#2008-3 © Copyright 2008, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

The Internal Revenue Service has accidentally created a real mess for winners of small tournaments, and the cardrooms that run the games. Operators now don’t know how, or even if, they are supposed to report players who win big, but less than $5,000.

The confusion was created by the IRS when it announced a new rule that went into effect on March 4, 2008. Card clubs, casinos and even charities either have to withhold 25% of the prizes of everyone who wins more than $5,000, or report those winners to the IRS on a Form W-2G.

The problem arises with tournaments where the prizes are less than $5,000.

There are two ways of reading the new rule. One is that by limiting the rule to prizes over $5,000, the IRS is saying that winners of smaller prizes don’t have to be reported. The other is that this is a special rule dealing with withholding, as well as reporting. So, cardrooms still have to sometimes report, but not withhold, smaller winners.

There is a general regulation that seems to require anyone who pays anyone else $600 in a year to file a Form 1099. Almost everyone, except businesses, ignores this rule. I get a 1099 in January from every gaming operator for whom I have done consulting work the previous year. But I never get 1099s from players I’ve worked with. (Just so the IRS knows: Yes, I do report that income on my tax returns.)

Although the 1099 rule says to keep track over the entire year, I don’t know of any cardroom that does that. It would be horrible to have to record every winning session – even just every winning tournament session – for every player, just in case any of them win $600 total in the year.

But some cardrooms do file 1099s when a player wins $600 or more in a single tournament.

There is an alternative to the 1099, the Form W-2G for “Certain Gambling Winnings.” It is required for anyone who wins $1,200 or more at bingo and slot machines; $1,500 at keno; $5,000 from a state lottery and now from poker tournaments; or at least 300 times the amount bet at a track.

Regular players know that gambling losses can be taken off their taxes, up to the amounts won. So, if you win $4,000 in a tournament, and that is reported to the IRS, you can take off $4,000 in losing bets that year. It probably makes no difference whether the form to report winnings is a 1099 or W-2G. But the W-2G is neater and easier, clearly telling the IRS that this is a gambling win and that therefore it can be offset with gambling losses. So, some cardrooms, at the request of their players, are filing W-2Gs and not 1099s when there is a tournament win of $600 to $5,000.

But some cardrooms always have felt that they do not have to file any report when a player wins at poker. There is some justification for this position. Thirty years ago, Congress rejected having casino table games included with lotteries and slot machines for tax withholding. The new rule covers only poker tournaments and only when players win at least $5,000. So they are still not reporting smaller wins.

The IRS created this mess by declaring that an Act of Congress did not mean what everyone thought it has meant for 40 years. If the IRS had done what it is supposed to do – hold hearings and get public comment when it proposes a new regulation – someone would have told them that sometimes players win tournaments, but less than $5,000.

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© Copyright 2008. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.