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[Mr. Fox is a tax practitioner enrolled to practice before the Internal Revenue Service.  He is also a financial consultant, the principal of Clayton Services and serves on a contractual basis as the chief financial officer of numerous privately-held businesses.  He can be reached in Irvine, California at (714) 225-7877 or by e-mail to: rcfox@claytonservices.com]

In The Mailbag is Overflowing, a March 2004 article in Card Player magazine, columnists Yolanda Smulik-Roche, E.A., and Roger C. Roche, E.A., answered six questions on gambling tax issues.  I believe four of the answers were either wrong or seriously misleading.  The table below sets forth the substance of the question involved, the gist of the answer provided by the columnists and my replies to their responses.
 

Q:  When should a W2-G be issued?
Roche's Response Russ Fox's Reply
The columnists noted that IRS Revenue Procedure 77-29 covers the situation but poker was not mentioned in the Procedure.  They state: “Many Nevada casinos are required to report winnings of more than $600 in a poker tournament, and some are required to withhold, as well. And, some are not required to do anything. This is due to numerous Private Letter Rulings made between the IRS and the various establishments and associations, usually as the outcome of negotiations during an audit. So, we have a situation in which there is no uniform law.” While there have been numerous Private Letter rulings between the IRS and various Nevada casinos, I am unaware of any Nevada casino still in business that is required to withhold for a poker tournament when the “triggering rule” has not been met.  The columnists fail to state this rule in their response to the reader.

Binion’s Horseshoe (the businesses and assets of which have been sold to unrelated companies) issued W-2G’s in their poker tournaments under a closing agreement it entered with the IRS in connection with an audit.

The triggering rule mandates that a W-2G be issued where the winnings were over $600 and are also at least 300 times the amount wagered.  For an analysis of the Binion’s Closing Agreement and the triggering rule see:
W-2Gs: Debunking the Big Lie.

The columnists’ use of the phrase “required to report” is at best misleading.  If the triggering rule is met, then they must issue a W-2G.  If the triggering rule is not met, then they are not required to issue one.  With the possible exception of the championship event at the World Series of Poker this year, I do not know of any poker tournament held anywhere in the world in which a prize is awarded that would trigger the mandate to issue a W-2G.

The columnists’ conclusion that “we have a situation in which there is no uniform law” is equally misleading.  The law is uniform.  What is not uniform is the election by a few cardrooms to issue a Form W-2G even when it is not required by law.

Q:  Regarding online poker, a reader who had several thousand dollars in winnings at online cardrooms said he knew how to report gambling losses, but that he had not received a W-2G and nothing had been withheld from the payouts made to him by the online casino.  The reader asks: “All payouts (winnings) are documented in writing, as are my deposits (losses). Can I simply add up the total of the winnings that are documented and put that down as the total gambling winnings on my tax return?”
Roche's Response Russ Fox's Reply
“Yes, that is exactly right.” The terminology in the question is hopelessly mixed up.  “Payouts” are definitely not “winnings.”  Likewise, “Deposits” are not “losses.”

It is correct that winnings over the course of a year, on a session-by-session basis, are added up to determine the amount reported for federal income tax purposes. Losses for that year, again on a session-by-session basis must also be summed to determine the maximum amount that can be entered as an itemized deduction on the tax return in which the winnings are reported.  The deduction of losses is limited to the amount of winnings reported in the return.

Q:  A player who did not receive a Form W-2G asks: " I was told a few years ago by the IRS in Nevada that whatever you walk out with that is more than what you walked in with is your gambling winnings, and you need to report it."
Roche's Response Russ Fox's Reply
“That is right. All games are required to have winnings reported as well as losses, but as separate figures and not one net figure together.” That is not right.  It is the results in each session that must be considered in determining winnings and losses, not your overall win or loss.  Any number of reasons unrelated to gambling wins and losses might account for walking out with “more money than I came in with.”  The amount in your pocket when you leave may also be less than what you came in with plus what you won.  Presumably the columnist would have also answered “yes” to the reverse of the question, “if I walk out with less is that my gambling loss?”  Again, many reasons may account for a decrease in the amount the player has when he leaves a casino.
Q:  A player asks: "If I play poker online, do I have to pay any taxes at the end of the year?"
Roche's Response Russ Fox's Reply
“Only if you were a winner for the year.” Whether you are a winner or a loser for the year is irrelevant; it is your results on a session-by-session basis that determines your tax liability.  The columnists correctly state above that wins and losses are separate figures and are not netted.  In addition, the wins online are added to any wins in face-to-face gambling situations to determine the amount of winnings reported for the year.  Finally, the payment of taxes is contingent on lots of things, including the amount of losses from gambling sessions and the other income, losses and deductions the taxpayer has.

For example, assume that A plays online poker and has the following results (each for a session): October 10, win $100; October 15, lose $500, November 4, win $300.  A has gambling income of $400.  A also has gambling losses from his online play of $500.  (You can only deduct losses to the extent of your wins.  If A’s only gambling were on this online poker site, he would be able to take $400 as an itemized deduction for gambling losses if he elects to itemize rather than taking the standard deduction.)