New Tax Law Takes Bite Out of Tournament Winnings Law Will Require Casinos to Take 25 Percent of $5,000 or More A new tax code has been released that spells out just how much money the government will take from those who are lucky enough to cash for $5,000 or more in poker tournaments. Starting March 4, 2008, casinos and cardrooms are supposed to start withholding 25 percent of any poker tournament winnings of $5,000 or more. This will particularly affect the poker hobbyists who go deep in tournaments with buy-ins that range from $100 to $550, and of course those who make their living humping the tournament poker trail. Language in the new tax code pointed to a tax court ruling that took place earlier this year. The ruling held that tournament poker is not a skillful competition and should be considered a gambling activity, at least for the purposes of taxation. The law requires casinos and cardrooms to withhold and report the winnings from a player if it amounts to $5,000 or more in a tax year. The code does not address winnings from online poker sites or from casinos off U.S. soil. Here’s an example of how much money the government will be making off of poker tournaments after March 4, 2008. If the law was in effect earlier this month, the top seven finishers of the $500 event that took place Aug. 7, at the Legends of Poker would have paid a total of $40,221 in taxes. The runner-up of this tournament, which attracted a healthy 460 entrants, would have taken home $27,972 after taxes ($37,295 before). The winner received $74,585. If the law was in place, that amount would’ve been $18,646 less. The notice that was released to accounting firms this week follows: Background. Under Code Sec. 3402(q)(3)(C)(i), payers must withhold 25% on proceeds of more than $5,000 from a sweepstakes, wagering pool, or lottery (other than a state-conducted lottery, covered by another withholding rule). Proceeds from a wager are determined by reducing the amount received by the amount of the wager. (Code Sec. 3402(q)(4)(A)) Facts. A poker tournament sponsor charges an entry fee and a buy-in fee for each participant. In exchange for paying the buy-in fee, a participant receives a set of poker chips with a nominal face value for use in the specific poker tournament. The sponsor pays amounts, which exceed a participant's fees by $5,000, to a certain number of tournament winner(s), out of a pool made up of all the participants' fees. Poker tournament sponsors must withhold. Rev Proc 2007-57, which is effective for payments made on or after Mar. 4, 2008, says poker tournament sponsors (including casinos) paying amounts to winners in a manner substantially similar to the facts above, must under Code Sec. 3403(q) withhold and report on payments of more than $5,000 made to a winning payee in a tax year. They must furnish a copy of the information return to the IRS on or before Feb. 28 (Mar. 31 if filed electronically) of the calendar year following the calendar year in which the payment is made. Rev Proc 2007-57 cites legislative history for the proposition that the term "wagering pool" includes all pari-mutuel betting pools, including on- and off-track racing pools, and similar types of betting pools. It also cites a non-tax case (U.S. v. Berent, (CA 9 1975) 523 F.2d 1360, 1361), holding that in common usage "pool" means "a particular gambling practice, an arrangement whereby all bets constitute a common fund to be taken by the winner or winners." The IRS said it won't assert any liability for additional tax or additions to tax for violations of any withholding obligation relating to amounts paid to winners of poker tournaments under Code Sec. 3402, as long as the poker tournament sponsor meets all of the requirements for information reporting under Code Sec. 3402(q) and its regs. RIA observation: Earlier this year, the tax court held that tournament poker is a wagering activity for purposes of the Code Sec. 165(d) limit on gambling losses. See Federal Taxes Weekly Alert 03/01/2007.
This is being discussed at some length on the main vpFREE forum right now. If this does go through and be slated to become effective as stated, somebody will challenge it in court, likely with an injunction barring the IRS from enforcement until the court renders a decision. Claiming that tournament poker (or TBJ) is an unskilled gambling activity is ludicrous! :flame:
Just talked to a Regional Director of Harrah's and was told this law will cover all types of tournaments because of the term "wagering pool".
If we simply replace our current tax system with a fairer flat or value added tax system, it would make money-grubbing rules like this a thing of the past. Check out the fair tax plan at http://www.fairtax.org The IRS is a joke.
Taxes A couple years ago, here in Oklahoma, when I finished second (39000) in a BJ tournament. They took out 28% and the state taxes were your responsibility. You can get alot of that back from loses deducted. Now for any winnings of $1200 or more they take 29%. For around here 25% would be better.
The first and only tournament I have played in, anyone who got into the final rounds were expected to fill out paperwork before playing. No thanks, I think I would wait until I actually won something. However, all of this raises a question. It's my understanding that these tax laws cover CUMULATIVE winnings on an annual, or yearly basis. So, where does the govt. or the casinos get off taking taxes out early? If I win 5,000 but then lose 10,000 then I am at a net loss and I owe NO taxes. But how do I prove losses to the IRS? How can I get that money back in the form of a refund? My friends, it ain't gonna happen. Of course, I could be wrong on this, but I don't think I am. I think all of this is problematic, and just another symptom of how badly broken our system is. They probably didn't take out State taxes because there was no law that forced them to do so. It's the same for me as an employer with out-of-state employees. Idaho has a state income tax, but I am in no way responsible to handle those taxes. BJM, were you an in-state resident of OK?
Jeff, you can write losses (and expenses) off against winnings although it involves some effort on the gambler's part throughout the year. Jean Scott has an excellent book out about taxes and the gambler, and she's working on an even more updated version right now. PM me and I'll set you up with details.....
Tournament taxation.. If i'm not mistaken, everytime I have won anything in a casino tournament, I have received a copy of a 1099 ,at the end of the year, filed by the casino with IRS. In the final analysis, doesn't this has the same tax implications as a deduction from the prize money.
Fredguy is right, but..... In the final analysis, the net tax responsibility is the same. However..... Let's say you spend $10K on tournament entry fees and expenses such as travel and rooms. You only cash in one event, for $10K. You broke even, right? Under the proposed law, the IRS would still get to keep part of your winnings, let's say $2,800. Sure, you'll get it back eventually if you've been keeping good expense records, but is that fair? Nope. Would a typical employee at a conventional job like to have the IRS withhold a lot more than the employee will owe, without the employee's permission? Nope. It's simply unfair.
Taxes Yes, I live in Oklahoma. The casino here will print you out a win/loss sheet. You can just get a notebook and record what you do there. That's everything you spend in the casino, here buying a hamburger, drink, bingo, etc.. I was able to write off 1/3 without even an arguement from IRS.
Gambling tax law is unfair in so many ways. If non-professionals do their taxes appropriately, they could end up paying a lot of tax because of gambling even in break-even years. The requirement to post all your wins on the front page of your 1040 (which falsely inflates your AGI) and then deduct losses on Schedule A is ridiculous. Some people wouldn't have to file Schedule A except for this, which means they no longer get the benefit of the standard deduction instead. And, inflating the AGI can lead to reductions in all sorts of tax breaks. A higher AGI often means reduced limits on deductions and exemptions. The child tax credit is also often a victim. All that can happen even if you are essentially telling the government you broke even gambling. That doesn't even begin to address the many issues that state taxes cause for gamblers. Mandatory withholding from tournament winnings will suck, but it's just the latest in a long string of inequities in the system. And many of those problems end up being more than just an interest-free loan to the IRS.
Let's direct our tax reform efforts in the right direction. Excess withholding of gambling winnings is not, of course, desirable but it is something we can easily live with. Our tax collection system is set up on a "pay as you go" method. Wage earners have their taxes withheld by their employers. Others, and some wage earners, are required to file quarterly estimates of their taxes due. So if you are subjected to excessive withholding on gambling winning then reduce your withholding on wages and/or quarterly estimates. Sure it requires some work (mainly in the form of calculations) on your part but it is within your power to adjust for excessive withholding. The real problem was well stated (in summary form) by KenSmith: So don't worry about withholding, it'll come out in the wash. Worry about how your gambling winnings are taxed and direct your efforts for reform in that direction.
A QUICK QUESTION ON TAXES TAKEN FROM TOURNEYS THAT USE THE CASH AND PROMO CHIP FOR PURSE. IS 2500- IN PROMO CHIPS TAXED AT THE SAME RATE AS 2500 CASH? If so, there is a large disparity between the two . Any thoughts on this topic?
I think you'll find that when casinos offer these split prize pools, that you'll likely receive all your winnings in chips, with half in live chips and half in promo chips. In my experience, when winnings are disbursed in chips, no tax forms are filed. Perhaps this is a legal loophole, or perhaps the casinos mistakenly think it is. In case I'm mistaken, has anyone seen the casino file a W2-G when payouts are partially promo chips? However wins are paid makes no difference to me personally. If I were to cash in one of these events, I would pay tax on the actual win after I convert the promo chips.
Another consideration is some but I'm sure not all casinos allow employees to cash promo chips at face value. Always ask when you win promo's, if so tip the tournament dealers with promo chips. My CPA agrees with Ken, promo chip taxes are due only for the real $$ won after conversion. Another tournament winnings tax question; If you play an invitational and are issued a 1099 for "prizes" won due to no entry fee, what if you purchased a cash rebuy? Would this now qualify your tournament winnings for a W2-G in lieu of a 1099? I have my CPA's opinion but would like to hear others.
regarding getting chips for tournament winnings FYI, when I won second in the Hilton 3-card poker tournament last month, I had to fill out the tax form, even though they paid me in chips. These were all live chips, not promos.
The ASSOCIATED PRESS released this statement on 10/20/07: Casinos and other sponsors of poker tournaments will be required to report winnings of more than $5,000 to the Internal Revenue Service beginning March 4, 2008, the tax agency said Friday. Sponsors who meet the reporting requirement won't need to withhold federal income tax at the end of a tournament, it said. If a sponsor does not report winnings, it is responsible for withholding the taxes and sending the money to the IRS, normally 25 percent of the amount subject to reporting. The IRS said poker tournament winners must provide their taxpayer identification number, usually a Social Security number, to the sponsor. If the winner fails to do so, the sponsor must withhold federal income at a rate of 28 percent. Casinos and sponsors of tournaments completed before March 4 next year will not be required to report winnings to the IRS or withhold tax. By law, the winners already must report poker earnings on their federal income tax returns. So it looks like withholding of POKER TOURNAMENT winnings will not be done as long as those winnings are reported to the IRS. Interesting that they only cover POKER is the statement. Nothing about BJ or other tournament winnings.
