As tax season approaches, it is always a good idea to revisit best practices around reporting your gambling winnings. Whether you’re a professional or recreational poker player, if you enjoy the occasional or more frequent gamble, one thing you’ve always got to be sure to do is pay your taxes in a timely manner. I have compiled a list of questions, tips and guidance that will help you file your 2022 tax return and stay ahead of the game for 2023.
First and foremost, it’s important to understand what’s considered gambling income. Once you’ve got that down, you should be sure to keep organized your gambling records, determine your wins and losses, and whether you’d be classified as a professional or recreational player. Of course there are also other considerations and we explore them further in this article.
What is Considered Gambling Income?
Before you begin to gather your documentation and records, it is important to understand what type of income is considered gambling winnings for tax purposes. While there is some legal uncertainty between a “game of skill” and “gambling”, the IRS clearly defines gambling as:
- Money earned
- From placing a wager
- On a game of chance or event with an uncertain outcome
Activities that meet this definition include: poker, table games, keno, slots, sports betting, horse betting, bingo, daily fantasy sports, peer-to-peer wagers, lotteries, certain raffles and sweepstakes.
Losses from any gambling activity can be applied against winnings from any gambling activity. All gambling winnings or losses must be reported at their gross amounts on your tax return. Gambling losses cannot exceed gambling winnings and any excess losses cannot be used to offset non-gambling income.
Organize Your Gambling Records
Just like it’s good practice to take notes at the poker table, accurate record keeping is the key to your gambling activities. It not only gives you a sense of your aggregate profit or loss but alleviates much of the stress around preparing your return.
If you have kept detailed records throughout the year, organizing them may not take much effort. You will need your logbook, copies of any tax forms received (W-2G or 1099-MISC), and a record of any estimated tax payments, if you made them.
If you did not keep any records throughout the year, you have some work to do. First, you should contact any casino you visited and request your player history. The casino will be able to provide any tax forms issued and a win/loss report. While a win/loss report is not the ideal solution, it could give you a general sense of your table game and slot history.
Each casino will also be able to provide your tournament poker history. This should include your total entry fees and your total tournament winnings. You can then compare this information to all winnings reported on Hendon Mob. Between these two sources, it should capture a large percentage of your tournament action.
Any other undocumented winnings and losses, such as those from cash games, will need to be recreated as closely as possible. The IRS requires contemporaneous records for gambling activity, so determining your activity after the fact becomes tricky.
Determine Your Winnings and Losses. Use the Session Method!
The IRS allows taxpayers to report all gambling winnings on a “per session” basis. The net result of each session should be tracked. Since this is one of the few advantageous tax positions for gamblers, it is important to capitalize on it. What constitutes a session varies by game type:
Poker: Each tournament is a separate session. If you are playing cash games, each session would consist of continuous play at a certain game type. Changing tables, or multi-tabling, in the same game type is still considered part of the original session. If you move from a no-limit game to a PLO game, you now have two separate sessions.
Slot Machines: Per the IRS safe harbor guidelines, each calendar day can be considered a session.
Table Games: Similar to poker, continuous play at one game type constitutes a session. As soon as you move from blackjack to craps, a new session starts.
Sports Betting: Each individual wager is considered a session.
There is some nuance in determining a gambling session. There are often special facts or circumstances surrounding these issues, so additional research may be needed on a case-by-case basis.
Once you have your net session results, you can separate all winning sessions and losing sessions to determine your reportable gross figures for the year. If you do not have accurate session records, you could be forced to report gross amounts, which could unnecessarily increase your Adjusted Gross Income and phase you out of certain tax deductions and credits. It may also subject you to additional state tax.
Determine if You Are a Recreational or Professional Gambler
This is one of the more frequently asked questions and a debated topic. While there is no black or white definition of recreational or professional gambler, you need to consider the following:
- Do you treat gambling like a business?
- How much time do you dedicate to gambling?
- Are you profitable?
- Can you show a history of success?
- Can you define your specific skill set or strategy?
The degree to which you meet the above criteria needs to be considered when making this determination.
If you are a professional gambler, you may be able to fund a retirement account based on your net profit from self-employment. The best part? If you are eligible, you can fund an IRA, SEP or Solo 401k even though the year has already ended. The amount of your contribution is dependent on your net profit, but this is one of the few tax planning opportunities available to professional gamblers after year-end and could result in significant tax savings.
If you gambled on an unregulated poker or gambling site, you may have met the requirements for foreign bank account reporting. If the highest balance in all your combined accounts was more than $10,000, you must file an FBAR for each account. You may also have a reporting requirement (Form 8938) if your balances were more than $50,000 on the last day of the year, or $75,000 at any point throughout the year.
You may also meet the requirement to file multiple state returns. Depending on your filing status (recreational or professional), you may need to file a nonresident return in each state you earned money.
Plan for 2023
It is never too soon to begin tax planning for the current year. Even if you haven’t finalized your 2022 tax return yet, there are always potential planning opportunities. It could be as simple as beginning contemporaneous record keeping or assessing year-to-date earnings for estimated tax payments. Staying current and aware of your tax position throughout the year will expand planning opportunities and could have a significant impact on your tax liability.