Archive for the ‘Gambling’ Category

Ignoring W-2Gs and $482,000 of Income Led to a Sub-Optimal Result

Monday, December 14th, 2020

Bluffing in poker can work quite well. However, if your opponent will always call, bluffing cannot work. One poker player learned that the IRS always call your bluffs (especially when they have evidence).

Guy Smith owns an interior construction business in Connecticut. He also enjoys playing poker, and had some success. With that success comes W-2Gs: They’re issued if you have a cash of $5,000 or more (net of the buy-in). Mr. Smith has had many, winning a poker tournament in Connecticut and finishing fifth in another in Florida.

Mr. Smith apparently didn’t tell his tax professional about those winnings. The IRS computer would, of course, send notices noting the discrepancies on the returns. Given the tournament winnings were more than $1 million, this is a big issue. Ignoring tax forms that are sent to the IRS has about a 0% chance of long-term success.

But like a bid informercial, that’s not all. Mr. Smith ignored $482,000 of income from his business (and didn’t tell his tax professional about that, either). Unfortunately for Mr. Smith, the IRS discovered this. With nearly $1.5 Million of unreported income and over $800,000 of unpaid federal income taxes, IRS criminal investigation was interested.

Mr. Smith pleaded guilty to one count of tax evasion last week; he is scheduled to be sentenced in March and faces up to five years at ClubFed. Given he has agreed to cooperate with the IRS and pay all outstanding taxes (and the penalties and interest), his actual sentence will likely be far less.


In just over two weeks I’ll be announcing this year’s winner of the “Tax Offender of the Year” award. To win this coveted award [1] it takes more than simply evading taxes. It has to be special; it really needs to be a Bozo-like action or actions. If you have any ‘deserving’ nominees, let me know.

[1] I’m not sure anyone really covets receiving this award, but given the actions of some of the previous winners it may be that some were actually trying to win the award.

Do Canadian Professional Poker Players Owe Income Tax?

Thursday, November 5th, 2020

In the United States, the tax law can be boiled down to two sentences: Everything is taxable unless Congress exempts it. Nothing is deductible unless Congress allows it. Gambling winnings are taxed–they are an accession to income. An American professional gambler clearly owes income tax.

However, in many countries like Australia only professional gamblers (those conducting a business) are taxed on their gambling winnings. This came up when Australian Joseph Hachem won the World Series of Poker. He successfully argued that at the time he won he was an amateur gambler and did not have to pay income tax on his winnings.

The law in Canada is not settled in this area. There is a court case from British Columbia that says that professional poker players do not have to pay tax on their winnings. But clarity is likely coming, as the Tax Court of Canada will hear the case of Jonathan Duhamel in March.

Mr. Duhamel won the 2010 World Series of Poker main event earning $8,944,310. Canada’s tax agency, Canada Revenue Agency (CRA), argues that Mr. Duhamel was operating a business; thus, he owes income tax on his net income. CRA argues that Mr. Duhamel hasn’t paid $1,219,114 (Canadian Dollars) in tax from 2010-2012. That’s $934,695 (USD), well worth fighting over.

The case will probably come down to whether or not the business aspect of Mr. Duhamel’s career outweighs the luck that caused him to win specific events. Per an article in The Canadian, CRA believes that because he considers himself a professional poker player, he behaves like a “serious businessman” while playing poker, he has no other primary source of income, and he performs his occupation for 40 to 50 hours per week, he is in business and owes income tax. Mr. Duhamel argues it’s just luck that causes him to win.

The good news for Canadian poker players is that clarity on income taxes is coming (probably next summer). The bad news is that to this observer it appears that CRA is starting with pocket Queens versus Mr. Duhamel’s eight-seven suited.

IRS: DFS Is Wagering (Gambling)

Monday, October 19th, 2020

In February 2014, I wrote a post titled, “Taxes and Daily Fantasy Sports: The Duck Test.” I concluded:

So daily fantasy sports have at least some element of luck. Then from a tax standpoint they sure look to be a form of wagering activity. There’s a prize, chance, and consideration. The Duck Test again: If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck.

On Friday, the IRS released a second Chief Counsel Memorandum dealing with Daily Fantasy Sports. An IRS attorney asked the question, “Does the amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitute an amount paid for a wagering transaction under §165(d) of the Internal Revenue Code?” The Chief Counsel’s Office conclusion was:

The amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a wagering transaction under §165(d).

The Chief Counsel’s office opinion is basically what I wrote over six years ago:

DFS transactions meet the definition of wager as interpreted by the Tax Court and State courts because there is an uncertain event (such as the live performance of individual players), winnings if the event resolves in participant’s favor, and consideration is lost if the event does not resolve in participant’s favor. Each DFS transaction is a pay to play competition with predetermined winnings for a certain number of participants. The outcome of the competition turns on the overall statistical performance of live professional players assembled into the fantasy team. The winning participant receives a return of his or her initial bet along with wagering gains, while the losing participant walks away empty handed. This is consistent with the courts’ interpretation of the term “wager.”

The IRS Chief Counsel memorandum also correctly notes that the fact that DFS is skillful wagering is a blind alley. “DFS transactions are similar to poker and other wagers in which a player’s skill is a component of the game but it does not dictate the outcome. As such, the argument that DFS transactions are excluded from wagering as a game of skill are unpersuasive.”

There are some obvious conclusions from this. First, DFS sites have been issuing Form 1099-MISC’s, not W-2G’s, to participants. We can expect the IRS to pressure the sites to switch (and expect the sites to fight this). Second, expect the sites to come under pressure to register as gambling sites in “grey market” states or to leave such states.

Both DraftKings and FanDuel, the two leading DFS sites, have expanded into sports betting (which is clearly gambling) and have registered appropriately in states where they act as sports books. In those states, DFS being considered wagering/gambling won’t matter. However, just like Nevada did years ago some other state or states are going to also consider DFS to be gambling.

For DFS players, there is both good and bad in this memorandum. The good is that you can deduct losses (to the extent of winnings). If DFS were a skill contest, you couldn’t; however, if DFS is a wagering activity losses are explicitly allowed up to the amount of winnings. That’s good. The bad is that for professional DFS players, you might not be able to take business expenses in a year that you lose money. The Tax Cuts and Jobs Act (passed at the end of 2017) specifically disallows a professional gambler from taking business losses.

For the DFS sites, this is a continuation of the bad news coming from the IRS. Like the first Chief Counsel memorandum, I expect the DFS sites to bury their head in the sand and fight this. Unfortunately, while DFS clearly involves substantial skill to be a consistent winner, that is completely irrelevant as far as whether or not it is a wagering (gambling) activity. The only way around this for the DFS companies is for Congress to change the law.

Just File the FBAR

Thursday, October 8th, 2020

One week from today is the tax filing deadline. It’s also the effective deadline for filing the Report of Foreign Bank and Financial Accounts, FINCEN Form 114; that’s the form that’s better known as the FBAR. The FBAR is part of the Bank Secrecy Act (it’s not a tax form), but tax professionals like me get the joy of preparing the form. There’s no tax due with filing the FBAR–it’s an information return. Yet I regularly hear excuses on why not to file the form.

You are required to file the FBAR if you have $10,000 aggregate at any time during the previous year in one or more foreign financial accounts. These include the obvious (non-US bank accounts and non-US brokerage accounts) to the not so obvious (most online gambling accounts). Penalties for not filing the FBAR are stiff (to say the least). Non-willful penalties begin at $10,000 while willful penalties start at the greater of $100,000 or half the balance in the account—yes, that penalty is per account.

The FBAR must be electronically filed. Most tax professionals’ software will handle filing the form. You can also do it yourself on the BSA E-Filing System. And if you have an FBAR filing requirement, you may also need to file Form 8938 with your tax return. This is essentially a duplicate of the FBAR but with different filing thresholds and slightly different accounts that must be reported. (The IRS has a good webpage on the differences between the FBAR and Form 8938 filing requirements.)

The rule of thumb with the FBAR is simple: When in doubt, include the account. There are no penalties for overreporting; there are severe penalties for underreporting. Take foreign cryptocurrency exchanges. The IRS has publicly stated that these do not have to be included on the FBAR. However, the instructions to the FBAR don’t say that. Thus, I urge individuals to include them. I maintain a list of foreign online gambling sites and cryptocurrency exchanges.

So don’t forget the FBAR when you’re filing your taxes. And if you have any doubts on whether to include that account, include it.

More on the IRS Daily Fantasy Sports Memo (“DFS Is Gambling”)

Thursday, August 20th, 2020

There has been some speculation in the gambling world on (1) why did the IRS memo on Daily Fantasy Sports (DFS) suddenly appear, and (2) is the IRS correct about the non-precedential memo?

Chris Krafcik on Twitter asked, ” Has anybody gotten to the why of the IRS DFS memo? Working backwards from the targets (DFS companies [i.e., DK [DraftKings] and FD [Fanduel]]), and having observed what I have of gambling industry lobbying skullduggery, fair to ask, imo, whether IRS was lobbied by a DK-FD competitor.”

The reality is far more mundane. John Brennan, who often writes on gambling, has an article today on the DFS memo. He quotes Jason Robins, CEO of DraftKings, from his conference call with gaming analysts last week:

We have been involved in [an] audit with the IRS for many years, and this was a memo that has no force of law and is non-binding,” Robins said. “In our view, the analysis is deeply flawed. …” [Emphasis added]

Let’s assume that DraftKings raised the issue in the audit that DFS wagers are not gambling for purposes of federal tax law because of the Unlawful Internet Gambling Enforcement Act (UIGEA) (which is a near certainty). The UIGEA contains a carve-out for DFS specifically exempting it. The IRS auditor did not know whether the UIGEA carve-out applied to the wagering excise taxes, and his or her manager didn’t know. They did what they were supposed to do: They asked the IRS Chief Counsel Office how this should be treated. This memo is the response to that inquiry. (It’s highly unlikely this memo is the result of a competitor’s actions.)

The next question is whether or not the IRS memo reaches the correct conclusion. As I previously noted, I think it does. As noted in the memo, wagering is not defined in the Tax Code. But Court decisions are unanimous in what to do when a term isn’t defined. From Tschetschot v Commissioner (T.C. Memo 2007-38):

When a term is not defined, we must apply the term’s “plain, obvious, and rational meaning.” Liddle v. Commissioner, 103 T.C. 285, 293 n.4 (1994), affd. 65 F.3d 329 (3d Cir. 1995); see also Boyd v. United States, 762 F.2d 1369, 1373 (9th Cir. 1985). According to the dictionary, a “wager” is defined as “something risked or staked on an uncertain event” or “a bet”. Random House College Dictionary (1968). Similarly, “to wager” is defined as: (1) Something risked or staked on an uncertain event; bet; (2) the act of betting. Random House College Dictionary (1973).

We can also look to the UIGEA for a definition of wagers. Indeed, DraftKings argues that because of the UIGEA, DFS is not wagering (gambling). Let’s look at the definition from 31 U.S.C. § 5362 (1):

(1) Bet or wager.—The term “bet or wager”— (A) means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome; …(E) does not include— … (ix) participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28)….

First, I agree that DFS companies (such as DraftKings) are exempt from the UIGEA. 31 U.S.C. § 5362 (1)(E)(ix) is quite clear about that.

However, this has nothing to do with how wagering is treated under the Tax Code (aka the Internal Revenue Code); that’s a different section of the United States Code (Title 26). But we can look at the overall definition of what wagering is from the UIGEA, even though the UIGEA doesn’t apply to DraftKings, to see how the definition of wagering does apply to them under Title 26 of the U.S.C. As I wrote back in 2014,

…[T]here are plenty of IRS and Tax Court rulings on this, and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

The IRS memo and common sense tells us that DFS has at least an element of chance. No rain is predicted for a football game, and it rains impacting play. Or a pitcher pulls his hamstring and only pitches two innings. Or, well, you get the idea. The examples are too numerous to mention and all of them back the IRS’s view that there is an element of chance to DFS.

I do agree that DFS is an activity where skill predominates. As I have written many times, poker is also a game where skill predominates over luck. But that’s irrelevant for the Tax Code; legally, poker is a form of skillful gambling. So is DFS. But it’s gambling no matter what the DFS companies may want to say.

The conclusion I reached last week still holds: The DFS companies have little chance of prevailing on this issue. I reached that conclusion in 2015, and nothing has changed. They would be far better off trying to lobby Congress for an exclusion in the Tax Code than fighting the IRS on this.

Burying Your Head in the Sand

Monday, August 17th, 2020

One of my favorite sayings (and I am not the one who came up with it) is “The Tax Code Giveth, The Tax Code Taketh Away.” It’s not fair, but we have to live with it as it is, not how we want it to be. Only Congress can change the Tax Code because it’s law.

Last week, I reported on the IRS releasing a Chief Counsel Memorandum where the IRS concludes that Daily Fantasy Sports (DFS) companies are liable for the Excise Taxes on Wagering. (Back in 2015 I came to the same conclusion as the IRS.) Per published reports, Jason Robins, the Chief Executive Officer of DraftKings, disagrees. The Wall Street Journal notes [pay link]:

“This was a memo that has no force of law, is nonbinding and [in] our view is deeply flawed in its analysis,” Mr. Robins told analysts. “Our position continues to be, which we believe has been reaffirmed through state legislatures and courts throughout the country, that [daily fantasy sports] is not wagering.”

First, state law and state courts do not change federal tax law. A state can call an activity a non-gambling contest but it can still be considered wagering (gambling) under federal law. We have a dual system of taxation in the United States, and state tax law and federal tax law differ in numerous respects.

Second, some states have concluded that DFS is gambling. For example, Nevada did so. Of course, a company executive will put the most positive light on something.

So I’m going to assist Mr. Robins with some information about the Federal Tax Code. Back in 2014, I wrote:

[T]here are plenty of IRS and Tax Court rulings on [what wagering/gambling is], and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

Clearly daily fantasy sports have elements 1 and 3. There’s a prize and there’s a cost to enter each event. Is there chance?

Gambling does not have to be 100% chance to be considered gambling. For example, poker is considered gambling under US tax law yet there’s plenty of skill involved with it. (Indeed, I’d argue that skill predominates over luck; however, there’s absolutely an element of luck in poker.) Let’s look at what’s involved with a daily fantasy sports contest. You generally select a team to play in a day’s events. Let’s say you selected Carlos Boozer and Shane Battier for today’s NBA daily fantasy sports contest. Those players scored 8 and 3 points, respectively. On the other hand, had you selected Taj Gibson and Chris Bosh you would have done far better; they scored 20 and 28 points. Yet before a single game who know what each player will score? If you had selected NBA star Lebron James you would normally do quite well; however, he didn’t play today.

The IRS Chief Counsel memorandum notes that there can be skill and the ‘contest’ can still meet the definition of a wagering activity:

In [Revenue Ruling 57-521], the contest participant’s own skill was the only factor involved in winning the puzzle game and there was no chance element at all. In contrast, DFS participants merely select a lineup for their simulated teams and have no ability to exercise control or influence over the actions of the players participating in the game and who earn the participants their fantasy points. DFS participants may be educated on the sports games, players, expected weather conditions, and other factors. Regardless of how educated a DFS participant is, their chosen player(s) may perform poorly that day, become injured, not play in a given game, or be affected by uncontrollable circumstances such as weather and officiating. The existence of chance indicates that DFS contests are distinguishable from the type of contest described in Rev. Rul. 57-521. We conclude that the “skill” involved in selecting fantasy players is similar to the skill involved in selecting winners of individual professional sports games, horse races, or other traditional sports gambling activities.

In my view, and the current state of the Federal Tax Code, it’s quite clear that a DFS contest is a wagering activity. It meets the specifications of wagering. There is consideration, there is a prize, and there is an element of chance (luck). Bluntly, Mr. Robins can educate the world on the skill needed to be a winner in DFS (and he is absolutely correct on the skill needed); however, under the Tax Code this is clearly gambling (wagering). Basically, Mr. Robins’s argument is irrelevant.

The only way this changes is to change the Federal Tax Code. That would require Congress to add a new section to the Tax Code specifically stating that DFS is not a wagering (gambling) activity.

If I were an auditor of a DFS firm, I would be insisting DFS companies either pay the wagering excise taxes or add a reserve for them. To put it in sports terms, the Pittsburgh Pirates have a better chance of winning the 2020 World Series than the DFS companies do of not having to pay the wagering excise taxes.

IRS: DFS Sites Liable for Excise Tax on Wagering

Thursday, August 13th, 2020

Back in 2015, I asked and answered the question on whether the DFS sites were liable for the excise tax on wagering. I came to the conclusion they were. In late July, the IRS came to the same conclusion: DFS sites are liable for this tax.

The IRS legal opinion (which cannot be cited, but does give the IRS’s reasoning) notes that clearly DFS entry fees are wagers, and that DFS events are wagering pools. The opinion cites Tschetschot v. Commissioner and also notes the dictionary definition of a wager.

The IRS opinion notes some obvious realities about skill and chance in DFS:

DFS participants may be educated on the sports games, players, expected weather conditions, and other factors. Regardless of how educated a DFS participant is, their chosen player(s) may perform poorly that day, become injured, not play in a given game, or be affected by uncontrollable circumstances such as weather and officiating. The existence of chance indicates that DFS contests are distinguishable from the type of contest described in Rev. Rul. 57-521. We conclude that the “skill” involved in selecting fantasy players is similar to the skill involved in selecting winners of individual professional sports games, horse races, or other traditional sports gambling activities.

The DFS tax rate is 0.25% on legal (authorized) wagers and 2% on any non-authorized wagers. If a DFS site operates only in states that authorized the wagers, they’ll owe 0.25% of the wagers collected; otherwise, they will owe 2%.

There’s a corollary to this that I’ve mentioned on several occasions. If DFS is a wagering activity for one aspect of tax law, it almost certainly it is for other aspects of tax law. The DFS sites have been issuing Form 1099-MISC’s as “skill contests.” It’s quite likely that DFS games are gambling and that W-2Gs should be issued instead of 1099-MISC’s.

Finally, I should point out that this legal opinion is just the IRS’s opinion. A DFS site, if audited on this issue, could appeal the decision into the courts. It’s possible, of course, a court could rule differently than the IRS legal opinion (though I doubt it).

Professional Gamblers (and Other Gambling Businesses) Now Eligible for PPP Loans

Friday, April 24th, 2020

The Small Business Administration today released new guidance on the Paycheck Protection Plan (PPP) loans. Included in the guidance is an FAQ that states:

Are businesses that receive revenue from legal gaming eligible for a PPP Loan?

A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues, and 13 CFR 120.110(g) is inapplicable to PPP loans. Businesses that received illegal gaming revenue remain categorically ineligible. On further consideration, the Administrator, in consultation with the Secretary, believes this approach is more consistent with the policy aim of making PPP loans available to a broad segment of U.S. businesses.

This means that as of today professional gamblers are now eligible for PPP loans. If you’re a professional gambler and are out of business, now is the time to apply with your bank. While there was additional funding for PPP loans approved this week, it will likely be used up quickly. Do note that if you partake in any illegal gambling activities you remain ineligible for PPP loans.

Additionally, small pubs with gambling activity (very common here in Las Vegas) are eligible for PPP loans.

Can a Professional Gambler Apply for a PPP or EIDL Loan?

Tuesday, April 7th, 2020

The CARE Act added Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) for businesses to recover from the COVID-19 pandemic. A question many of our clients have asked is, “I’m a professional gambler. Can I apply for one of these loans?” The answer is no.

It’s not as if a professional gambler can gamble in most locations today (casinos are closed everywhere, though those residing in states with online gambling can partake), so professional gamblers are being impacted. The problem is a regulation adopted in 1996. From 13 CFR § 120.110 (What businesses are inelgible for SBA business loans?). 13 CFR § 120.110(g) states:

Businesses deriving more than one-third of gross annual revenue from legal gambling activities.

(All illegal activities are ineligible per 13 CFR § 120.110(h).)

The American Gaming Association wants this changed; it also prevents small casinos, such as those in South Dakota, from applying for these loans. But changing a federal regulation takes time. The change must be published in the Federal Register, comments must be taken, etc. It’s a near certainty that the COVID-19 emergency will be long past when the regulation is changed (and that assumes the SBA decides to make a change).

Is this fair? No. But it’s reality.

Online Gambling and Offshore Cryptocurrency Exchange Mailing Addresses for 2020

Thursday, February 27th, 2020

If you have one or more foreign financial accounts and you have $10,000 aggregate in those account(s) at any time during 2019, you must file the Report of Foreign Bank and Financial Accounts (the “FBAR”). This is Form 114 from FINCEN. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.) You also should consider filing an FBAR if you have $10,000 or more in a non-US Cryptocurrency Exchange.

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have an address for Bodog. If anyone has a current mailing address, please leave it in the comments or email me with it.

There remains debate over whether you need to file an FBAR for foreign cryptocurrency exchanges. At a presentation last year, an IRS employee stated that for the FBAR foreign cryptocurrency exchanges did not have to be reported. Unfortunately, the instructions for the FBAR do NOT state this. (See here, here, and here.) Thus, I strongly advise that foreign cryptocurrency exchanges continue to be reported on the FBAR. There is no penalty for overreporting; there are severe penalties for underreporting.

There is no dispute, though, about reporting foreign cryptocurrency exchanges on Form 8938: They must be reported on Form 8938 (if you have a Form 8938 filing requirement).

Note: This list is presented for informational purposes only. It is believed accurate as of February 27, 2020. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.