Disclaimer: The author of this article is not an attorney or a tax professional. The advice given may not apply to your particular situation. Please seek the help of a tax attorney or CPA to determine how you should report your poker winnings and what deductions you should use.
Tax time can be confusing for professional poker players. Many players think that they don’t have to pay taxes on their winnings since the online poker site is located outside the US, but US citizens must pay taxes on all income regardless of where that income was generated.
Here’s how a professional poker player should prepare for tax time.
Become a Business
Most gamblers are familiar with the W-2G. This is the form gamblers use to report their winnings. It’s great for recreational gamblers and it’s what you’ll have to use until you establish yourself as a business.
In order to qualify yourself as a business, you need to do the following:
- Play poker on a regular basis. On again, off again play will peg you as a recreational player.
- A significant portion of your income must come from poker.
- You must show a profit in poker for at least 3 out of the last 5 years.
- You must keep records and present yourself as a business.
Once you qualify, you may be able to use Schedule C of your 1040 and enter your winnings/losses as profit and losses from a business.
Why Not Just Use the W-2G?
Because it taxes the living bejesus out of you. If you use the W-2G, you’ll pay a 25% tax on your winnings and it’s unlikely you’ll be able to deduct expenses the way you would if you were a business.
Find Out What You Can Deduct
Once you become established as a business, you can start deducting reasonable expenses. These expenses can include:
- Internet connection
- Computer and peripherals
- Poker books, Coaching and software
- Travel to and from poker tournaments
- Home office if your computer is a separate room and is only used for your business
A tax professional can help you determine what other expenses you can deduct.
State Tax
If you live in a state that levies a state income tax, you’ll have to speak with a tax professional in your state to find out what the laws are and what you can do to minimize your tax burden. Every state is different.
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Just because you play online doesn’t mean that your winnings are tax free. You have to keep accurate records and report your profits and losses just like any other business. Remember that this article is only a general guide. Seek the advice of a tax professional in your state before filing.