This final article in the series begins with a discussion of withholding. This leads into a discussion of poker tournaments (in cardrooms and casinos). Lastly, we’ll examine banking regulations and how they impact online gambling.
The IRS is mandated with collecting the federal government’s tax revenues. For employees, this means payroll deductions of income taxes that your employers remit to the IRS. If you’re self-employed, this means filing Form 1040-ES.
Many forms of gambling have withholding requirements, while some are exempted. If you’re lucky enough to win while playing blackjack (21), baccarat, craps, roulette, or the big-6 wheel, nothing will be withheld. However, if you win $600 or more and your gross winnings are at least 300 times your wager, you will receive a W-2G and 25% of your gross winnings will be withheld. (The monetary limit is $1200 from bingo and slot machines and $1500 from Keno.)
But what about poker?
Poker is not mentioned specifically in the regulations. Thus, it falls under the generic $600 or more and 300 times your wager restrictions. There are only a few poker tournaments where this comes into play (e.g. the main event of the World Series of Poker).
The IRS isn’t happy about this. They believe, probably correctly, that many tournament poker players are not reporting all (or a large portion) of their winnings. Thus, the IRS wants to impose withholding on poker tournaments, by writing a Revenue Procedure that mandates withholding. I believe that this will likely classify poker tournaments as “wagering pools:”
26 USC [Ch. 24] Sec. 3402 (a) (1) reads,
“Every person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, making any payment of winnings which are subject to withholding shall deduct and withhold…”
26 USC [Ch. 24] Sec. 3402 (a) (3) (C) reads,
“Sweepstakes, wagering pools, certain parimutuel pools, jai alai, and lotteries”
The IRS will try to lump poker tournaments in as wagering pools. But are poker tournaments a wagering pool? This discussion is a bit complex, so it’s in the hidden text below.
There is only one court decision on point referencing “wagering pools.” In Chickasaw Nation v. United States (208 F.3d 871), footnote 1 notes, “The term [wager] is also defined to include “(A) any wager with respect to a sports event or a contest placed with a person engaged in the business of accepting such wagers, [and] (B) any wager placed in a wagering pool with respect to a sports event or a contest, if such pool is conducted for profit ….” 26 U.S.C. §§ 4421(1)(A) and (B)”
IRS Technical Advice Memorandum 199906057 states, in part,
“Section 4401(c) provides that each person who is engaged in the business of accepting wagers shall be liable for and shall pay the tax on all wagers placed with him. Each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax on all wagers placed in such pool or lottery.
Under § 4421(1), the term “wager” includes any wager placed in a wagering pool, if such pool is conducted for profit, and any wager placed in a lottery conducted for profit.
Section 44.4421-1(c)(1) of the Wagering Tax Regulations provides that a wagering pool conducted for profit includes any scheme or method for the distribution of prizes to one or more winning bettors based upon the outcome of a sports event or contest, or a combination or series of such events or contests, provided that such wagering pool is managed and conducted for the purpose of making a profit.
Under § 44.4421-1(c)(3), a contest includes any type of contest involving speed, skill, endurance, popularity, politics, strength, appearances, etc.. such as a general or primary election, the outcome of a nominating convention, a dance marathon, a log-rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc.
Rev. Rul. 57-521, 1957-2 C.B. 779, states that a wagering pool is a gaming transaction where the wagers alone comprise the prize to be won by the successful contestant.”
In a private letter ruling in 2005, the IRS noted that:
“Based on the description of the tournament play, if the activities are to be classified as wagering, they must fall within the definition of either a “lottery” or a “wagering pool.” However, these terms are not defined in the Code or regulations associated with federal withholding or reporting requirements. Thus, it is appropriate to look to dictionaries, court decisions, and other regulatory provisions to ascertain the ordinary meaning of the terms.
Wagering pool . The dictionary does not define a wagering pool. However, “pool” is defined as “all the money bet by a number of persons on the result of a particular event with the aggregate to be paid to the winner or divided among several winners according to conditions established in advance.” Webster’s Third New International Dictionary 1764 (1986). Similarly, Black’s Law Dictionary defines pool as follows: “In various methods of gambling, a pool is a sum of money made up of the stakes contributed by various persons, the whole of which is then wagered as a stake on the event of a race, game, or other contest, and the winnings (if any) are divided among the contributors to the pool pro rata. Or it is a sum similarly made up by the contributions of several persons, each of whom then makes his guess or prediction as to the event of future contest or hazard, the successful better taking the entire pool. Such pools are distinct from the practice of bookmaking.” Black’s Law Dictionary 1161 (6th ed. 1990).
United States v. Berent , 523 F.2d 1360, 1361 (9th Cir. 1975), notes that in “common usage the term pool connotes a particular gambling practice, an arrangement whereby all bets constitute a common fund to be taken by the winner or winners.” State v. Duci , 727 P.2d 316, 319 (Ariz. 1986) notes that “pool selling” is generally defined as “the receiving from several persons of wagers on the same event, the total sum of which is to be given the winners, subject ordinarily to a deduction of a commission by the seller of the pool.”
In connection with the tax on certain wagers imposed by § 4401 of the Code, § 44.4421-1(c)(1) of the Wagering Tax Regulations provides that a wagering pool conducted for profit includes any scheme or method for the distribution of prizes to one or more winning bettors based upon the outcome of a sports event or contest, or a combination or series of such events or contests, provided that such wagering pool is managed and conducted for the purpose of making a profit. Under § 44.4421-1(c)(3), a contest includes any type of contest involving speed, skill, endurance, popularity, politics, strength, appearances, etc., such as a general or primary election, the outcome of a nominating convention, a dance marathon, a log-rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc.
Thus, these authorities suggest that a wagering pool is an arrangement to pool bets into a common fund, which are wagered on a sports event or contest, with the successful bettor (or bettors) receiving the pool proceeds, subject to the pool sellers commission. That contrasts with a situation where monies are received as entrance fees in order to compete for a preestablished prize offered by a third party that must be awarded in any case….”
Put simply, poker tournaments are not wagering pools.
Will this stop the IRS from trying to impose withholding on poker tournaments? No, but it will be interesting to see what code section they come up with to justify withholding. Of course, if Congress amends the Code to specify withholding from tournaments, then it will become a non-issue.
Banking Regulations
Two banking rules come into play vis-a-vis online gambling. First, if you have a foreign bank account(s), and at any time during the year you have $10,000 in the account, you must report the account. You must do this in two ways: first, by checking the box on Schedule B of Form 1040 that asks this question. Additionally, you must file a report of Foreign Bank and Financial Accounts (Form TD F 90-22.1) with the US Department of the Treasury (not the IRS).
So what is a foreign bank or financial account? Bank accounts are obvious; financial accounts are less obvious. The instructions for Form TD F 90-22.1 state that the definition of a financial account is, “Generally includes any bank, securities, securities derivatives or other financial instruments accounts…The term also means any demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution.”
So now we must ask, what is a financial institution? Well, your thinking it’s a bank. But that’s not necessarily true. Under a different law (as noted below), the IRS considers the following domestic entities to be financial institutions:
“The financial institutions as defined in 31 CFR 103.11, for
which the IRS has civil enforcement are listed below.
1. currency dealer or exchanger.
2. check casher.
3. issuer of traveler’s checks, money order, or stored
value (funds or monetary value represented in digital
electronics format (whether or not specially encrypted) and
stored or capable of storage on electronic media in such a
way as to be retrievable and transferable electronically).
4. seller or redeemer of traveler’s checks, money orders
or stored value.
5. money transmitter.
6. licensed gambling casinos/card clubs having gross
annual gaming revenues in excess of $1,000,000 (except those
in Nevada where the dollar criteria is $10,000,000).
7. a domestic agent, or agency of a foreign bank which is
not supervised by one of the Federal Banking Regulations,
such as a law firm acting as an agent for a foreign bank
8. banks and other financial institutions which are not
supervised and examined for safety and soundness by any
Federal banking agency or the SEC.” (see
http://www.irs.gov/govt/tribes/article/0,,id=108265,00.html).
The IRS hasn’t pressed the point, but if they want to, they could classify all online casinos as financial institutions. There is no doubt, though, that Neteller, FirePay, and similar services are foreign bank accounts and must be reported (if you meet the $10,000 threshold).
So you have to report a foreign bank account—that’s not a big deal (just another piece of paper). Well, that’s true except for one not-so-minor detail:
The quickest and surest way that I know of to have your return audited by the IRS is to declare a foreign bank account on Schedule B and/or Form TD F 90-22.1. Based on my experience in dealing with the IRS, the audit rate is close to 100% the first time you make such a declaration.
So if you have a foreign bank account, you need to make sure you declare your gambling income.
Finally, under the Bank Secrecy Act banks are encouraged to report suspicious transactions of less than $10,000. So if you receive regular Neteller deposits of (say) $4,000 and your bank considers them suspicious, you may be flagged. The Comptroller of the Currency handles banking regulations; their handbook on the Bank Secrecy Act is available here.
Conclusion
The rules that an online gambler must follow to correctly report his or her taxes can get frustrating. The regulatory world is based on the real (brick and mortar) world, not the online world. There are many places where a gambler can make mistakes. I strongly urge that online gamblers consult a professional tax advisor to make sure that they don’t end up going down the wrong path.
