[GUEST POST:  One of my readers, Brian Woods, happens to be a CPA, so how timely is this post for all us Americans?  And he also had a blog on my blog links]

When Doublefly and I originally traded e-mails about writing one of his “guest” entries, I originally thought I would write about transitioning away from NLHE cash games and into mixed games.  I am primarily a mass-tabling PL/NL O8 player at the lower levels (mostly $50-$200).  My transition away from NLHE evolved for one primary reason: I am arguably the worst on-line cash NLHE player on the interwebz.  That crazy two card game most of you play is both mind-numbingly boring and impossible for me to beat.  So I moved to PLO initially and ultimately to PL/NL O8 where I grind out paltry winnings on a monthly basis; though I am owed A LOT of money by Mr. David Sklansky.   

However, after thinking about it I decided to go in another direction entirely.  You see in the real world I am a CPA.  I own my own practice and we are primarily a tax shop for individuals and small businesses.  I handle the tax work for a handful of poker players in addition to other clients.  Over and over on the forums I see horrible advice and misconceptions about taxes (US) as it relates to poker winnings (poker and gambling winnings are used interchangeably in this post).  Hopefully this blog post will dispel some of those myths while not putting you to sleep. 

So without further ado here are the Top 5 misconceptions about taxes on poker winnings:

1. I broke even (lost) for the year so I don’t need to report my winnings-This is probably the most commonly repeated error I hear.  The reality is that if you have one session where you won $1 you have winnings and you need to report.   A win can come on-line, in a live cardroom, a home game or even an illegal private club.
2. I didn’t cash out my on-line winnings so I don’t need to report-Uhhhhhhh yes you do.  In the US we use the “constructive receipt” doctrine to determine if an item of income is includible.  Simply put if the funds (winnings) are received by a taxpayer without substantial limitations on access to those funds, constructive receipt has occurred and the winnings are taxable income.  Thus, if you deposit $215 one Sunday afternoon in December and ship the Sunday Million that evening for $250k that $250k is now taxable income whether you cash it all out or wait until the following January.
3. The IRS doesn’t even know I won-Yes we live in a country that requires voluntary compliance with it’s taxing system.  Having said that the IRS can be a bit of a pain in the rear if you underreport your income.  Here are a few people the IRS had to give a little spanking to:

4. I can just go to the track and collect losing tickets-Well, of course you can do this.  I mean what is a little fraud between you and the IRS?
5. On-line poker is illegal so I can’t pay taxes on an illegal enterprises-Well first, smarter people than I still conclude that on-line poker is not federally illegal (I realize it is in certain states).  But even if it were illegal you would still be required to report that income and pay taxes despite the illegality of the income source!

Once these myths are wiped from your brain your next question will likely be “OK now I understand those issues but how exactly do I fill out these forms?”  Well there is one very important question to answer when determining how to present your return.

Continued next week...