Free Photo | Friends having fun while playing poker (freepik.com)
Poker’s popularity in the United States attracts both casual players and professionals. However, with increased participation comes tax implications for poker winnings. The Internal Revenue Service (IRS) classifies poker winnings as taxable income, subject to federal taxation. Taxes can vary on a state level, with some states imposing additional taxes while others, do none.
So how do taxes work for poker winnings?
Why Poker Winnings Are Taxable
The IRS classifies poker winnings as gambling income. This specific classification can be based on:
- The legal framework: The legal system in the United States clearly states that any money won from gambling must be declared as income according to Section 61(a).
- Income definition: Additionally, the definition of income according to the IRS is quite broad; it encompasses any growth in wealth regardless of its source. This could potentially include poker earnings within its broad definition.
- The consistency with other types of income: Poker winnings are handled in much the same way as “Other sources of income”, like salaries, investment returns, or business earnings, all of which are liable to be taxed.
However, whether or not you pay tax on your winnings depends on where you are playing. For example, Cameron Dhaliwal from Business2Community explains that while gambling winnings are subject to federal and state taxes, winning poker at a regulated offshore casino means paying no tax. The reason? Offshore poker sites are not regulated under U.S. Federal law, which means your poker winnings do not fall under the federal level (source: https://www.business2community.com/gambling/offshore-poker-sites).
Types of Poker Winnings Subject to Tax
It’s crucial to understand that all types of poker winnings may be subject to taxation, which includes cash winnings, tournament prizes, online poker earnings, and just recently, your cryptocurrency earnings like Bitcoin or Ethereum from poker.
- Cash winnings: The money earned from playing in cash games or tournaments is considered cash winnings irrespective of the sum won.
- Tournamant prizes: Prizes at tournaments can include both cash rewards and the equivalent value of monetary prizes, like cars or holiday getaways in poker competitions are subject to tax.
- Online poker earnings: Revenue from playing poker games on various platforms, even if the poker tournaments are hosted outside the United States, it is taxable.
- Crypto winnings: Poker players who receive their winnings in the form of cryptocurrencies are required to pay taxes based o the value of these coins at the time they received them.
Players need to remember that they must report their winnings, with or wiithout any official documents from the gambling platform, albeit online or land-based. Failure to report your poker earnings could lead to fines and unnecessary legal issues.
Reporting Requirements
The IRS has set out clear guidelines and regulations for declaring poker earnings. This includes casinos and poker tournament planners who must provide Form W-2G for prizes exceeding $5,000 (excluding the entry fee). This specific form details the total winnings and any federal tax held back.
Even if you don’t receive a Form W-2G, you are legally obligated to report all gambling winnings, including poker, on your tax return. This applies regardless of the amount won. While all winnings must be reported, the $5,000 threshold for Form W-2G issuance applies specifically to poker tournaments. For other types of gambling, different thresholds may apply.
Again, it’s crucial to maintain accurate records of all poker sessions, including wins and losses, to ensure proper reporting and potential deductions.
Tax Rates on Poker Winnings
Poker winnings are subject to both federal and, in many cases, state taxes. With federal taxes, poker winnings are taxed as ordinary income. The tax rate will depend on your total taxable income for the year and can range anywhere from 10% to 37%.
For poker winnings of $5,000 or more from a poker tournament, the payer, which is the casino or poker event planners, are required to withhold 24% of your winnings for federal income tax. State taxes, on the other hand vary by state. This includes the tax rates and the state regulations, so it’s important to check your state’s specific requirements.
Interstate Gambling and Tax Implications
Let’s say you live in Utah, where all forms of gambling is illegal, but win a poker tournament in New Jersey, where poker is legal. The tax situation can become somewhat complex, and ight need a professional tax accountant to understand the ins and out.
Now, regardless of state laws, gambling winnings are subject to federal income tax. You must report these winnings on your federal tax return.
Even if gambling is illegal in your home state (like Utah), you are generally required to report all income, including your out-of-state winnings on your state return.
This is where it gets a little tricky. The state where the gambling took place, New Jersey for this example, will require you to file a non-resident tax return and pay taxes on the winnings you earned in the state.
Here’s the thing, though, not all states where gambling is legal have state taxes. States that have legal gambling but no state income tax include:
- Nevada
- Florida
- South Dakota
- Texas
- Washington
- Wyoming
Even if you live in a state without income tax, you may still owe taxes to another state if you win money gambling there. For example, if you live in Florida but win money in a Nevada casino, you may owe taxes to Nevada.
Some states, like Illinois, do not allow you to deduct gambling losses or get credit for taxes paid to other states on gambling winnings. This can result in double taxation.
States that have legal gambling but do tax winnings include:
- New Jersey
- Pennsylvania
- Michigan
- Indiana
- Iowa
- and many others
The tax rates and rules vary significantly between states. Some may only tax winnings above a certain threshold, while others tax all gambling income. Remember that professional gamblers may have different tax rules compared to recreational players in some states.
Exemptions and Special Cases
While poker winnings are generally taxable, there are some special considerations:
Professional vs. Recreational Players
The IRS distinguishes between professional and recreational players. Professional players may be able to deduct more expenses but are also subject to self-employment tax.
Foreign Players
Non-U.S. residents may be subject to different tax rules, often involving a flat 30% tax rate on gambling winnings, unless a tax treaty provides for a different treatment.
Losses and Deductions
Recreational players can deduct gambling losses up to the amount of their winningsonly if deductions are listed. Professional players may deduct business expenses related to their poker activities.
Charitable and Amateur Tournaments
Winnings from certain charitable gambling events may be exempt from federal income tax, but specific conditions must be met.
Threshold for Reporting
While all winnings are taxable, casinos are only required to report winnings over $5,000 for poker tournaments. However, this does not exempt smaller winnings from being taxable.
Cryptocurrency Poker Winnings
Cryptocurrency winnings are treated similarly to cash winnings for tax purposes. The fair market value of the cryptocurrency at the time of receipt is considered your taxable income. If you hold onto the cryptocurrency and its value increases before you convert it to fiat currency, you may also incur capital gains tax when you sell or exchange it.
For U.S. taxpayers, cryptocurrency transactions, including those related to poker winnings, should be reported on Form 8949 and Schedule D. The IRS considers cryptocurrency as property, not currency. This means each transaction or trade could potentially be a taxable event. Keep detailed records of the value of cryptocurrency at the time of winning and at the time of any subsequent transactions.
Conclusion
Understanding and complying with tax obligations is crucial for poker players. Proper record-keeping, awareness of federal and state tax laws, and consideration of professional status are key factors. While strategies exist to minimize tax liability, it’s essential to remain compliant with IRS regulations.
