Archive for the ‘Gambling’ Category

Taxes and the WSOP: 2016 Update

Monday, May 16th, 2016

I’ll be heading to the Rio Hotel and Casino tomorrow for three days of continuing education. In a little over two weeks, the poker world will be descending on the Rio for the annual World Series of Poker. (I’m probably one of the few individuals who is in both groups.) The 2016 WSOP consists of 68 “bracelet” events culminating in the championship event that begins on July 9th. There are also daily tournaments, satellite events, and cash games at the Rio. Other Las Vegas hotels run poker tournaments, so there are tournaments for almost any size of buy-in available.

I’ve been writing about the tax impacts of the WSOP for years. The first post, back in 2007, noted that the Rio refuses to follow the rules regarding issuing W-2Gs when a poker player presents a correctly completed Form 5754. In 2011 I looked at staking and the WSOP. I presented “updates” in 2014 and 2015 (though essentially nothing has changed).

And that’s still the case today. The Rio won’t issue multiple W-2Gs (though they’re getting closer to admitting the real reason: cost) and the IRS hasn’t come after them (yet). The onus remains on the player to issue required paperwork and withhold taxes when required when the player has backers. (See the 2011 and 2015 updates.)

I have received several inquiries from non-Americans who plan on playing at the WSOP regarding withholding of US taxes and if there’s any means of avoiding this. As noted in IRS Publication 515, withholding is required on gambling winnings (for poker tournaments, of $5,000 or more net) except for residents of these countries:

Tax treaties. Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.

Gambling income of residents of Malta is taxed at 10%.

If you’re from one of these countries, you should not have tax withheld from your winnings. My understanding is the Rio is authorized to issue Individual Taxpayer Identification Numbers (ITINs) to winners. (If you already have an ITIN, make sure you bring that number with you.) You may still owe tax to your home country for those gambling winnings; be aware that the IRS does share information with other countries’ tax agencies.

But what if you’re from a country that does not have a tax treaty with the US? Suppose you’re from Portugal, and you play in a WSOP event and are lucky enough to cash. Let’s say your net win is $100,000. Will you get the full $100,000 or not?

The Rio is required to withhold 30% of your net win, so you will receive $70,000 in my hypothetical. You will also receive paperwork showing the withholding (IRS Form 1042-S). If you owe income tax to Portugal on your gambling winnings, you should be able to claim a tax credit for the double taxation.


I’ve been writing about this for nearly a decade and almost nothing has changed. Eventually the WSOP will be called out by the IRS for their violation of the rules on issuance of W-2Gs (and 1042-S’s). It doesn’t look like that will happen in 2016, though.

1500 Full Tilt Remission Petitions Denied by Department of Justice

Sunday, May 8th, 2016

Most (but not all) of the remission payments for balances on Full Tilt Poker have been resolved. However, a notice appeared on Friday on www.fulltiltpokerclaims.com:

INFORMATION REGARDING DENIED PETITIONS

GCG has been informed that the Department of Justice Asset Forfeiture and Money Laundering Section has denied approximately 1,500 Petitions. Petitioners flagged for denial have been notified via email. Please be sure to check your email account’s spam or junk folder to ensure the message was not filtered. Denied petitioners have ten days to appeal the decision.

Impacted individuals have until Monday, May 16th to file appeals.

HatTip: Kevmath

Online Gambling Addresses Updated for 2016

Tuesday, March 8th, 2016

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year.

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.

There is one major change for 2015. 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 addresses for Bodog or Bovada. If anyone has a current mailing address, please leave it in the comments or email me with it.

Note: This list is presented for informational purposes only. It is believed accurate as of March 8, 2016. 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.

If anyone has additions or corrections to the list feel free to email them to me.

North Carolina Added to Bad States for Gamblers

Saturday, February 13th, 2016

North Carolina State Seal

North Carolina changed its tax law over a year ago. While I have professional gambling clients in North Carolina, I do not currently have amateur gambling clients. It’s likely I won’t be getting many of those, as North Carolina legislators have made the Tar Heel State a bad state for gamblers.

North Carolina eliminated many itemized deductions for the 2014 tax year while increasing the standard deduction. Overall, this simplification is likely a good thing for most residents. Gamblers, though, are severely penalized. There’s no longer a deduction for gambling losses, so an amateur gambler residing in North Carolina who has $100,000 of wins and $100,000 of losses owes tax on the $100,000 of wins.

So here is my current list of bad states for gamblers:

Connecticut [1]
Hawaii [2]
Illinois [1]
Indiana [1]
Kansas [1]
Massachusetts [1]
Michigan [1]
Minnesota [3]
Mississippi [4]
New York [5]
North Carolina [1]
Ohio [1]
Rhode Island [1]
Washington [6]
West Virginia [1]
Wisconsin [1]

NOTES:

1. CT, IL, IN, KS, MA, MI, NC, OH, RI, WV, and WI do not allow gambling losses as an itemized deduction. These states’ income taxes are written so that taxpayers pay based (generally) on their federal Adjusted Gross Income (AGI). AGI includes gambling winnings but does not include gambling losses. Thus, a taxpayer who has (say) $100,000 of gambling winnings and $100,000 of gambling losses will owe state income tax on the phantom gambling winnings. (Michigan does exempt the first $300 of gambling winnings from state income tax.)

2. Hawaii has an excise tax (the General Excise and Use Tax) that’s thought of as a sales tax. It is, but it is also a tax on various professions. A professional gambler is subject to this 4% tax (an amateur gambler is not).

3. Minnesota’s state Alternative Minimum Tax (AMT) negatively impacts amateur gamblers. Because of the design of the Minnesota AMT, amateur gamblers with significant losses effectively cannot deduct those losses.

4. Mississippi only allows Mississippi gambling losses as an itemized deduction.

5. New York has a limitation on itemized deductions. If your AGI is over $500,000, you lose 50% of your itemized deductions (including gambling losses). You begin to lose itemized deductions at an AGI of $100,000.

6. Washington state has no state income tax. However, the state does have a Business & Occupations Tax (B&O Tax). The B&O Tax has not been applied toward professional gamblers, but my reading of the law says that it could be at any time.

Can a Resident of a Non-Tax Treaty Country (With Respect to Gambling) Get His Withheld Funds Back?

Tuesday, February 9th, 2016

Today, I received an inquiry from a citizen of New Zealand (he is not a US citizen or permanent resident). He had done well in a poker tournament here in the United States–well enough to have had 30% of his net winnings withheld. Non-US citizens who are not from a country with a Tax Treaty with the US where gambling income is exempted are subject to 30% withholding on gambling winnings. The gentleman had gambling losses in the US that exceeded his win. He wanted to know if I could file a Form 1040NR for him so he could get his withheld funds returned to him.

The problem is that except for Canadians and residents from tax treaty countries, there is no way to get that withholding back. Canadians are allowed to file a Form 1040NR and claim gambling losses up to the amount of wins, and get a refund. New Zealanders are not.

But he produced an email he had sent to another accounting firm along with their response. He asked the same question he asked me, with the same facts, and was told by that firm he could get a refund. He also referred me to an Internet article where someone said it was possible.

Well, the IRS was wrongly giving refunds a few years ago but they figured out there was a problem. The IRS redesigned Form 1040NR a couple of years ago; line 11 of Schedule NEC now states,

Gambling Winnings—Residents of countries other than Canada. Note: Losses not allowed.

I know the law in this area, and my correspondent is out of luck. He cannot legally get back his withheld funds. (If he is a professional gambler and has to pay tax to New Zealand on his winnings, he likely can get a tax credit on his New Zealand tax return to prevent double taxation.)

What bothers me isn’t the incorrect information on the Internet (I’ve come to expect that) but that my correspondent communicated with a supposedly respected accounting firm that should have known the right answer but either didn’t know or didn’t care to find out. I don’t know tax law well with respect to, say, the banking industry. Of course, if a bank were to approach me about doing their tax returns I’d decline the engagement and refer them to someone who does know that industry. My mother taught me that if you don’t know the answer to a question, saying “I don’t know but I’ll find out” is a great answer, and it’s one I use today. I hope that firm tries that answer out in the future. Their Errors & Omissions insurance carrier will appreciate it.

A Tale of Three States

Wednesday, February 3rd, 2016

Hawaii, Indiana, and Mississippi are three states where daily fantasy sports (DFS) is being debated. The three states are representative of what is likely to occur in every state.

Last week, Hawaii Attorney General Doug Chin issued an advisory opinion that DFS was gambling under Hawaii law.

Gambling generally occurs under Hawaii law when a person stakes or risks something of value upon a game of chance or upon any future contingent event not under the person’s control…The technology may have changed, but the vice has not.

On Tuesday, Honolulu (Oahu County) Prosecutor Keith Kaneshiro sent letters to DFS companies FanDuel and DraftKings ordering them to cease and desist offering DFS to Honolulu residents:

Gambling is illegal in Hawaii, and on January 27, 2016, the state Attorney General issued a formal advisory opinion confirming what I have long believed: That daily fantasy sports contests are a form of gambling and violate Hawaii statutes.

It appears DraftKings will leave Hawaii.

Meanwhile, the Mississippi Attorney General also issued an opinion that DFS is illegal in the state. The opinion notes that DFS would be illegal both in a casino (there are casinos in Mississippi) and outside of a casino. Neither DraftKings nor FanDuel has left the Magnolia State.

Today, the Indiana State Senate sent legislation to the Indiana House that would explicitly legalize and regulate DFS. It is unclear whether or not the bill will eventually make it into law.


The wild cards that could both negatively or positively impact DFS are:

  • Will the current federal investigations of DFS in Florida lead to prosecutions?
  • Will New Jersey win the en banc appeal of New Jersey’s legalization of sports betting (the lower court and the Court of Appeals ruled that New Jersey was barred by the Professional and Amateur Sports Protection Act (PASPA))?  A loss by New Jersey could make DFS illegal nationally; one interpretation of PASPA is that it makes all sports betting, including indirect betting such as DFS, illegal (except for the states specifically exempted within the law).  A win by New Jersey might overturn PASPA.
  • Will the lawsuits and appeals filed by DFS companies in New York and Illinois succeed in anything but delaying DFS exits from these states?
  • Will the payment processors leave DFS making the industry financially unable to continue?
  • Will the IRS rule that DFS is or isn’t gambling?
  • Will Congress act on gambling in any manner?
  • Will an anti-gambling candidate become the next President of the United States?

A lot will happen over the next two to three months. Because it’s Tax Season, I won’t be following this as closely as I have been over the last couple of months. A great resource on DFS is the Legal Sports Report.

An observer might ask, what does this all mean? I believe that we will see a dichotomy within the states on how they treat DFS. I believe that about 20 states will explicitly ban DFS, another 20 states will legalize and regulate DFS, while a few states will ignore DFS and let it continue in its current unregulated state. But the wild cards noted above could drive the DFS industry under or make it wildly successful.

Fail, Caesar! An Update

Thursday, January 21st, 2016

It’s been just over a year since Caesars Entertainment Operating Company (CEOC) declared bankruptcy. If Caesars Management was hoping that the court-appointed examiner would be giving them good news, and that the company would be coming out of bankruptcy unscathed, well, the news of the day is anything but.

Yesterday’s Wall Street Journal noted that a reorganization is not a given. Judge Benjamin Goldgar noted,

It doesn’t have to end with a confirmed plan…A trustee could be appointed, the case could be dismissed or, my favorite, the case could be converted to chapter 7 [liquidation], which would just be a hoot, wouldn’t it?

It’s likely the temperature in Caesars’ boardroom dropped ten degrees when they heard about that. As to why the judge made the remark, it turns out that Caesars doesn’t want the examiner’s report made public. Now why is that, as examiner’s reports (in a bankruptcy) are normally made public? Could it be that there’s damaging information in the report?

If we are to believe a report in the New York Post that’s exactly why. “Court-appointed probe will slam Caesars for fraud,” screams the headline. The first two paragraphs tell the story:

Caesars Entertainment’s court-appointed examiner has told company officials and creditors’ lawyers he believes the company acted improperly when it transferred assets away from the hobbled casino prior to putting it into Chapter 11, The Post has learned.

A report by the examiner, expected to be released next month, is likely to conclude there was a degree of civil fraud connected to the transfer, three sources with direct knowledge of the talks said.

Ouch.

As to what this means, quite a bit, and none of it is good for Caesars’ plan to get out of bankruptcy:

  • The transfers made just before the bankruptcy (allegedly moving Caesars’ best assets out of CEOC prior to the bankruptcy) could be undone, dragging more of Caesars into bankruptcy;
  • There could be personal liability for members of the Board of Directors of Caesars; and
  • Asset sales and a very different exit for Caesars from bankruptcy would become far more likely.

For my poker-playing readers, it’s still unlikely that this will have a direct impact on this year’s World Series of Poker. It’s in everyone’s interest that the WSOP operate as planned because it’s profitable. That said, I would not be surprised to find assets such as the WSOP owned by someone besides Caesars by the end of the year.

Texas Attorney General: DFS Illegal in Texas

Tuesday, January 19th, 2016

Texas’s Attorney General, Ken Paxton, issued an opinion today that says that daily fantasy sports (DFS) is illegal under Texas law. The crux of Mr. Paxton’s argument is,

Under section 47.02 of the Penal Code, a person commits an offense if he or she makes a bet on the partial or final result of a game or contest or on the performance of a participant in a game or contest. Because the outcome of games in daily fantasy sports leagues depends partially on chance, an individual’s payment of a fee to participate in such activities is a bet. Accordingly, a court would likely determine that participation in daily fantasy sports leagues is illegal gambling ‘under section 47.02 of the Penal Code.

Texas is one of several states where any element of chance is enough to make something gambling.

The reactions were predictable. DraftKings and FanDuel stated that Mr. Paxton got the law wrong. “The Attorney General’s prediction is predicated on a fundamental misunderstanding of DFS. We intend to continue to operate openly and transparently in Texas, so that the millions of Texans who are fantasy sports fans can continue to enjoy the contests they love.” FanDuel’s response was similar.

Unfortunately, I suspect that Attorney General Paxton got this right. Raffi Melkonian, an appellate lawyer in Houston who specializes in Fifth Circuit and Texas appellate practice, stated (via Twitter):

I trust his legal view far more than what has been stated by DraftKings and FanDuel.

Of course, none of this should have been a surprise to anyone. As I said almost two years ago,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element.

Another state where DFS is of dubious legality is Florida. An Assistant Attorney General in Vermont, John Treadwell, stated that “Daily fantasy sports violate Vermont’s gambling laws.” Adding in Illinois and New York and the picture of DFS in the US is mostly cloudy with a chance of rain.

Are Tips (Gratuities) at the Poker Table Deductible?

Monday, December 21st, 2015

You win a poker tournament, and the floorperson asks you, “Do you want to leave anything for the dealers?” That’s a tip (or gratuity). I was recently asked, “Is that tax deductible? And what about when you’re playing a cash game; is the dollar you tip the dealer deductible?”

The Tax Code states that those in business can take deductions of their business expenses. That IRC § 162:

(a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….

The Tax Court has looked at this many times; for example, in Lychuk v. Commissioner (116 T.C. No. 27),

The Treasury regulations specify that ordinary and necessary business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs., such as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, sec. 1.162-7(a), Income Tax Regs. The Supreme Court has explained that a cash method taxpayer such as ACC may deduct an expenditure under section 162(a) if the expenditure is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) paid during the taxable year, and (5) made to carry on a trade or business…The Supreme Court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business…and that an ordinary expense is an expense that is “normal, usual, or customary” in the type of business involved, [internal citations omitted]

So let’s look at tipping when you win a poker tournament. First, it’s definitely an ordinary expense. Tipping is part of the culture of gambling and poker tournaments; it’s expected that winners will tip (especially when nothing is taken from the prize pool specifically for dealers). As long as the tip is reasonable, it’s clear that a professional poker player can deduct the tip as a business expense.

However, that’s not the case for amateur gamblers. Only those who are in the business of gambling can take business deductions. Thus, an amateur gambler cannot deduct his gratuities.

A secondary question arose: Does a player’s net win for W-2G purposes subtract any gratuities left? The answer to this is clear: No. A gratuity is not required, and only professionals are allowed to deduct gratuities. Thus, a W-2G simply takes a player’s gross win (what he cashed for) and subtracts his entry fee to determine the amount noted on the W-2G.

Now, what about cash games? It’s customary when winning a hand of poker to take a dollar out of the pot and give it to the dealer (as a tip). The same rules apply for cash games as tournaments. For professionals, gratuities are deductible; for amateurs, they are not. Technically, an amateur player needs to add back any gratuities given for his net win or loss. However, from a practical standpoint the custom (and it is just that, a custom) of tipping out of the pot makes it effectively already included in a player’s net win or loss for the session. Few (if any) players will calculate the amount of tips in a session and adjust their session results accordingly. From a practical standpoint, tips in cash games are already included in a player’s sessions results. This also means that you can’t separately deduct gratuities in cash games because you’ve already included them in your sessions results.

NY Judge Rules Against DFS Sites

Friday, December 11th, 2015

New York Judge Manuel Mendez granted the New York State Attorney General a preliminary injunction that bans DraftKings and FanDuel from operating in New York. Both sites will appeal, but for now daily fantasy sports (DFS) is gone from the Empire State.

As for legislative solutions, there’s an additional issue raised by attorney Daniel Wallach this morning: The Professional and Amateur Sports Protection Act of 1992. This act banned traditional sports betting in all but four states. Mr. Wallach believes that the law could be read to ban DFS, too:

This decision shouldn’t be a surprise, and I expect it to be upheld on appeal. (Note that I am not an attorney, so please don’t take what I write as legal advice.) As I wrote back in mid-November, I expect more states to ban DFS while some will move to explicitly allow it (by regulating it). Remember that the first instinct of any regulator is to ban anything that’s new. With DFS not only is that an issue, there’s also the dubious legality of it.

UPDATE: DraftKings and FanDuel filed appeals. Both sites received temporary stays against the original injunction until January 4th.