New Tax Law Takes Bite Out of Tournament WinningsLaw Will Require Casinos to Take 25 Percent of $5,000 or Moreby Bob Pajich | Published: Aug 31, 2007 | |
 
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Starting March 4, 2008, casinos and cardrooms are supposed to start withholding 25 percent of any poker tournament winnings of $5,000 or more. This will particularly affect the poker hobbyists who go deep in tournaments with buy-ins that range from $100 to $550, and of course those who make their living humping the tournament poker trail.
Language in the new tax code pointed to a tax court ruling that took place earlier this year. The ruling held that tournament poker is not a skillful competition and should be considered a gambling activity, at least for the purposes of taxation.
The law requires casinos and cardrooms to withhold and report the winnings from a player if it amounts to $5,000 or more in a tax year. The code does not address winnings from online poker sites or from casinos off U.S. soil.
Here's an example of how much money the government will be making off of poker tournaments after March 4, 2008. If the law was in effect earlier this month, the top seven finishers of the $500 event that took place Aug. 7, at the Legends of Poker would have paid a total of $40,221 in taxes.
The runner-up of this tournament, which attracted a healthy 460 entrants, would have taken home $27,972 after taxes ($37,295 before). The winner received $74,585. If the law was in place, that amount would've been $18,646 less.
The notice that was released to accounting firms this week follows:
Background. Under Code Sec. 3402(q)(3)(C)(i), payers must withhold 25% on proceeds of more than $5,000 from a sweepstakes, wagering pool, or lottery (other than a state-conducted lottery, covered by another withholding rule). Proceeds from a wager are determined by reducing the amount received by the amount of the wager. (Code Sec. 3402(q)(4)(A))
Facts. A poker tournament sponsor charges an entry fee and a buy-in fee for each participant. In exchange for paying the buy-in fee, a participant receives a set of poker chips with a nominal face value for use in the specific poker tournament. The sponsor pays amounts, which exceed a participant's fees by $5,000, to a certain number of tournament winner(s), out of a pool made up of all the participants' fees.
Poker tournament sponsors must withhold. Rev Proc 2007-57, which is effective for payments made on or after Mar. 4, 2008, says poker tournament sponsors (including casinos) paying amounts to winners in a manner substantially similar to the facts above, must under Code Sec. 3403(q) withhold and report on payments of more than $5,000 made to a winning payee in a tax year. They must furnish a copy of the information return to the IRS on or before Feb. 28 (Mar. 31 if filed electronically) of the calendar year following the calendar year in which the payment is made. Rev Proc 2007-57 cites legislative history for the proposition that the term "wagering pool" includes all pari-mutuel betting pools, including on- and off-track racing pools, and similar types of betting pools. It also cites a non-tax case (U.S. v. Berent, (CA 9 1975) 523 F.2d 1360, 1361), holding that in common usage "pool" means "a particular gambling practice, an arrangement whereby all bets constitute a common fund to be taken by the winner or winners."
The IRS said it won't assert any liability for additional tax or additions to tax for violations of any withholding obligation relating to amounts paid to winners of poker tournaments under Code Sec. 3402, as long as the poker tournament sponsor meets all of the requirements for information reporting under Code Sec. 3402(q) and its regs.
RIA observation: Earlier this year, the tax court held that tournament poker is a wagering activity for purposes of the Code Sec. 165(d) limit on gambling losses. See Federal Taxes Weekly Alert 03/01/2007.
8 Comments
adamp360
1 year ago
buuuuuullshit
joshuatree78
1 year ago
This is just stupid. If I play in a 10k buy in event and just barely make the money I will get something like 13k Then the casino with holds 25%, which is 3,250. Even though I made money in the tourny, I go home with 9,750 and a net loss of 250.
goldnsquid
1 year ago
Yet another example of why we need the FairTax to become law.
blitz100
1 year ago
Aren't casinos and card rooms already required to issue a 1099-MISC on any tournament winnings totaling $600 or more during a year?
What makes this law really stupid is that someone who wins $4900 earlier in the year then cashes for $500 not only won't receive the $500, but will also owe $850 or risk being arrested when he tries to leave. Am I misinterpreting this law?
brookbert
1 year ago
People are supposed to pay taxes on their winnings as ordinary income. The article makes it seem like this is a new tax. It is not a new tax. It is a withholding of tax, similar to your social security or payroll taxes, which your employer automatically sends to the government. Everyone who earns any money playing poker should report those earnings, but they don't. The government knows you don't, so they are making the casinos report it, and pay it, for you. If you have paid more than you owe through the withholding over the year, you will get a refund. This does not increase the tax, it merely enforces it.
for joshuatree78: under the ruling, there will only be a withholding on $5k of winnings. So, if you buy-in for $10k and walk away with $13k, there will be no withholding by the casino.
for blitz100: i believe the ruling will only apply winnings of $5k per event. So if you win $4900 earlier in the year, then cash for $500, there will be no withholding on either transaction. However, there will still be a 1099 and you are supposed to report the winnings as income.
pugfrog23
1 year ago
God, this is a joke. It should be out of your net winnings...YOUR NET winnings. Take into consideration the actual pay in. Or better yet have it just be 15 percent for all income.
harvester
1 year ago
Best part is the whole IRS is a joke and illegal on their face value. People win everyday against thie anti American treasonous organization. My advice is to get a fake ID and screw them for as much as possible, their days are numbered. The sad fact Canadians and UK players I have played with pay $0 in taxes, we are more like old school Russia here day by day....so sad what a waste.
ashantiavrilbaby
1 year ago
They're just mad that they're still losing money after the whole Hurricane Katrina and the Iraq thing.