[Nothing is this post is legal advice, and nobody should rely on it. This post is simply a recitation of my best understanding of the way poker winnings are taxed. I'm not a lawyer or an accountant and I'm especially not YOUR lawyer or YOUR accountant. If you want legal or tax advice, you should seek the counsel of a lawyer or accountant licensed to practice your jurisdiction.]
Basically, the IRS treats poker winnings like any other gambling winnings, requiring that you declare your winnings as income and allowing you to deduct your losses, but only to the extent of your winnings. So if you are stuck on the year, you can't take a deduction for the amount you're stuck; you can only deduct up to the amount of your winnings.
This is pretty shitty for poker players, since a poker player being stuck for the year is not really that different from a business being in the red for the year but the business can take a deduction for its net loss and the poker player can't. I think the rationale behind this policy is that productive business is something the government wants to encourage, so it's willing to subsidize bad years for businesses, but gambling is something the government doesn't really want its citizens doing, so it doesn't give the same tax advantage to gambling losses. This seems ridiculous. A poker pro having a losing year is much more analogous to a business having a losing year than it is to some degenerate spending thousands on scratch tickets, yet for tax purposes it's treated like the latter rather than the former. gg irs.
Initially, I thought I could just net my winning and losing sessions and report the net as income, but I dug a little deeper and it turns out that the IRS requires poker players to report all of their winning sessions as income and itemize deductions and deduct all losing sessions as itemized deductions. Furthermore, the IRS has never explicitly defined what constitutes a "session." While the limitation on deductions for losses is mildly tilting, this itemization requirement combines with the murkiness of the definition of a session to put me on apoplectic hippo-tilt.
The most aggressive position I could take with respect to the definition of a session would be that a session lasts until I move money from my Cake account to my bank account. Under this definition, my entire play over the course of the past year has been one long session. But I doubt this would hold up in an audit or in court, since it would basically allow me to skirt the itemization requirement entirely.
The most extreme way to define a session in the other direction would be to say that every hand you play counts as a "session." Even less extreme than this, you could say that, for online poker, every table session counts as a session, and it would still impose incredibly burdensome accounting requirements on online poker players who multitable. Trying to track every single buyin at a table, auto top-up, and the amount in my stack when I close the table would be a goddamn nightmare. And I, a casual microstakes online player for 2009, would end up having to report probably somewhere in the neighborhood of $100,000 of income and then take itemized deductions for $98,000. This would be completely ridiculous.
The compromise that's most widely advocated by people who have written publicly available materials on this subject is to define a session as any continuous period playing the same game. This definition is pretty much in line with what most multitabling online players consider a session and basically allows us to use the "Sessions" tab of Hold 'Em Manager to account for our sessions. It's still needlessly burdensome, but it's not nearly as burdensome as trying to track every auto top-up. I've adopted this method and will be using it to prepare my return.
My anger over these policies is driven by three considerations. The first is that, regardless of the definition of a session, in nearly all cases, reporting all winning sessions as income and then deducting losing sessions ultimately creates the exact same tax liability as netting winning and losing sessions and reporting the net as income. So all of the tedious bean-counting serves really no purpose other than to force poker players to waste time and effort keeping records. gg irs.
You may have scratched your head when your read the word "nearly" in the preceding paragraph. Well, it turns out that the only situation in which this system changes the ultimate tax liability of the taxpayer is...SURPRISE, the situation that I am in! My situation is that the total of my losing sessions for last year is less than the standard deduction. So I still have to report all of my winning sessions as income, but it doesn't make sense for me to itemize my deductions since the standard deduction is still larger. So I, and various other poor people similarly situated, end up paying a much higher marginal tax rate on our poker winnings than richer poker players for whom itemizing deductions makes sense.
How sick is it that our supposedly progressive income tax scheme creates such a horribly regressive result? How sick is it that the only situation where the burdensome accounting measures imposed on poker players make any difference in their final tax liability is when it increases the tax burden on the very poorest of players? This is such a fucking brilliant and devious way for the government to punish poor people for gambling. gg, irs.
Now, the third and final consideration that tilts me when I think about this is the fact that in practice, nearly no poker players will have given this as much thought as I have or researched this as deeply as I have. I am confident that the majority of them will not even report their poker winnings as income, and the majority of those who do will simply net their wins and losses for the year. And they will probably be fine because they won't be audited. So the real effect of these arcane regulations is to punish people who make a good faith effort to understand and obey the law. gg, irs.
In sum, with respect to poker, the federal income tax harshly penalizes impoverished, law-abiding citizens. gg, irs.
I can sort of understand the rationales behind these policies. Poker is not productive work in the sense that it doesn't really create, it just transfers consumption. Society would rather have people donig some value-creating productive work than grinding away at the tables and taking money from fish who do. Furthermore, the government doesn't want poor people gambling with what little money they have, so it imposes regressive taxes in an attempt to discourage this behavior.
But I'm not a pro who sits in the Venetian all day preying on drunk tourists and banking six figs a year who never plans on doing anything good for society. I'm a 23-year-old who is trying to get through law school. I'm looking forward to a long and productive career practicing law, advising entrepreneurs and investors in small businesses. I also want to defend people accused of crimes who would otherwise be swept into overcrowded prisons by an overstressed and imprecise criminal justice system, and stand in court to vindicate the rights of people who have been wronged. I live off $1,200 a month in one of the most expensive neighborhoods in one of the biggest cities in America, scrimping everywhere and making substantial cutbacks on my standard of living in an effort to keep my student loan debt as low as possible.
I'm not some degenerate gambling addict who spends an entire minimum wage paycheck on scratch tickets and ends up on public assistance. I started grinding microstakes last year, mostly for the fun and challenge of the game, with some hope of maybe creating a little side income for myself to enjoy life a little bit and not have to live like such a pauper. I played smart and ran good and ended the year a couple thousand bucks in the black. Now I sit down to do my taxes and find all of these nonsensical rules robbing me of the value of my standard deduction.
Surely, there are better places for the IRS to find the $700 of taxes that I have to pay than my meager bankroll. Surely, the IRS can find that $700 somewhere other than my empty pockets. But just as surely, it doesn't give a shit and will happily take its disproportionately large cut of my modest poker winnings.
gg, irs.
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