Taxable Talk

If you win more than $5,000 net you will receive a W-2G (if you’re an American) or a Form 1042-S (if you’re a non-American). If you’re an American and you provide your social security number to the casino, there will be no withholding. If you’re a non-American and you have an ITIN (an Individual Taxpayer Identification Number) and you are from a Tax Treaty country, there will be no withholding. Otherwise there will be tax withheld: 24% for Americans and 30% for non-Americans.

So what are the Tax Treaty Countries? As noted in Publication 515, “Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.”  (Residents of Malta have a 10% withholding rate.)

But if gambling winnings of a resident of the United Kingdom isn’t subject to tax, why would a casino withhold? Because if there’s no ITIN, a casino must withhold. Most (but not all) casinos still issue ITINs. I go over the ITIN situation below.

Suppose Russ plays in a WSOP event and is backed by Scott. Scott has provided half of Russ’s buyin and Russ has agreed to give Scott 50% of his net winnings. Russ is lucky enough to win $10,000 net, so he will receive tax paperwork from the Paris Hotel and Casino (where the WSOP is played). What should Russ do?

First, before the tournament Russ should collect social security numbers from his backers. The IRS has a form for this: Form W-9. The backer completes the form (including signing it) and provides it to the individual he’s backing (not the IRS). The IRS also has a form, Form 5754, designed specifically for the situation where you have backers. You include the names, addresses, and tax identification numbers (social security numbers or ITINs) of the backers along with their percentage winnings or the exact winnings. The casino is supposed to issue multiple W-2Gs. Unfortunately, the WSOP will not issue multiple W-2Gs even though the instructions to Form 5754 specify that the casino is supposed to follow the form. Indeed, I am unaware of any Las Vegas poker room currently accepting Form 5754. However, it’s still a good idea to have the form completed if you’re playing (it’s additional backup that the IRS could request).

So what should Russ do when he cashes at the WSOP? Russ becomes the casino for paperwork issuing; he must issue his backer(s) paperwork to show their winnings. It’s a fundamental principal of US tax law that everyone pays tax on their income, not anyone else’s. Russ should issue Form 1099-MISC(s) to his backers showing their shares of his winnings. A couple of comments about Form 1099-MISC. First, you issue one 1099-MISC to an individual per type of income per year. Thus, generally you will wait until the end of the year to send out your 1099s. Second, it’s far easier to obtain backers’ tax identification numbers before you pay them. You should make receiving appropriate tax paperwork (W-9 for Americans, W-8BEN for non-Americans) a requirement for your backers to receive their shares of your income. Third, note that Form 1099-MISC cannot be downloaded off the Internet. If you file paper Form 1099-MISCs with the IRS, you must order the forms from the IRS. If you are going to paper-file your Form 1099s, you must also order Form 1096 (this is the cover page that you use to send 1099s to the IRS).

One other key point: Russ needs to maintain a paper trail showing he sent the winnings to Scott.  This can be a cancelled check, wire transfer paperwork, etc.  But what if Russ pays Scott in cash or casino chips?  He needs a signed and dated receipt.

What happens if an American is backed by an individual from a Tax Treaty country (such as Russia)? Under the US-Russia Tax Treaty, the gambling income of a Russian is not subject to US taxation. Second, what happens if an American is backed by an individual from a non-Tax Treaty country (such as Australia) or from Canada (the US-Canada Tax Treaty mandates withholding)? Finally, what happens if someone from a non-Tax Treaty country or Canada is backed by an American? For all three scenarios, let’s assume I’m entering the main event of the WSOP (the buy-in is $10,000); my backer is paying $5,000 and is receiving 50% of my winnings. I place in the event and win $20,000, so my backer is owed $10,000 (all numbers before withholding).

Scenario #1: US Player Backed by an Individual from a Tax Treaty Country. Let’s assume I’m playing and am backed by Ivan from Russia. I receive a W-2G for $10,000 (my net winnings). It would seem all I have to do is just pay Ivan his $10,000 share of my gross profit, right? Wrong. Even though Ivan is from a Tax Treaty country, paperwork is required or tax must be withheld. Ivan needs to provide you either a Form W-8BEN or a Form W-8ECI. The Form W-8BEN is used to note the benefits of a Tax Treaty. Ivan would complete the form, including his ITIN and note the Article of the Tax Treaty that specifies that there would be no withholding. As long as you receive the completed Form W-8BEN you can then pay Ivan his share. If you pay by cash or casino chips, make sure you get a signed receipt from Ivan acknowledging his receipt of the money.

What if Ivan doesn’t have an ITIN? Then you must withhold at 30% even though he’s exempt from withholding. You would need to complete Form 1042-S and depending on the amount withheld very quickly remit that money using EFTPS to the IRS. (EFTPS is now the only method available for making withholding deposits to the IRS.) Ivan can get the money back by filing a Form 1040NR following year-end. If Ivan has a business operating in the US, he would provide Form W-8ECI with either his Employer Identification Number (EIN) or his ITIN. This will allow you not to withhold to Ivan. Note: Even if no withholding is required a Form 1042-S must be submitted to the IRS.

We can see that even the easy scenario isn’t necessarily that easy.

Scenario #2: US Player Backed by an Individual from a Non-Tax Treaty Country This case is relatively straightforward. Let’s say your backer is Jon from Canada or Australia. (Although Canadians can get some to all of their money back by filing Form 1040NR after year-end, you are required to withhold on their income per the US-Canada Tax Treaty.) You must withhold 30% of their winnings. You would pay him all of his $5,000 investment and 70% of his $5,000 winnings ($3,500) for a total of $8,500. You would complete Form 1042-S with his information and note that $1,500 of his $5,000 of income has been withheld. Depending on the amount withheld, there can be very quick deadlines for remitting that withholding to the IRS; that withheld funds must be remitted using EFTPS.

Scenario #3: Non Tax-Treaty Player Backed by an Individual from the US This is the ugly scenario. Suppose Jon is backed by Russ from the US. Russ isn’t subject to any withholding on his money (he’s a US citizen, after all) and is more than willing to provide a completed Form W-9. Unfortunately, because Caesars will not issue multiple W-2Gs/Form 1042-S’s, all of the $10,000 Jon wins will be subject to withholding. So Jon will receive $17,000 (his $10,000 entry plus $7,000 of his $10,000 in winnings). Jon is left with two bad options. He could pay Russ $3,500 (half of the amount he has won). Russ will rightly be annoyed as he should receive $5,000. Jon has no way of telling the IRS that $1,500 of his tax withheld is for Russ [See Note 1 below]. Alternatively, Jon can pay Russ $5,000 and now he only has $2,000 of his winnings (rather than the $3,500 he should have). That method probably doesn’t appeal to Jon at all. Unfortunately, neither option is palatable to both individuals and these are the only two options available.

There is a solution: Americans should not back individuals from non-Tax Treaty countries. (The better solution, Caesars issuing multiple W-2Gs/1042-S’s, will have to wait until the IRS goes after Caesars on their policy.)

There are some other things that need to be pointed out. The participant will likely have to issue 1099-MISC’s or 1042-S’s to individuals. You probably don’t want everyone to know your social security number. If you’re a professional gambler, there’s a solution: Apply for an EIN. You can do this at no charge online at the IRS website. You must have an EIN if you are going to have to withhold funds. Next, if there’s a possibility you are going to be a withholding agent, you must have both an EIN and an EFTPS account. After you get the EIN, immediately enroll in EFTPS. Your passwords are mailed to you; this takes about 10-21 days from the date you enroll, so get this going now if you are going to be playing in the 2023 WSOP and this applies to you. Third, you can give Caesars a piece of your mind (nicely, though) and let them know about the ridiculousness of their policy. That’s especially true if you’re from Australia and you would like to be backed by an American (or someone from a country with a favorable Tax Treaty with the US).

When I wrote this article in 2018, it was very uncertain whether or not casinos would be allowed to issue ITINs. As I noted in the introduction, the WSOP expects to be able to issue ITINs soon.  If you are from a country with a Tax Treaty with the US that covers gambling and are playing in a poker tournament at a different casino, you can (and likely should) check with the casino to see whether or not they issue ITINs. Let’s say you’re from the United Kingdom and are backing Russ. He wins $20,000 at the WSOP ($10,000 of it goes to you) and you don’t want him to withhold $3,000. If you wait to do something until Russ wins the money, he’s going to have to withhold. In that case, you will have to apply for an ITIN and file Form 1040-NR with the IRS the following year. It takes at least two months to receive an ITIN after applying. Form 1040-NR is released around February 1st (of the following year); it takes at least six months to receive a refund after filing Form 1040-NR. The refund is issued as a check mailed to the address on file.

There are three methods available to apply for an ITIN. No matter which method you use you will need to complete Form W-7 and have the required backup documents (generally, your original passport). You can apply by mailing your Form W-7 with backup documents to the IRS. This is generally done with the filing of a tax return. You can provide a prepaid courier envelope to receive back your passport. Your ITIN will be issued in about four to six months. You can also make an appointment at an IRS office. The IRS will review your backup documents for your W-7 and make “certified copies” and forward the W-7 to Austin, Texas (where ITINs are issued). If you have a Tax Treaty reason, you can obtain an ITIN. The last time I checked the wait time to get an appointment here in Las Vegas is six weeks. I was also informed by a local IRS Certified Acceptance Agent that the IRS has not cut them off (yet) from reviewing W-7 paperwork and forwarding paperwork and “certified copies” to Austin. This may be a good method for someone who is in Las Vegas to apply for an ITIN and has a tax treaty reason to obtain an ITIN. Also, if you use a local Certified Acceptance Agent you will not obtain an ITIN immediately; your ITIN will still be mailed to you in a few months. Thus, my strong recommendation for such an individual backing an American is to get your ITIN now!

But what if you already have a valid ITIN and are from a Tax Treaty country? Then there are no issues. You will just let the casino know your ITIN number when you cash. (You may be asked to provide other documentation and/or be asked to complete a Form W-8BEN.)

In the United States, casinos are considered financial institutions and must obey anti-money laundering (AML) laws and regulations. These are mostly promulgated by the Financial Crimes Enforcement Network (FinCEN) but some are issued by other federal agencies and regulatory bodies. The basic idea of all these laws is to be able to trace the money. (Do note that I am not an attorney; I’m a tax professional. For those who need professional advice about AML laws, seek an attorney who specializes in this area. This is just a brief summary and absolutely not meant as legal advice.)

Let’s say you have an account at the WSOP, funded by a cash deposit or wire transfer, and you take out $12,000 in casino chips to play in a high-stakes cash game. The cage will file a Currency Transaction Report (CTR) on the transaction. These (generally) aren’t a big issue. You do want to avoid Structuring your transactions. Let’s say instead of taking out $12,000 in one transaction you elect to take out $6,000 in two transactions (separated by an hour). That’s structuring, and that’s a felony. Additionally, a Suspicious Activity Report (SAR) would be issued. At a continuing education seminar a couple of years ago we were told by the head of IRS Criminal Investigation in Las Vegas that they investigate few CTRs but all SARs issued. The solution: Just go big and take out all the money you need at once.

Another area where a poker player can run afoul of the AML rules is by (a) wiring money to one casino, (b) cashing out a significant amount from that casino as casino chips, and (c) going to a second casino and using those chips as a buy-in or for obtaining that casino’s chips. There are multiple issues here. Let’s look at a specific hypothetical example. Ivan wires $50,000 to the Paris casino for the WSOP. Ivan leaves $35,000 on his account at the WSOP, and cashes out $15,000 in chips telling the cage, “I’m going to use these for buying in to big events at the Wynn/Encore.” As far as I know, there’s nothing illegal in Ivan doing this (Ivan is not trying to evade AML rules); however, he’s likely running afoul of the AML policies of the WSOP (Paris Hotel). Casinos want their chips used at their casino, and taking those chips out for use elsewhere almost certainly is against the AML rules that the Paris Casino has adopted and must follow (or they will get in trouble win FINCEN). The solution to this is simple: Wire money to each casino.