Stop gambling, Make Money!

There appears to be some common personality traits between gamblers, poker players and the stock, options, and day trader types, so the Geldpress team decided to do some coverage on poker to mix things up a bit.

The interesting thing about poker is that every player I have ever met and talked to claims to hate the game. Yet despite their hatred toward the game, they can still spend countless hours playing. Why do they hate the game? There are a myriad of reasons including suck outs, bad beats, river cards, other bad players, bad dealers, cracked aces, impatience, and many more. But even if those horrible cards and dealers don’t get you, and you manage to come out ahead, the IRS will certainly come knocking at your door to take what little you have left!

Let’s say you are fortunate enough to win a moderately sized poker tournament in the amount of $5,000. With the new IRS poker tournament rules, the house is required to issue a 1099-Misc to any tournament player who is paid out more then $600. Before you start thinking that the 1099 doesn’t matter, and that you can easily write off the win, consider this:

  • You can only write off poker or other gambling losses up to your total winnings, and not a penny more.
  • You can not carry over your losses from year to year.
  • You must itemize your deductions to qualify for the write off. For those apartment dwellers who were smart enough to avoid the housing bubble, you will likely not be itemizing, which means you will pay taxes on the full amount of any reported winnings, regardless of any losses you incur!
  • You can not easily hide behind the shroud of “Professional gambler status” with the IRS. To do so, you must prove to obtain the majority of your income from gambling, and you also can never show a loss in your business. It is the only business the IRS places such a restriction on.
  • Poker dealers expect tips, and the rule of thumb is 5-10% of wins from poker tournaments or bad beat jackpots. Your 1099 will show the FULL AMOUNT of the payout, regardless of how much you tip the dealer! The 1099 will also NOT subtract out any entry fees. How is that for double taxation!

Compare those rules to the IRS rules for the stock market:

  • The stock market is a long term positive sum game, so you are expected to WIN!
  • All stock transactions can and must be recorded to the IRS - WINS and LOSSES. You only pay tax on the net sum of the two, compared to gamblers
  • If you do incur losses, 100% of them are deductible, and can be carried over from year to year if you max out the IRS limit for yearly losses.
  • You DO NOT have to itemize to claim investment losses. They are recorded on the 1040 schedule D, and is utilized regardless of whether you itemize the rest of your taxes.
  • The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2007, the maximum capital gains rates are 5%, 15%, 25% or 28%.
  • Dividends from investments are taxed at only 15%, but is of course subject to change based on IRS rules.
  • It is much easier to convince the IRS of your professional trader status then it is for professional gambler status. Professional traders can deduct all legitimate expenses used for their trading business - computers, phone lines, investment newsletters and adviser fees, travel expenses (Investment expositions), etc. Note: Still a few hurdles to IRS trader status, but certainly less so then professional gambler status. IRS Publication 550 has the detailed special rules for traders in securities, starting on page 72.

And if that is not enough to convince you to STOP GAMBLING, and MAKE MONEY, consider the fact that there are plenty of hands off investment styles such as mutual funds and ETF index funds. For those wanting to try and out smart the morons of wall street (does “BUY BUY BUY” ring a bell?), I’d recommend a lot of homework (Ugh, I sound like Cramer!!) as you progress down your path to investment wealth. And for the poker players in the audience, the good news is that good poker players will easily pick up the skills to do well in the options market. But you will need to learn how options work first. So go check out the Geldpress bookstore and BUY BUY BUY!

Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor (Agora Series)
Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor (Agora Series) by Lee Lowell

Other Tax Artciles: