Here is what my friend (the poker impressario at one
of the largest casinos): thinks:
I've got a really nasty taste in my mouth about poker and taxes. First
the history.
In the early days of tournament poker (1980's or so) Binion's and The
Golden Nugget (Gran Prix) as well as Caesers Palace and Vegas World
(Stratosphere) all paid out cash. In the late 80's the IRS went to Binion's
and threatened to confiscate the prize pool if Binion's did not
WITHHOLD taxes. After some negotiations, Binion's agreed to issue
W-2Gs to winner in excess of $600.
It wouldn't cost Binion's anything and would let them continue with
business. So, no fight from the casino. In subsequent events, other
casinos followed Binion's precedent.
The only problem is, this agreement violates the IRS's own guidelines
for the issuance of W-2Gs. There are three specific conditions
mentioned in IRS code for the issuance of W-2Gs.
1) All slot wins in excess of $1199.
2) All keno wins in excess of $1500 plus the cost of the ticket.
3) Any cash win in excess of $599 when the payout is in excess of
300 to 1 AND they payout exceeds $599.
It's listing 3) that covers poker--or it should anyway. The third
listing was developed to cover pool payout for horse races and was
then extended to cover payouts for any risk/prize pool situation.
Poker tournaments are nothing more than a risk/prize pool. Certainly
the third condition is met by poker tournament pools.
But, the casinos are not about to challenge the IRS. The three
conditions listed above are only the times casinos are REQUIRED to
issue W-2Gs. A casino can issue one anytime they want to. And so,
as with most things, casinos are not about to rock the boat and piss
off the wrong guy.
As for your main question: should poker winnings be subject to taxes?
If you are claiming professional status, yes. It's your income and
should be taxed at the same rate I am taxed for dealing the game.
If you are not a professional, no. And as for how you tell the
difference, you got me on that one!