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Over 145,000 online gambling accounts have been opened by consumers in New Jersey since its inception in late November.
With the 2013 tax year now closed, it’s not too early to think about the tax implications for playing online in New Jersey.
Today begins a series of posts on that topic, with the first installment covering the federal tax consequences for U.S. resident players using NJ iGaming accounts.
All gambling winnings are taxable under the Internal Revenue Code.
Winnings from playing online in New Jersey for U.S. residents are no different than from playing online in Nevada or Delaware, or from playing in brick and mortar casinos throughout the United States.
Many taxpayers mistakenly believe that gambling winnings are taxable only if the casino issues a Form W-2G.
The Internal Revenue Service requires players to maintain an accurate diary or similar record of all gambling winnings and losses.
A diary should contain:
The date and type of the specific wager or wagering activity.
The name and address or location of the gambling establishment.
The names of other persons present at the gaming establishment.
The amount(s) won or lost.
From my experience, very few players maintain this information. And most—but not all—get away with it, because the IRS can’t examine everyone’s tax return with gambling losses.
Players can’t assume that casinos will hand over upon request sufficiently detailed records of play on an online account for tax purposes.
While regulations require iGaming sites to maintain certain records of online play, it is not their responsibility to maintain separate diaries on behalf of all players that will meet IRS standards.
Players are required to separately total all gambling winning sessions and losing sessions.
Unfortunately, neither the tax code nor the IRS defines a session for poker play. In one case (LaPlante v. Commissioner, T.C. Memo 2009-226), the U.S. Tax Court inferred a taxpayer may net all slot winnings and losses from a single day of play at one casino as one gambling session.
The idea is that continuous play of one type of game may be considered a single session.
Applying the logic to online play, one poker tournament may be considered a single session, and continuous online poker cash game play may also be considered a single session.
Because there are different poker cash game formats, of course, it’s possible the IRS would require separate sessions for each type of game played.
Considering there is no direct legal authority on this issue, one prudent approach could be to maintain at a minimum all of the information listed by the IRS for a diary, supplemented with other records.
Online gambling winnings are taxable when they are credited to the player’s online account, not when the winnings are actually withdrawn. A doctrine in the tax law called constructive receipt implies that because one could have withdrawn the winnings from the online account, it is taxable income at that point.
Gambling losses are deductible only to the extent of gambling winnings.
Amateur gamblers report winnings at “other income” on line 21 of Form 1040, and deduct losses as an “other miscellaneous deduction” deduction on Schedule A.
Professional gamblers report winnings and losses on Schedule C.
The professional versus amateur gambler status for tax purposes is a facts and circumstances determination. The U.S. Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23 (1987) established the standard:
[I]f one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business . . . .
Professional gamblers may deduct ordinary and necessary business expenses against gambling income. One example of a business expense for an online professional gambler is the home office deduction. There are caveats to this deduction; see IRS Publication 587 for more information.
Next time we will discuss New Jersey income tax consequences for online players in New Jersey.
Disclaimer: Nothing contained in this article is specific legal advice, as each person’s situation is different. Contact a tax professional to discuss particular facts and circumstances.
IRS Circular 230 Notice: This article is not intended to be used, and it cannot be used by any taxpayer, for the purpose of avoiding federal tax penalties that may be imposed on a taxpayer.