Although there are currently legal issues being debated in the US senate about whether online poker is legal, this does not matter when it comes to dealing with any money that you earn as a result of playing poker online. As is true with any income from any source, that income is subject to normal income tax deductions. In the UK income derived from either cash game or poker tournaments is free from tax at the moment, mainly because the government does not think you can make a living from poker. This explains why many poker players try and gain UK citizenship because of the favourable financial conditions for poker players in this country.
Please note that this article is purely for information purposes and you should seek the advice of a tax professional if you need specific advice relating to your poker finances as a professional player.
For poker players outside of the UK managing your tax is very important. Recently a well-known player has fallen foul the tax system in the United States. Michael Mizrachi, known as “The Grinder”, had a lot of poker success between 2004 and 2008 and invested in property and other investment vehicles with the cash he won in prizes. Due to what he describes as bad financial advice from an incompetent advisor he is facing a $330,000 tax bill and has had to foreclose some of the properties he owns in order to cover this bill.
Calculating your taxable poker income is complicated for players. Any session that you win is counted as gross earnings whilst any gambling losses are counted as deductions in the same way certain business expenses are taken into account. The IRS considers each session separately when calculating tax. This begs the question, what is a session? There is much debate on what constitutes a poker session and there is no definitive answer given by the IRS or the poker community. Another problem for players is that the IRS limits gross winnings against net losses so if you have a losing year you cannot claim a net loss on your taxes for that year, you simply break even in the eyes of the tax system.
As an example, let’s say that Player A wins $100,000 in his first year as a poker professional but loses $200,000 in his second year before making $150,000 in the third year. His net gain is $50,000 over three years, but the IRS would tax the $250,000 in the two years he profited without taking into account the second year where he lost $200,000. As you can see this is a harsh system and one that does not take into account the realities of life as a professional poker player. Of course the IRS does not care about this because there are questions regarding the legality of poker in their eyes anyway. When you factor in medical deductions and other expenses, poker and tax are not good friends.
Poker players are advised to take an accurate diary of their winning and losing sessions allowing you to accurately declare your gross winnings then work out the itemised deductions as gambling losses. Hand histories and records from Paypal or other transactional methods can be used as supporting documentation to prove your declared amounts to satisfy the IRS your financial returns are accurate. For some reason they are sceptical about poker players! Remember that the IRS did not consider online poker and the realities of life as a professional poker player when working out their procedures so the more information you have the better.
If you do have to pay tax on your poker playing then take time to learn the rules carefully. Even if you sell a share of yourself to someone else there is a form you receive from the casino that formalises that you did not receive the full amount in winnings as advertised in the poker tournament. Failure to have this document would mean you are taxed on a $1 million prize when you only received $500,000 of it having sold a share of yourself to another player. Managing your tax is extremely important if you are subject to those deductions.
By Malcolm Clarke