Living in the NYC metropolitan area, I feel extremely fortunate to have survived Hurricane Sandy without losing power or sustaining flood damage. Thoughts and prayers to those less fortunate.
Stuck indoors all day yesterday, I watched the 2012 World Series of Poker Main Event final table reduce from nine to three. Play resumes tonight at 9:00 PM ET on ESPN (on a fifteen minute taping delay) until a champion wins the coveted bracelet. The winner takes home (before taxes) $8,531,853.
The current chip leader, Greg Merson, is a twenty-four year old American from Laurel, MD. According to this article in the Washington Post, Merson’s most recent tax filing stated he is an “internet probability specialist.” The article goes on to describe Merson’s ups and downs as he emerged in the poker world.
I’ve discussed on several occasions that a poker player reports gambling winnings as a professional or amateur gambler. Does filing instead as an “internet probability specialist” raise any issues? Maybe.
Merson began playing poker online while in high school. At 19 years old, he dropped out of college to play poker online full time. After “Black Friday” effectively eliminated the online poker market in the U.S. in April 2011, he moved to Toronto to continue playing online.
Playing live at this year’s World Series of Poker has already paid off big time for Merson. He won $1.1 million and the gold bracelet in the Six Max No-Limit Hold’Em Event in July, and stands to win at least $3,799,073 in the Main Event.
From the little I’ve read, it seems that Merson played minimal to no live poker prior to 2012. Let’s assume he in fact played no live poker prior to 2012. In that case, “internet probability specialist” is merely a euphemism for professional gambler. All of his gambling winnings and losses as an “internet probability specialist” would be reportable on Schedule C and he could deduct ordinary and necessary business expenses associated with the online poker play.
More interestingly, what if Merson also had live poker winnings and losses during a tax year for which he filed as an “internet probability specialist”? Could an “internet probability specialist” report online poker winnings as a professional and separately report live poker winnings as an amateur on the same return? Or must the live and online winnings be combined?
Because there is no case law or statutory authority to my knowledge that supports a bifurcation of gambling winnings between live and online play, I believe in that case filing as an “internet probability specialist” would be inappropriate.
The Internal Revenue Code does not distinguish between types of gambling for tax purposes. Whether a taxpayer’s winnings are from horse racing, live poker, online poker, etc., all of the gambling winnings are combined together and thus taxable either as a professional or amateur. There is no case law to support the position of a taxpayer claiming to be a “professional blackjack player” but also an amateur poker player at the same time. If the taxpayer is a professional of any type of gambling, then all the gambling should be considered part of the profession.
Of course, if Merson filed as an “internet probability specialist” and combined all his gambling winnings (live and online) on Schedule C anyway, then the tax law would seem to be applied correctly. Instead it’s just a labeling issue.
A final question to consider is whether one who files as an “internet probability specialist” is more likely to trigger an IRS examination. High income taxpayers are already at a high risk of audit, so I suppose not. Lower to moderate income taxpayers, however, may be asking for an examination by using an unfamiliar term for their profession. Then again, “professional gambler” is unfamiliar to many at the IRS anyway, so I’m not so sure the difference would be beyond marginal.
Good luck to the remaining three in tonight’s conclusion of the Main Event!
(Hat tip to @PokerScar for sharing the piece in the Washington Post.)