Taxable Talk

I’m a poker player. I’ve been playing competitive poker, including tournaments, for several years, quite successfully. And yes, I claim my winnings on my tax return. I’m also co-author of a poker book.

I’ve had a natural fascination with gambling and taxes for several years, and that’s a primary reason why one of my areas of emphasis is gambling taxes. Several individuals have asked me to give an overview on online gambling and taxes. Given the out-and-out lies and falsehoods that I see on the Internet, I’m going to present a short series on online gambling and taxes.

“If I gamble online, it’s overseas, and I don’t have to pay tax on it.” I see this statement all the time, and it’s absolutely false. Under the US Tax Code, all income for US citizens is taxable, whether earned in the US, overseas or on the Internet. Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).

“Internet gambling is illegal, so I don’t have to pay taxes on it.” Ignoring (for the moment) the legality of Internet gambling, this is also false. The US taxes legal and illegal income. Remember Al Capone? He went to prison not for the murders he committed, but for tax evasion.

“The government has no way of tracking how much I win, so I’m not going to report it, and they’ll never find out.” If you’re not audited for some other reason, the government is not likely to find out. However, if for whatever reason you are audited, and you have unreported income that the government finds out about, you will, at a minimum, pay tax, penalties and interest. If the IRS determines that you willfully evaded taxes, you could even be subject to imprisonment.

“I didn’t receive a W-2G, so I don’t have to report the gambling income.” Another falsehood. Whether you receive paperwork or not, all gambling income is taxable.

“I can net my gambling wins and losses.” Some gamblers can net their wins and losses—if they are professional gamblers. Most gamblers, however, must put their gambling income on line 21 (Other Income) and take their losses, up to the amount of their winnings, as an itemized deduction on Schedule A. This deduction is not subject to the 2% AGI limitation.

Finally, “I don’t have to claim my online gambling winnings until the money is repatriated into the United States.” This is yet another falsehood for gambling income. When you win your wager, you have gambling income, no matter if the bet is in the United States, the United Kingdom, or any other country. This falsehood, though, deserves a complete debunking and that will be the subject of the next installment of this series, next week.

This entry was posted on Thursday, August 11th, 2005 at 8:19 pm and is filed under Gambling. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.