Archive for the ‘Gambling’ Category

The FBAR Is *Not* Due Tomorrow

Thursday, June 28th, 2018

Most tax-related deadlines are on the 15th of various months. Income tax returns for individuals are due on April 15th; the extended deadline is October 15th. But just to have fun with us there are some exceptions. One of these used to be the FBAR—the Report of Foreign Bank and Financial Accounts (Form 114).

The FBAR used to be due on June 30th, and that was a receipt deadline. Almost every other deadline in tax is a postmark deadline; for example, if you mail your tax return on April 15th and it takes a month to get to the IRS it’s still considered timely filed. That wasn’t the case for the FBAR. Luckily, Congress changed the law.

Beginning with 2016 FBARs (those filed last year) the deadline was changed to be concurrent with the tax deadline (April 15th). There’s an automatic six-month extension until October 15th. A few years ago the FBAR changed and now must be electronically filed. It now also does not have to be accepted by the deadline to be considered timely; it only has to be filed by the deadline.

Every year I get asked by a few clients, “Russ, why haven’t you reminded me about the FBAR deadline at month-end?” I’m happy to tell them that’s simply no longer the case.

Gambling with an Edge Podcast

Friday, June 22nd, 2018

I was the guest on this week’s Gambling with an Edge podcast. You can download the podcast here or on iTunes. The main point of discussion was the new tax law, but we covered some other topics such as bad tax states for gamblers, the Cincinnati Reds’ bobblehead case, and yesterday’s ruling in South Dakota v. Wayfair.

WSOP and Taxes: 2018 Update

Wednesday, May 30th, 2018

The 2018 World Series of Poker (WSOP) begins today here in Las Vegas. There are also several other tournament series that have either begun or will soon begin at the Venetian, Wynn/Encore, Aria, Planet Hollywood, Binion’s, Golden Nugget, and Orleans hotels. Very little has changed from 2017, but I am updating the post I did last year with some new information.

The WSOP has made one change that could impact some Americans: If you use a passport for identification, you must bring a second piece of identification (such as a state ID card). From the WSOP FAQs:

What Photo ID’s are acceptable?
The following forms of ID are acceptable:
US Passport [and Passport Card] (A second form, an unexpired governmental ID verifying physical address such as a valid Driver’s License will also be required with this first form of ID).

(A driver’s license or state ID by itself is sufficient.)

Good luck to those participating in this year’s WSOP! And now on to the meat of the post:

The tax environment has changed, so I’ve decided to do a thorough update of the tax situation for those attending the WSOP (and other summer poker tournament series here in Las Vegas). I’ll cover the basics of the tax situation, backing, foreign (non-US) backing, and non-American winners and what they will face with taxes. This post will be somewhat long, so I’m going to break this into sections that you can click on to open. The focus is on tournaments where tax paperwork is issued.

The Tax Basics

Backing by Americans of Americans

Backing: Non-Americans

Non-Americans and ITINs

[Note 1]: I recently became aware of a lawsuit in the Midwest where Caesars’ policy is being challenged. The lawsuit is scheduled for trial in late January 2018.

[Note 2]: It is likely the IRS would reject a Form 1040NR filed by Jon noting his extra withholding. The IRS won’t understand the issue given that there is no tax treaty issue (say, Jon is from Australia) and say, “Take it up with Caesars.” It’s a classic Catch-22.

Online Gambling and Offshore Cryptocurrency Exchange Addresses for 2018

Wednesday, January 24th, 2018

This list has been superseded by the 2019 list.

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. (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.

Note: This list is presented for informational purposes only. It is believed accurate as of January 24, 2018. 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.

GOP Tax Proposal Targets Professional Gamblers’ Losing Years

Thursday, November 2nd, 2017

The Joint Committee on Taxation released its new tax proposal, H.R. 1, today. Buried within it is Section 1305:

(a) IN GENERAL.—Section 165(d) is amended by adding at the end the following: ‘‘For purposes of the preceding sentence, the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering trans action.’’.

So what does this mean? The Joint Committee on Taxation (JCT) sent out an analysis:

Sec. 1305. Limitation on wagering losses.

Current law: Under current law, a taxpayer may claim an itemized deduction for losses from gambling, but only to the extent of gambling winnings. However, taxpayers may claim other deductions connected to gambling that are deductible regardless of gambling winnings.

Provision: Under the provision, all deductions for expenses incurred in carrying out wagering transactions (not just gambling losses) would be limited to the extent of wagering winnings. The provision would be effective for tax years beginning after 2017.

JCT estimate: According to JCT, the provision would increase revenues by $0.1 billion over 2018-2027.

The JCT analysis is wrong about the current law. Only professional gamblers can take business expenses beyond their gambling winnings to create an overall loss. This is the result of Mayo v Commissioner; Section 1305 would overrule the Mayo decision.

I will have more on this proposal, most likely over the weekend. There’s quite a bit for me to digest. For now, let me state that my first reading of the measure did not leave me feeling good about it.

Israel Tax Authority Targets Poker Professionals

Wednesday, November 1st, 2017

Some unknown bureaucrat working at the Israel Tax Authority was likely reading something about poker or perhaps watching the World Series of Poker on television when he asked himself, “I wonder if Israeli poker players are paying their income taxes?” He likely looked at poker websites such as Hendon Mob and did a search on ‘Israel.’ He discovered that there were Israeli poker professionals and even an Israel Poker Tour (held in Cyprus).

As an article in Globes notes, the Tax Authority wants its share. The current disputes include:

– Taxing poker as a business (at a rate of up to 50%) rather than as gambling (at 35%);
– Allowing business expenses, such as travel and tournament fees; and
– Allowing poker losses and ‘staking losses’ (where a player wins money but must give it to others) as an offset to income.

It appears that the Tax Authority has won that poker income will be taxed as a business, but has not allowed all business expenses and what I’m calling staking losses. Disputes are finding their way into Israel’s court system; it will likely be months to years before there’s a resolution of the issues.

That said, one thing is clear: With the Internet and publicity, it’s getting harder and harder to hide the fact that you’ve earned income. Sharon Fishman, the manager of criminal taxation department of Doron, Tikotzky, Kantor Gutman and Amit Gross law firm, is quoted in the Globes article:

An administrative decision was recently taken there to zero in on this segment of professional poker players. This is due mainly the accessibility of the information about them on the Internet, because there are now international websites that report who won international tournaments, who plays on the Internet, and who is traveling to overseas tournaments. They publish the names of the winners, where they come from, and how much money they earned, so the tax authorities suddenly have abundant evidence, and you can’t tell them that you weren’t there and didn’t win.

Can a Tunnel Bridge Agent be a Professional Gambler, Too?

Monday, October 2nd, 2017

The Tax Court looked at whether someone who worked full time as a Tunnel Bridge Agent could also be a professional gambler. There is a lot in the decision, including some things that I believe the Court gets wrong.

The opinion first describes the differences between being a professional gambler and an amateur gambler. If you are unaware of the differences in the tax treatment, this opinion is must-reading. Unfortunately, the opinion gets the definition of a professional gambler only half-right. “To be a professional gambler, the taxpayer must engage in gambling for profit,” is what the opinion states (citing Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987)). But the courts have held that you need to be gambling for your livelihood, a stricter standard. There are numerous amateur gamblers who do so for a profit (I am one of those), but I’m an amateur gambler. My livelihood comes from my tax practice, but I’m skilled (or lucky) enough to make money from poker.

In any case, today’s taxpayer, Mr. B, doesn’t even pass this test. His first problem is where he gambled and his recordkepping or, should I say, his lack of recordskeeping.

Boneparte gambled at horse racetracks and in casinos. At the casinos his preferred game was baccarat, but he also played other table games as well as slots. Sometimes he gambled alone, and sometimes he gambled with a friend. He gambled primarily in Atlantic City. He did not keep a contemporaneous written log of winnings and wagers.

If you’re in business, you are supposed to keep records. The IRS rules on gambling—and these date back to the 1970s—mandate a contemporaneous, written log. (Remember, those rules were written well before smartphones or any cellphone. Today, computer records would most likely be accepted.) But if you have no records, you’re going to have trouble substantiating that you’re a professional gambler. Yes, Mr. B had casino win-loss statements but (a) these are not guaranteed to be accurate (a point the Court missed in its opinion), and (b) professionals want to know what they’re succeeding in and failing in; the only way to do that is to keep your own records.

As an aside, it’s hard to be a professional gambler when you are playing games of pure chance with a house (casino) advantage. That’s why most professional gamblers play poker (where you’re playing against other players); a lesser number of professional gamblers partake in sports betting and “advantage” video poker (where there’s a small player advantage with perfect play). But I digress…

The Court then looked at the nine-factor test of whether an activity is engaged in for profit.

(1) [T]he manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation.

Mr. B. didn’t lose on all of the factors: Factor #4 (expectation of asset appreciation) was held not to apply. With the Court ruling that Mr. B. Isn’t a professional gambler, most of the rest of the opinion goes into calculation issues of his return and penalty calculations.

However, I want to point out an error the IRS made that I’ve seen in my practice. If a casino win-loss statement shows a net loss $14,887, and we know that the gambler had gross wins (before losses) of $18,000, his gross losses must be $32,887. That’s simple math. I once had to explain to an IRS Revenue Agent how this works; it took about a half-hour for him to grasp the concept. In this case, the IRS was holding this same idea that Mr. B’s gross loss was his total loss. The Court, though, understood basic math:

As explained above, two propositions are true: (1) the gains from wagering transactions for which there was gain total $18,000, and (2) the gains from wagering transactions for which there was a gain minus the losses from wagering transactions for which there was a loss equal -$14,887. It mathematically follows from these two propositions that the losses from wagering transactions for which there is a loss equal -$32,887 (i.e., $18,000 ! $32,887 = -$14,887). [Mr. B] is entitled to a section 165(d) deduction equal to this amount to the extent of gains from wagering transactions. This gain is $18,000. Therefore his section 165(d) deduction is $18,000.

Mr. B’s returns were self-prepared. He included his gambling on both a Schedule C and as Other Income. In almost all cases, you’re either a professional gambler or an amateur gambler (not both). The IRS assessed both the late filing penalty (Mr. B’s return was postmarked after the April deadline) and the accuracy-related penalty; both were sustained.

Mr. B gives a good example of someone who wanted to be a professional gambler because it would help him save on his taxes. Unfortunately for him, he neither treated his business professionally nor was he able to show the Tax Court that he was a professional gambler.

It’s One 1099 Per Person, Or the Most Stupid and Hilarious Thing I’ve Seen in Some Time

Friday, September 29th, 2017

One of my clients, Barri Brown (all names in this post are fictitious), was missing a 1099 issued by one of the two large Daily Fantasy Sports (DFS) companies. It didn’t show on her Wage & Income Transcript, so she called their accounting department and requested a copy. A few days later they emailed it to her. She forwarded it on to me and I entered it into her return.

And then I took a look at the pdf and saw that it was 18 pages long. I wondered what kind of attachments this company would send on a 1099? Perhaps a breakout of state tax issues (although that didn’t apply to my client). Or perhaps some internal accounting records detailing Ms. Brown’s profits and losses.

How about the 1099s for everyone this company serviced with the last name of Brown? The second page is that of Brett Brown, the third page is Daniel Brown, etc. At least only the last four digits of the social security numbers were shown (but both my client and I know the exact amount of Brett Brown’s DFS income from this site in 2016).

In one way, this is hilarious. Apparently it was easier for that clerk to email the 1099s for all the Browns to my client than to just send the specific 1099. (I have to wonder about how they create their 1099s, but that’s a question for another day.)

In another way, it’s stupid. Hasn’t this company heard of privacy concerns and laws? My client has every right to know her income, but absolutely no right to know Brett Brown’s income (unless Mr. Brown elects to tell one of us).

But my client asked a very good question. “That is HILARIOUS and absurd and maybe illegal?” I’m not an attorney, so I can’t state with certainty whether this was a violation of the law. The reality is that this was almost certainly a stupid error, and there wasn’t the intent to do something illegal.

(Tax professionals fall under the provisions of the Federal Trade Commission Act. If a tax professional were to deliberately do this, it definitely could be a violation of the FTC Act.)

Unfortunately, the data breach at Equifax and this act of stupidity reinforce my belief that businesses need reminders to treat data security very seriously. My client used an Employer Identification Number (EIN) with the DFS company; I strongly recommend that sole proprietors (like my client) do that whenever possible. A stolen EIN (for a sole proprietor) can’t be used to file a personal tax return.

Let me give a helpful hint to those issuing 1099s and sending them out: It’s one to a customer. Barri Brown doesn’t need Steven Brown’s 1099. Luckily for this company, my client is able to laugh this off (as am I). The problem is that if this happened to Ms. Brown, it likely happened to Mr. Nelson and others.

The 2017 Real Winners at the World Series of Poker (London Calling, Again)

Sunday, July 23rd, 2017

The main event of the World Series of Poker has completed: 7,221 ponied up $10,000 to enter. The final nine players began competing on Thursday; last night the winner was crowned. How much of his winnings does he get to keep? And why are four of the nine very, very happy that their court system considers poker to be a complete game of chance?

One note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis. Now, on to the winners.

Congratulations to Scott Blumstein of Morristown, New Jersey for winning poker’s biggest prize of $8,150,000. Mr. Blumstein came into the final table with the overwhelming chip lead and never relinquished it. Mr. Blumstein ended a long head-up battle when a deuce was the last community card and his Ace-deuce beat his opponent’s Ace-eight. A professional gambler, he’ll lose 47.11% of his winnings to federal and New Jersey tax ($3,839,429). Even though he had the largest winnings, he does not face the top tax burden among the nine (his is the second highest).

Dan Ott of Altoona, Pennsylvania (near Pittsburgh) finished in second place. Mr. Ott started the final table in fifth place, and worked his way into second place and a prize (before taxes of) $4,700,000. His state tax burden is the lowest among Americans (Pennsylvania’s state income tax is a flat 3.07%), but as a professional gambler he must also pay Altoona’s Earned Income Tax of 1.60%. Overall, Mr. Ott will pay an estimated $2,099,806 in tax (44.68%) to obtain after-tax winnings of $2,600,194. Indeed, Mr. Ott almost falls to fourth place based on after-tax results.

Finishing third and winning $3,500,000 was Benjamin Pollak. Mr. Pollak, originally from Paris, France, moved to London. Why would a Frenchman move from beautiful Paris to London? In a word, taxes. As a European Union resident, he could move to any other E.U. country and fall under their tax system. The US-United Kingdom Tax Treaty exempts gambling winnings from withholding. Additionally, poker winnings are completely tax-free in the United Kingdom (a court case a few years ago cemented this for now), so Mr. Pollak gets to enjoy all of his $3,500,000 of winnings.

But let’s assume that Mr. Pollak had remained living in Paris. On the positive side, the US-France Tax Treaty exempts gambling winnings from withholding. On the negative side, France is anything but a low-tax country. I cannot be certain of the taxes for 2017; the actual tax rates are voted in towards year-end so I’ve used the 2016 tax rates for my analysis. However, I doubt 2017 rates will vary significantly from last year. At an income of €152,260, the marginal tax rate is 45% (the highest in France). There’s also a surtax of 3% at an income of €250,000 or more (and this rises to 4% at €500,000 or more). Mr. Pollak would owe about 48% of his winnings in tax. No wonder London was calling for him!

You may be wondering why American professional poker players don’t hop a 747 and move to London. First, Americans owe tax on their worldwide income, so an American residing in London would still owe tax on his World Series of Poker winnings. Second, while Europeans currently can relocate to the United Kingdom per the European Union, Americans cannot.

(One thing that is very unclear today is how long Frenchmen will be able to lower their tax by moving to England. With the passage of Brexit last year sometime in the near future the United Kingdom won’t be part of the European Union; the tax benefits of residing in the United Kingdom for French poker players will vanish. But I digress….)

The individual who had the most fun at the final table was clearly John Hesp of Bridlington, England. Mr. Hesp, a grandfather of seven and the oldest competitor (he’s 64), is decidedly not a professional poker player. Indeed, his prior tournament experience was playing in £10 (about $13) tournaments at his local casino in Hull; here, he was competing in a $10,000 (about £7,695) tournament! Mr. Hesp was clearly having the time of his life; the $2,600,000 he won will make this trip to Las Vegas a great memory. Even better, he gets to keep all the money.

Antonie Saout of Morlaix, France finished fifth and won $2,000,000 before taxes. Mr. Saout also lives in London (in fact, he shares an apartment with Mr. Pollak) so he, too, benefits from the United Kingdom’s great treatment of poker players. His after-tax winnings are his pre-tax winnings of $2,000,000. Had Mr. Saout remained a resident of France he would have owed about 48% of his winnings to the France Tax Agency. This was the second time Mr. Saout made the final table of the WSOP main event: He finished in third place in 2009.

Bryan Piccioli of San Diego ended up in sixth place and won $1,675,000 before taxes. Mr. Piccioli is a professional poker player and faces the highest percentage tax burden among the final nine: an estimated $489,328 to federal tax and $201,695 to California income tax (a total tax burden of $791,023, or 47.23%). Based on after-tax winnings, Mr. Piccioli finished in eighth place.

Damian Salas of Buenos Aires, Argentina finished seventh. Mr. Salas is a former attorney who is now a professional poker player. He earned $1,425,000 for his efforts. Argentinians love gambling and gambling winnings are not subject to income tax in Argentina. (Casinos in Argentina do pay significant taxes.) However, the United States and Argentina do not have a tax treaty; thus, Mr. Salas will lose 30% of his winnings to the Internal Revenue Service.

In eighth place was Jack Sinclair of London; he received $1,200,000 in winnings. Like the others residing in the United Kingdom he gets to keep all of his winnings. In one sense Mr. Sinclair was the biggest winner despite finishing eighth. Based on after-tax winnings of $1,200,000 Mr. Sinclair finished sixth. It’s always nice when your after-tax income is the same as your pre-tax income.

Ben Lamb, a professional poker player from here in Las Vegas, finished in ninth place. This was Mr. Lamb’s second time finishing in the top nine of the main event (he finished third in 2011). Mr. Lamb loses an estimated $408,483 (40.85%) to federal income tax. As a resident of the Silver State Mr. Lamb doesn’t have to worry about state income tax on his winnings.

Here’s a table summarizing the tax bite:

Amount won at Final Table $26,250,000
Tax to IRS $6,390,860
Tax to New Jersey Division of Taxation $754,196
Tax to Franchise Tax Board (California) $201,695
Tax To Pennsylvania Department of Revenue $144,290
Tax to Altoona Earned Income Tax $75,200
Total Tax $7,566,241

That’s a total tax bite of 28.82%. That’s fairly low for the main event because four of the winners face no taxation at all.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner Before-Tax Prize After-Tax Prize
1. Scott Blumstein $8,150,000 $4,310,571
3. Benjamin Pollak $3,500,000 $3,500,000
2. Dan Ott $4,700,000 $2,600,194
4. John Hesp $2,600,000 $2,600,000
5. Antoine Saout $2,000,000 $2,000,000
8. Jack Sinclair $1,200,000 $1,200,000
7. Damian Salas $1,425,000 $997,500
6. Bryan Piccioli $1,675,000 $791,023
9. Ben Lamb $1,000,000 $597,517
Totals $26,250,000 $18,683,759

As noted previously, Bryan Piccioli finished in sixth place but based on after-tax winnings he ends up in eighth place. While taxes may be the price of civilization, the price in the United States is high.

This was an off-year for the IRS. The IRS’s total of $6,390,860 didn’t match the first place prize of $8,150,000. Still, it did exceed the first place winner’s after-tax prize of $4,310,571. That’s because we all know that the house (the IRS) always wins.

WSOP and Taxes: 2017 Update

Monday, May 22nd, 2017

The poker world is about to descend on Las Vegas for the World Series of Poker (WSOP) and a score of other tournament series. The tax environment has changed, so I’ve decided to do a thorough update of the tax situation. I’ll cover the basics of the tax situation, backing, foreign (non-US) backing, and non-American winners and what they will face with taxes. This post will be somewhat long, so I’m going to break this into sections that you can click on to open. The focus is on tournaments where tax paperwork is issued.

The Tax Basics

Backing by Americans of Americans

Backing: Non-Americans

Non-Americans and ITINs

[Note 1]: I recently became aware of a lawsuit in the Midwest where Caesars’ policy is being challenged. The lawsuit is scheduled for trial in late January 2018.

[Note 2]: It is likely the IRS would reject a Form 1040NR filed by Jon noting his extra withholding. The IRS won’t understand the issue given that there is no tax treaty issue (say, Jon is from Australia) and say, “Take it up with Caesars.” It’s a classic Catch-22.

[Note 3]: In prior years the WSOP has allowed winners to leave their money with the WSOP and obtain their winnings later. Anyone choosing this option should confirm with the WSOP that this can be done.