (line 21, Form 1040) on my 2010 tax return (I’ll receive that money in about one week).
Next is the value of the hotel room. The value that should be claimed on the tax return for a prize is the fair market value of the prize–that is, what you could purchase it for on the open market. I have a hotel room for nine nights. I can get a quote from various travel websites and determine the value. I find that my hotel is worth $1,200. [2] So that, too, must go on my tax return.
But what year should that income be reported in? While I won the contest in 2010, I won’t be receiving any value from the prize until 2011. Income in the U.S. is based on the concept of constructive receipt. The idea is when you receive something, whether or not you utilize it doesn’t matter; rather, it’s just the receipt that counts. Suppose you receive a check in the mail on December 27th but don’t go to the bank to deposit until the following January. You can’t delay the income because you’re tardy in going to the bank. The income still must be claimed on this year’s tax return.
Constructive receipt works in reverse, too. I won’t receive any of the benefits of the hotel room until January 2011. That portion of the prize–the $1,200 that my hotel room would cost if I paid for it directly–should be claimed on my 2011 tax return (due in 2012) as Other Income.
The final component of this is the poker tournament. The tournament’s buy-in hasn’t been officially announced, but let’s assume it’s $500+$50 ($500 goes into the prize pool and $50 to the casino for running the tournament). It’s pretty clear that has a value of $550, and that, too, is Other Income on my 2011 tax return.
There’s an additional complication, though. I’ve won an entry into a poker tournament. What happens if I win money in the tournament? More likely, of course, is that I do not win any money in the tournament; how is that treated on my 2011 tax return?
The result in the tournament, be it cashing for a prize or busting out and getting nothing, is treated like any other gambling result. If I do not cash, I have a gambling loss of $550. I can take that loss (and all other gambling losses) on Schedule A as a miscellaneous itemized deduction not subject to the 2% AGI limitation on itemized deductions. Of course, I can only take gambling losses up to the amount of my gambling winnings.
Let’s say that some combination of luck and skill allows me to cash for, say, $2,550 in the tournament. I have a gambling win of $2,000 ($2,550 gambling win less the buy-in of $550) that must be noted as Other Income (line 21 of Form 1040). “But weren’t you provided the entry for nothing?” you ask. Yes, but the value of the entry has already been accounted for. To not include the entry would cause me to be taxed twice on the same income.
“Well, if you lose you won’t be reporting the $550,” you state. That’s possibly correct, but the winning of the entry through a contest and the result in the poker tournament are two separate, discrete events and must be handled as separate items on the tax return. (Note that if I have no other gambling during 2011 and do not cash in this tournament that I would not be able to take the gambling loss.)
If any of you will be at this poker tournament at the Atlantis Resort in January, please stop and say hello. I’ll be the gentleman losing all his money in Binglaha on January 14th. [3]
NOTES:
[1] Anyone who doesn’t think that contests and sweepstakes must be declared on their tax returns can imitate Richard Hatch, the first winner of Survivor on CBS. He still thinks that’s the case even after receiving 51 months at ClubFed. I know better and hopefully you do, too.
[2] Estimated value of the hotel room. I’ll determine the actual value once I know the dates I’ll be staying at the hotel.
[3]What is Binglaha? It’s an Omaha poker variant popular at BARGE. It is played exactly as pot-limit Omaha, except that after the flop betting a single die is rolled (typically by the player on the button.) If the result of the roll is a 1, 2, or 3, the game is played high-low split eight-or-better. If the roll is 4, 5, or 6, the game is played high-only. The person originally responsible for this monstrosity is Don “ADB Bingo” Reick.
I know of a friend that paid a $200 entry fee for a hold-em tournament at a casino to benefit a fallen police officer. My friend won, and the prize was a seat at the the WSOP main event at the Rio, which, as you know, has a $10K entry fee. As you mention above, the winning of the entry into the tourney is a taxbale event and reportible in gross income and separate, discreet event. What happens if my friend does not attend the tournament(i.e. he never shows up), would he be entitiled to an itemized deduction for gambling loss even though he did not gamble? Or would it be treated like an option that lapsed and he would have a capital loss (which is limited to capital gains)? Not sure how to attack this one.
My feeling–without researching everything–is that he would have a $10k gambling loss.
Yeah, I think you can probably exclude it from income under Rev. Rul. 57-374, therefore, he doesnt get screwed if he takes the standard deduction instead of itemizing.
[…] will be randomly selecting one of the people who signed up for their site to win the prize. I personally went through a similar situation when I won a free trip to the Bahamas. My tournament entry was a prize, and could not be offset by the loss in the event. (And yes, I […]