All poker winnings are taxable income, but the amount depends on your level of activity — amateurs are typically taxed at a flat rate, while professionals are typically taxed using a progressive system. Given the nature of extreme fluctuations in poker winnings and losses, it’s understandable that players will want to write off their losses.
So, can you write off poker losses? The short answer is yes, you can write off poker losses. But it’s not as simple as deducting all of your losses against your taxable income. If that were the case, the government would be subsidizing most poker players. Imagine a 9-max poker game; eight players could report their losses, and only one player would report any taxable income.
Writing off poker losses requires diligence in documenting all winnings and losses. Aside from that, there are certain restrictions in place to ensure that tax collection is easier for everyone. To learn more about the methodology you need to follow when writing off poker losses, read on.
Writing Off Poker Losses
Poker players know that you can never win it all — you win some, you lose some. But that’s not true of the IRS, though. It wants specifics and looks at all reports thoroughly. The IRS expects your income tax return to include all of your winnings, big or small.
Reporting your winnings is a prerequisite before you can even begin to use your losses as tax deductibles.
Amateur and professional poker players may differ in the process of claiming their losses, but the restrictions are the same. Your tax deductibles can never exceed the winnings that you’ve reported in your tax return. If you’ve gone through an extremely unlucky year, you can’t file your losses without any winnings.
For example, if you’re an amateur player with a reported taxable income of $10,000 from poker, you can neither report more than $10,000 worth of losses nor carry the excess over to the next taxation year.
If you’re a professional player, your tax deductibles will include all purchases that you’ve made in pursuit of making money through poker. These deductibles include all of your travel, gas, and hotel expenses, equipment purchases, and poker losses. Similarly, you can’t have more deductibles than your payables.
FAQs: Using Poker Losses as Tax Deductibles
Taxes in poker are relatively straightforward. If you win, you pay a 25% flat-rate. You can use your losses as tax deductibles, and you can get a full or partial refund if you file your winnings and losses correctly.
You wouldn’t believe how many poker players miss filing their winnings and losses in their tax returns. To help make the process easier, we’ve compiled the most common questions that amateur players tend to ask when it comes to poker tax deductibles.
Can I Deduct Gambling Losses If I Don’t Itemize?
No. An amateur player, or someone who plays poker casually, can only use their losses for tax deductions if they report all of them as itemized deductions. If you only claim standard deductions, you can’t use poker losses to offset your payable taxes.
Professionals can lower their tax bracket by including their losses on Schedule C, together with all the purchases and business expenses that they’ve made in pursuit of making money with poker. The IRS considers someone a professional if he relies on poker as his primary source of income.
How Do I Prove Gambling Losses?
All players who file a claim for tax deductibles should keep a log of all their winnings and losses, together with the date of activity, location, and the amount you’ve won or lost.
It’d be wise to keep detailed documentation of all your activities every time you play poker. Having a journal will make it easy for you to keep track of your taxable income (winnings) and tax deductibles (losses).
Players need to secure the following documents to prove their losses when filing their tax returns:
- W-2GA is an official withholding document that you will receive when a payout is issued. Not all winnings will get a W-2GA, though. Only those who won $5,000 or more in one session will receive this document.
- Form 5754 is an official document that you use to report all of your winnings. It’s not a proof of losses, but keeping your winnings as detailed as possible will make you eligible for tax deductions.
- Tickets, checks, credit records, bank withdrawals, and receipts are your best proof when reporting your losses. Whenever you play poker, be sure to keep all of these to be eligible for tax deductions.
Some players think that tax journals and keeping all of these documents are overkill, especially when you’re only playing poker casually. But it’s the best way to protect yourself when filing your income tax return, and it’ll save you from a lot of trouble with the IRS.
What Happens If You Don’t Report Gambling Winnings?
Your tax deductions can never exceed the amount that you’ve reported as taxable income. If you have $0 in taxable income, then your tax deductibles can never exceed $0.
To give you an idea, let’s run through a simplified scenario of an amateur poker player when filing tax returns:
Let’s say you participate in a sit-and-go (SNG) with a buy-in of $500, and you won a total of $5,600. Your taxable income is $5,100, and the casino will withhold 25% of that amount in exchange for a W-2GA. The next day, you played again with a buy-in of $500. You reached $2,000, then lost everything before your session ends.
When you file your income tax return, your total taxable income is $5,100 minus the $500 that you lost — not the $2,000 because, technically, that’s not your money yet. Your payable tax is $1,150, and since the casino withheld 25% from your winnings, the IRS will issue a partial refund of $125.
If you’ve been unlucky throughout the year and managed to accumulate a total loss of $10,000, the IRS will only refund $1,275. You can’t use the excess as a write off for the next taxation year or carry over to future returns.
This is a super simple example of paying your taxes and using your losses as tax deductibles. Of course, in reality, it’s likely that you’ll have more than two games that you can easily remember. That’s why the IRS always reminds gamblers to have a journal with them whenever they play to keep all of their winnings and losses documented.
Do Casinos Keep Track of Your Losses?
The IRS receives reports on all activities and payouts from casinos. They know when you were there, what you played, how much you won, how much you lost, and how much they withheld from your winnings.
Casinos know even more about you now with the introduction of membership cards. They track your gambling habits, every payout you received, every bet you made, every reward you claimed, and every service you availed. The casino compiles and reports everything to the IRS, so it’s safe to say that its eyes are on you as soon as you enter the casino.
There are only two things inevitable in life: death and taxes. Winnings from gambling of any kind are taxable income, and the IRS expects everyone to self-report all of their winnings. You may love to gamble, but rolling the dice with the IRS isn’t something that you should even consider.
Poker is a game of luck and skills; sometimes you win big, sometimes you win small, and often you lose it all. But if you keep all of your activities documented, losing big in poker can have a silver lining when the end of taxation year comes. It would be best if you practice a bit of diligence in monitoring your activities. By doing this, you’ll be able to use your losses to offset some of your payable taxes.
Important Disclaimer: This information is based on research only. Please consult a tax professional for definitive answers regarding your situation.
Jim James has over 15 years of experience playing professionally and is the author of the best-selling book called Automatic Poker. Using a no-nonsense mathematical and logical approach to beating the games, he has won 7 figures at the poker table. Jim is well-known as the world’s leading expert on playing short or mid-stacked poker.
Today, he helps other players demystify what it takes to win money in No-Limit Hold’em and has helped countless people become winning poker players through his Online Poker Academy.