FiliusBruce
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December 29th, 2019 at 4:52:32 PM permalink
Based on the sales of so many gambling books and products, I’m confident there are many more non-professional gamblers out there than professional ones. (By professional gambler, I mean people who get to file their taxes as a “professional gambler”, fitting the narrow definition provided by the IRS.)

In this large pool of non-professional gamblers, some of us are interested in gambling with an edge. That is, we don’t play games where the casino has the edge. We only like to play games where, considering the return of the game itself and adding the casino benefits, we’d get over 100% of our wager back, on average.

But with the new federal tax law (formally known as Tax Cuts and Jobs Act of 2017) in effect for 2018 and later, gambling with an edge has become quite different for non-professionals. It’s now much harder to deduct gambling losses due to the increased standard deduction and a new cap on the amount of state, local, and property taxes that could be deducted. This has changed everything!

(Before we start, let me emphasize that this is not tax advice. It’s merely gambling-related thoughts from a humble non-professional gambler who decided to crunch the numbers and was surprised by the results.)

Let’s say you are living in Southern California. You are married with no children, you have a day job, and you like to take occasional trips to Las Vegas to gamble. You only gamble when you have an edge. You only play the best video poker in town, which according to vpFREE2, is Full Pay Deuces Wild. The highest denomination in Las Vegas is $1.25 a hand, returning 100.76%. Let’s also say you play the game perfectly, with no strategy mistakes. You’d make 0.95¢ a hand. Right?

No! It's probably not a good idea to play this game. You’d lose money.

This is because the federal and state governments would like a share of your win, but want nothing to do with your losses. (After all, they think of gambling as a vice. Why would they want to subsidize it?) In order to understand this, we need to understand your taxes better.

Let's assume you don’t have any other income other than your salary and your spouse’s salary, which add up to $130,000 a year. Let's say you file your taxes jointly, and the only income taxes you pay are California state taxes and federal taxes. For the sake of simplicity, I'll assume you have no adjustments to income, tax credits, AMT, etc. Of course your own situation could be very different, but unless you give thousands of dollars to charity each year, have large medical costs, or have already won and lost a lot of money to gambling this year, your situation could be quite similar to the example I'm discussing here. Even if have those extraordinary deductions, a lot of what I’m discussing below would probably apply to you, although with a few small differences.

Let’s quickly go over your California taxes. Using California's published tax rates, you’d get a personal exemption of $244 and a standard deduction of $9074, making your taxable income $120,682. Your California tax would be $5560, and you’d have a marginal tax rate of 9.3%. (2020 numbers would be very similar, with some slight adjustment for inflation.)

Remember this marginal tax rate. It’s very important for your gambling decisions. It means that for every dollar your income goes up, California wants 9.3¢ of it in taxes.

Your federal taxes are next. The federal tax law has changed a lot for 2018 and later. There are no longer any personal exemptions, but the new federal law gives you a standard deduction of $24,400 for 2019, much larger than previous years.

In our example, it would be better to take the standard deduction, since itemizing won’t save you as much. You’d only be able to deduct your California tax of $5560 if you itemize. (Even if you pay much more in state and local taxes, the new federal tax law caps the deduction for local taxes at $10,000). According to IRS's 2019 numbers, your federal taxable income would be $130,000 - $24,400 = $105,600, your federal tax would be $14,949, and you’d have a marginal tax rate of 22%. Once again, remember that 22% number. It means that for every dollar your income goes up, the IRS wants 22¢ of that in taxes.

Now let’s get back to gambling. It’s your first trip to Las Vegas in the year. You sit down at your favorite Full Pay Deuces Wild machine, and you play one hand. What are your real expectations?

If you win some money, you have gambling income, and your taxes go up a little. If you lose some money, you have gambling losses, but your taxes don’t go down! This is because you need to have a large gambling losses before it would be better to itemize deductions instead of taking the standard deduction. The standard deduction is $24,400, and if you itemize, you’d only have $5,560 in state taxes to list as itemized deductions. For the itemized deductions to be a better choice, you’d need to have at least the difference of those two numbers, $18,840, in gambling losses. But even that is not enough. On gambling losses, the IRS says “You CANNOT deduct more than the amount of gambling income you report on your return”. So you’d need to have at least $18,840 in gambling income and $18,840 in gambling losses for the year. You may very well be in such a situation, but it needs a lot of gambling to get there. Still, even if you are in such a situation, a lot of the following discussions may apply, with a few differences.

Let’s look at the actual numbers for your favorite game. I used the Wizard Of Odds Video Poker Strategy Maker to calculate the odds of perfect play for Full Pay Deuces Wild. The total return, ignoring taxes, is 1.007620. So it's a 100.7620% game, where you may expect a 0.7620% edge against the casino.

But the game changes vastly if you incorporate taxes in evaluating the game. The Natural Royal Flush win, previously worth $998.75 (4000 coins of 25¢, minus your original wager of $1.25), is now worth just $686.14, since the state and federal governments want $312.61 of your win. The Four Deuces are similar: they are now worth just $170.89 instead of $248.75. This goes all the way down to the Straight, which would be worth 86¢ instead of $1.25. But the taxes don’t affect your results at the bottom of the pay table: If you win a Three of a Kind and get your wager back, you haven’t really won anything, and your gambling income would be zero. If you fail to make a paying hand and lose your original $1.25, taxes won't affect the results either, because you can't deduct your gambling loss.

Looking at the probabilities, in 55% of hands you’d fail to make a hand, and the loss is all yours. In 28% of hands you’d end up even. In the other 17%, you’d end up winning something, and the governments want their shares.

When I added up the adjusted wins, instead of a 0.76% edge in your favor, I found that you expect to lose 16.59%. Worse than the horrible tie bet in baccarat, and three times worse than the odds of the double-zero roulette. (Those bets are still bad, and become even worse when you consider the effect of the asymmetrical taxation I just described.) You’d not even dream of playing a game where you expect to lose 16.59% of your bet, would you?

So, you thought you had a 0.76% edge in your favor, but it’s really a 16.59% edge against you. The casino doesn’t have an edge either: it also expects to lose 0.76% to your perfect play. It’s the governments that have an edge here! Even without considering the taxes the casino pays when it wins your money, the state and federal governments have a 17% edge in this bet.

Careful readers would notice a problem with my argument above. We only calculated the edge for a single bet, but you are not taxed on each individual bet. Rather, you are taxed per session, which could consist of several bets. When you make many bets, the range of possible results becomes less varied, and the mathematical variance (based on all the money that you have put at risk) becomes relatively lower.

So let’s assume you make two bets instead of one. About 30% of times you’d lose both your bets. And in 31% of cases you'd lose one of your two bets and get the other back through a Three of a Kind, thus losing half your total wager. At other times, you’d end up flat or you'd win something. Overall, the average amount of money you may end up losing would be reduced. If you lose overall, you’d be on your own to cover your loss (in other words, you can't lower your taxes due to the loss). If you add the numbers up, playing two hands reduces your expected loss from 16.59% of your total wager for one hand to 13.71% of your total wager for two hands, according to my calculations.

Playing more hands in a session will reduce the expected loss even further. Playing ten hands results in a 7.26% expected loss, fifty hands gets you to a 3.68% loss, and a hundred hands to 2.71%. I ran the numbers up to a thousand hands, but even then, you should expect to lose 0.92% of your total wager!

Now, I only had a limited amount of time to run my calculations. There may be a certain number of hands that, if you play that many hands in a session, you would finally have an edge. But the numbers I’m showing above should be quite eye opening. (They'd be even worse if you are in a higher tax bracket.)

Let’s look at them again: you planned to play a thousand hands of your Full Pay Deuces Wild in a session. You expected to wager a total of $1250, you expected to win $9.52, and you assumed the government would take some of that. You thought you still had a positive expectation. But when you consider your taxes properly, even with perfect play, the actual expectation is losing $11.50 in your one-thousand-hands session. If the casino is not compensating you that much in comps, you’re better off not playing. (Why would the casino put up a game with a 0.76% edge against them and comp players 0.92% on top of that is beyond me, but I guess it could happen if there's an amazing promotion. If you run into such a game, be careful and calculate the value of promotions correctly. The car they’re giving as a prize comes with a tax bill too!)

So, with the latest tax law, can you actually expect to make some money gambling if you have a well-paying day job and you’re not filing taxes as a professional gambler? Yes, but only if you have a large edge, or there's something that covers your losses (like a coupon or an existing win):

• You have free play from a coupon with no requirements for betting your own money (like some of the coupons from the Las Vegas Advisor or American Casino Guide)? You almost definitely have an edge because there’s no chance for a loss.

• You have a matchplay coupon? Because you are risking some of your own money, you need to do your own math based on your marginal tax rates to see if it’s worth playing. If your total marginal tax rate is not too high, it may be worth playing since match play coupons tend to come with a large edge against the casino.

• You’ve already won more money than you lost in this session from a coupon or free play? You can play any game with a theoretical edge while you are still in black, since losses can now reduce your taxes until you wrap up your gambling session. But you should stop betting if you lose the money you had won, or if your gambling session ends.

Finally, there is a chance that a tax-adjusted strategy could do slightly better than the commonly available strategies (which don’t consider taxes): If by changing the strategy you can reduce the number of hands with no pay, perhaps you can reduce your expected loss. I don’t have the tools to calculate such a strategy for a long session, but we can do that for a single bet using the Wizard Of Odds calculator. If I put the tax-adjusted return (based on the tax scenario that I mentioned above) for each bet into the calculator, the calculated strategy would have a 16.58% expected loss instead of 16.59%. Someone smarter than me can try to come up with a strategy that is optimized for a session of several wagers, but I believe the longer the session, the closer such a strategy would be to a commonly available strategy.

The main point that I tried to highlight in this post is that if you have other sources of income and are not filing your taxes as a professional gambler, you need to understand your taxes and consider your marginal tax rates in order to find out if you have an actual edge. This is much more important now that itemizing deductions is not as beneficial as it used to be.
Last edited by: FiliusBruce on Dec 29, 2019
DRich
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December 29th, 2019 at 5:57:44 PM permalink
FillusBruce, I agree with you but the majority of gamblers at the $1.25 level are not declaring any of their income so therefore it is not being taxed.
At my age, a "Life In Prison" sentence is not much of a deterrent.
FiliusBruce
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December 29th, 2019 at 7:26:40 PM permalink
Quote: DRich

FillusBruce, I agree with you but the majority of gamblers at the $1.25 level are not declaring any of their income so therefore it is not being taxed.


Well, the same math applies at any denomination if you're not filing your taxes as a professional gambler. And of course it gets even worse if you're playing an already-negative game.
DRich
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December 29th, 2019 at 7:32:39 PM permalink
Quote: FiliusBruce

Well, the same math applies at any denomination if you're not filing as a professional gambler. And of course it gets even worse if you're playing an already-negative game.



I don't see how taxes apply at all if you are not claiming any income from the machines. I don't agree with it, but very few people will claim income that is not reported to the IRS.
At my age, a "Life In Prison" sentence is not much of a deterrent.
TomG
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December 29th, 2019 at 7:49:40 PM permalink
Quote: DRich

I don't see how taxes apply at all if you are not claiming any income from the machines. I don't agree with it, but very few people will claim income that is not reported to the IRS.



You mean there people who play casino games that aren't logging every single bet they make in order to comply with the spirit of the tax law?

During the years when I played Deuces Wild for an hour every day, I made sure to itemize all 65,000 winning hands on my tax returns.
FiliusBruce
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December 29th, 2019 at 7:49:57 PM permalink
Quote: DRich

I don't see how taxes apply at all if you are not claiming any income from the machines. I don't agree with it, but very few people will claim income that is not reported to the IRS.



Taxes apply on any income even if you don't get any W2G form. If one doesn't declare such income, they're committing tax fraud.

But of course if one plays higher denominations, they will get W2G forms and then committing that tax fraud will become even harder. You can't find FPDW in Vegas at higher denominations, but the same kind of math applies if you play $250-a-hand 9/6 Jacks or Better at Caesar's Palace. You'd think the casino only has a half-percent edge against you, while it's much worse due to the assymetrical nature of taxes.

My point is it's very hard to find any game with any edge with the new tax laws if one has a day job and is not filing as a professional gambler. Even the best available games lose their edge.
Last edited by: FiliusBruce on Dec 29, 2019
FiliusBruce
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December 29th, 2019 at 7:57:06 PM permalink
Quote: TomG

You mean there people who play casino games that aren't logging every single bet they make in order to comply with the spirit of the tax law?

During the years when I played Deuces Wild for an hour every day, I made sure to itemize all 65,000 winning hands on my tax returns.



You are not supposed to record every hand. But you need to keep a record of the total amount of win or loss for the whole session.

And if you read the post until the end, you notice I discuss the actual practical case: With the new tax law, if you're in the tax brackets I used in the example and play a thousand hands in that session, you're losing 0.92% of your total wager instead of winning 0.76% of it.
AZDuffman
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December 30th, 2019 at 3:50:22 AM permalink
If you declare your gambling as a business then you fill out Schedule C and deduct the losses. Same as you ever could.

The new tax law has zero to do with that. Same as I can deduct my local taxes on a rental home.

People are so misinformed on taxes.
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darkoz
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December 30th, 2019 at 6:07:59 AM permalink
Quote: AZDuffman

If you declare your gambling as a business then you fill out Schedule C and deduct the losses. Same as you ever could.

The new tax law has zero to do with that. Same as I can deduct my local taxes on a rental home.

People are so misinformed on taxes.



He states in the OP that this discussion is for people who dont qualify as professional gamers who can claim it as a business

Most misinformation in life comes from not reading and comprehending while jumping to incorrect conclusions
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AZDuffman
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December 30th, 2019 at 6:19:52 AM permalink
Quote: darkoz

He states in the OP that this discussion is for people who dont qualify as professional gamers who can claim it as a business

Most misinformation in life comes from not reading and comprehending while jumping to incorrect conclusions



A Schedule C need not be an operating business. I’ve never had a W-2G but AFIK you’d need to file C to take the losses anyhow.

The losses are not and never were “deductions.” They were losses offsetting income and itemization should not affect that. If it does then file a C.

There is a difference between “loss” and “deduction.” Same with “expense.” An old boss said there is a thing called “tax sense.” Has nothing to do
With education or intelligence. Has to do with understanding tax forms and law. He said you got it or you don’t.
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billryan
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December 30th, 2019 at 7:02:40 AM permalink
Thats is nothing compared to how the new retirement tax laws will affect people. Wonder how Grandma will feel when she looks down ( or possibly up) and sees the $100,000 she left little Jimmy causes him to be in higher tax brackets from jump street.
Someone once proclaimed " taxes are for little people.". Now the tax code says it as well.
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SingleCoinVP
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December 30th, 2019 at 7:05:43 AM permalink
It could be worse. In Mississippi for example, the State tax on all W2-Gs is 3%. In other States it could be higher. This is on top of the Federal tax. A professional player would never play in those States.

In the past, my tax returns have always had gambling revenue. I itemized all my returns due to my business interests. This allowed me to offset all or part of my winnings. I kept a daily dairy in case I was ever audited. I was audited once, not for a gambling related issue. I will not be itemizing this year.

Video poker is a gambling game where the outcome is determined by a random computer chip. The math that is used to predict the outcome contains undefined terms that vary with the individual. The majority of the games have a built in house edge. If you don't play like a computer forever, the house edge increases. If you run out of money before you win, you are out of the game. If you win, the federal and possibly the State government want to share in your winnings. They will not share your losses.

This does not sound like a great opportunity to me. I am sure a professional player can find a way to avoid taxes. The rest of us have some decisions to make.
Last edited by: SingleCoinVP on Dec 30, 2019
FiliusBruce
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December 30th, 2019 at 9:02:22 AM permalink
Quote: AZDuffman

A Schedule C need not be an operating business. I’ve never had a W-2G but AFIK you’d need to file C to take the losses anyhow.

The losses are not and never were “deductions.” They were losses offsetting income and itemization should not affect that. If it does then file a C.

There is a difference between “loss” and “deduction.” Same with “expense.” An old boss said there is a thing called “tax sense.” Has nothing to do
With education or intelligence. Has to do with understanding tax forms and law. He said you got it or you don’t.



If you want to use Schedule C for gambling activity, you must qualify as a professional gambler. The US Supreme Court has said in Groetzinger, 480 U.S. 23 (1987) that "facts and circumstances" determine this: "If one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business." (For reference, Google "tax issues for professional gamblers journal of accountancy"). In my example, it's clearly not a full time activity for the player.

Non-professional gamblers can itemize their gambling losses on Schedule A. I did that for the last few years. With the new tax law, such an itemization no longer can reduce my taxes unless I have very large losses, tens of thousands of dollars.
DogHand
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December 30th, 2019 at 9:28:45 AM permalink
FiliusBruce,

First of all, let me welcome you to the WoV board! Your inaugural post shows an impressive attention to detail rarely seen among first-time (or in fact any) posters.

However, I feel compelled to point out a flaw in your reasoning. In your post you said:

Quote: FiliusBruce

<snip>Let’s look at them again: you planned to play a thousand hands of your Full Pay Deuces Wild in a session. You expected to wager a total of $1250, you expected to win $9.52, and you assumed the government would take some of that. You thought you still had a positive expectation. But when you consider your taxes properly, even with perfect play, the actual expectation is losing $11.50 in your one-thousand-hands session.<snip>



Later in the thread in reply to TomG's facetious (and humorous!) comment about recording the results of every hand you stated:

Quote: FiliusBruce

You are not supposed to record every hand. But you need to keep a record of the total amount of win or loss for the whole session.<snip>



But that's the flaw in your first post. If you treat the 1000 hands as a session, then you tell the tax authorities that you won $9.52, and you pay your taxes based on that amount, leaving you with a profit of $6.63. Your claim of losing $11.50 due to taxes in your 1000-hand session is based on paying taxes on every single winning hand, rather than paying taxes on the net result.

Hope this helps!

Dog Hand
DRich
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December 30th, 2019 at 9:45:54 AM permalink
Quote: FiliusBruce

Taxes apply on any income even if you don't get any W2G form. If one doesn't declare such income, they're committing tax fraud.



Exactly, and that is what most people do.
At my age, a "Life In Prison" sentence is not much of a deterrent.
AZDuffman
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December 30th, 2019 at 9:55:12 AM permalink
Quote: FiliusBruce

If you want to use Schedule C for gambling activity, you must qualify as a professional gambler. The US Supreme Court has said in Groetzinger, 480 U.S. 23 (1987) that "facts and circumstances" determine this: "If one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business." (For reference, Google "tax issues for professional gamblers journal of accountancy"). In my example, it's clearly not a full time activity for the player.

Non-professional gamblers can itemize their gambling losses on Schedule A. I did that for the last few years. With the new tax law, such an itemization no longer can reduce my taxes unless I have very large losses, tens of thousands of dollars.



I accept hat clears Sch C up. But you are paying less total taxes without the itemizing? You have a ham under your arm and are complaining you don’t have any bread.
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FiliusBruce
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December 30th, 2019 at 9:57:02 AM permalink
Quote: DogHand

First of all, let me welcome you to the WoV board! Your inaugural post shows an impressive attention to detail rarely seen among first-time (or in fact any) posters.


Thank you!

Quote:

But that's the flaw in your first post. If you treat the 1000 hands as a session, then you tell the tax authorities that you won $9.52, and you pay your taxes based on that amount, leaving you with a profit of $6.63. Your claim of losing $11.50 due to taxes in your 1000-hand session is based on paying taxes on every single winning hand, rather than paying taxes on the net result.


My $1250 x 0.92% = $11.50 number comes from computing the probabilities for all possible scenarios that can happen after playing 1000 hands of FPDW, then discounting them by the tax margins in my example if it was a winning session but not changing the loss if it's a losing session. I wrote careful code for this calculation, which took quite a while to run. (The code computes the convolution of 1000 discrete probability distributions, each of which is an independent FPDW hand played perfectly. The running time is O((m+n) choose n), where m is the number of hands in the session, 1000 in our case, and n is the number of different outcomes in each hand, which is 11 for FPDW.)

Basically, if you pay those taxes on the winning sessions and get no tax discount on the losing sessions, your expected value for the play is reduced by a lot.

If I was looking at paying taxes on every single hand, I would have arrived at $1250 x 16.59% = $207.37, which is of course wrong.
Last edited by: FiliusBruce on Dec 30, 2019
FiliusBruce
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December 30th, 2019 at 10:09:05 AM permalink
Quote: AZDuffman

I accept hat clears Sch C up. But you are paying less total taxes without the itemizing? You have a ham under your arm and are complaining you don’t have any bread.


The point is not if one pays less or more total taxes, that's in the hands of Congress and state legislatures. The point is that with the new tax law, one can't play video poker and expect an edge in their favor if they have a day job. While with the old tax law one could.

I'm not saying the new tax law is bad (it is IMHO, but that's for a different forum), I'm saying it changes how you should look at gambling with an edge and you need to do your homework carefully. The same winning video poker game you may have played for years suddenly becomes a losing game.
darkoz
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December 30th, 2019 at 11:59:01 AM permalink
Quote: FiliusBruce

The point is not if one pays less or more total taxes, that's in the hands of Congress and state legislatures. The point is that with the new tax law, one can't play video poker and expect an edge in their favor if they have a day job. While with the old tax law one could.

I'm not saying the new tax law is bad (it is IMHO, but that's for a different forum), I'm saying it changes how you should look at gambling with an edge and you need to do your homework carefully. The same winning video poker game you may have played for years suddenly becomes a losing game.



Or you could just cheat on your taxes
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AxelWolf
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December 30th, 2019 at 12:08:00 PM permalink
Quote: SingleCoinVP

A professional player would never play in those States.

Absolutely not true, they have been and they will continue to.
You just have to find stuff with a big enough to edge to overcome the 3% and other obligations. It happens all the time.
♪♪Now you swear and kick and beg us That you're not a gamblin' man Then you find you're back in Vegas With a handle in your hand♪♪ Your black cards can make you money So you hide them when you're able In the land of casinos and money You must put them on the table♪♪ You go back Jack do it again roulette wheels turinin' 'round and 'round♪♪ You go back Jack do it again♪♪
SingleCoinVP
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December 30th, 2019 at 1:12:57 PM permalink
Quote: AxelWolf

Absolutely not true, they have been and they will continue to.
You just have to find stuff with a big enough to edge to overcome the 3% and other obligations. It happens all the time.

People who have regular jobs pay taxes too. Everyone does. What's different is everyday people don't use math to calculate their profit in advance and conveniently leave out the taxes.

Does having "professional gambler" as your job description on your tax forms trigger an audit? It always made me nervous to show gambling revenue. I was never audited because I did, but my annual gambling revenue never exceeded $20K.
Last edited by: SingleCoinVP on Dec 30, 2019
ChumpChange
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December 30th, 2019 at 5:09:32 PM permalink
People play VP to win $1000, not to pay taxes.
People play VP to win $4000, and to pay taxes.
Not everybody can escape the taxman because some other machine is paying a million coins and how could they resist?

But yeah, try to keep your gambling winnings way over your standard deduction, so your losses will exceed your standard deduction.

Win $100,000, lose $40,000: are your losses deducted from your gambling wins or do they reduce your losses by the standard deduction first?
$40,000 - $24,000 = $16,000
$100,000 - $16,000 = $84,000 of gambling income, instead of $60,000 of gambling income?
It could depend on what your other deductions are.
TomG
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December 30th, 2019 at 7:38:35 PM permalink
Quote: FiliusBruce

You are not supposed to record every hand. But you need to keep a record of the total amount of win or loss for the whole session.



There are gambling experts who would say my 'session' started sometime in the 1990s and hasn't yet ended. Although I agree with that, I would concede for tax purposes the 'session' should start on 1 January and end on 31 December. I also understand that the law may state things differently and the IRS is justified in following the letter of the law. If I were to take the approach of recording income as it should be, rather than as the law is written, what options would the IRS have? What actions would they consider reasonable on their part? Would they disagree with the gambling income I list on my tax returns and tell me a different number based on the evidence they have? In that case I would just pay what they say, which would make things so much easier for me. Would they prosecute for fraud? In that case I would love to present my side to a judge.

The whole "session" thing is just weird and wrong. A video poker "session" might have a few thousand bets over a few hours. A blackjack "session" perhaps less than 50, especially for guys who show their max bet and leave. While a single sports bets might constitute one "session". In that last case, some guys might have millions in action for the year and then based on the letter of the law, really would be supposed to itemize every single bet.

Put $1,000 in a Deuces Wild machine on 1 January, play for an hour or two, cash out, and then use that same ticket everyday for the year. On 31 December see how much above $1,000 it is and list that on income tax returns. And if it's below $1,000, there was not video poker income for the year. The only record keeping that needs to be is if I lose that entire $1,000 and have to put even more money in. That should be a viable option. And it is far more honest and far better for the treasury department than the way every other 25-cent video poker player in the country does it. If the IRS thinks that is wrong, they know everything about me and can come and find me and tell me their opinion of the law.
FiliusBruce
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December 30th, 2019 at 7:55:59 PM permalink
Quote: ChumpChange

But yeah, try to keep your gambling winnings way over your standard deduction, so your losses will exceed your standard deduction.


That's very difficult for most non-professionals. You need to have the bankroll, find such opportunities, and play enough to have that much winning.

Quote:

Win $100,000, lose $40,000: are your losses deducted from your gambling wins or do they reduce your losses by the standard deduction first?
$40,000 - $24,000 = $16,000
$100,000 - $16,000 = $84,000 of gambling income, instead of $60,000 of gambling income?
It could depend on what your other deductions are.


In my hypothetical example of the California-based gambler filing jointly with their spouse with $130,000 income from their day jobs, the adjusted gross income would be $130,000+$100,000 = $230,000. The itemized deduction would be $5560+$40,000 = $45,560. But such large adjustments start making things complicated due to AMT and phase-out of exemptions and deductions, specially for California taxes. I can try to figure that out, but your example is a little too hypothetical. One would need to have a very good edge or be very lucky to have a total of $100,000 of winning sessions and just $40,000 of losing sessions.
FiliusBruce
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December 30th, 2019 at 8:09:30 PM permalink
Quote: TomG

While a single sports bets might constitute one "session". In that last case, some guys might have millions in action for the year and then based on the letter of the law, really would be supposed to itemize every single bet.


No tax form asks for itemizing every single bet. If you are not filing as a professional gambler, you are supposed to add up all your winning sessions and arrive at a number (let's call it W) and write that in Schedule 1, then add up all your losing sessions (let's call it L) and write the smaller of L and W in Schedule A.

I have no idea what a sports betting session may be, but I guess someone betting millions of dollars on sports with an edge is filing as a professional.

Quote:

Put $1,000 in a Deuces Wild machine on 1 January, play for an hour or two, cash out, and then use that same ticket everyday for the year. On 31 December see how much above $1,000 it is and list that on income tax returns. And if it's below $1,000, there was not video poker income for the year. The only record keeping that needs to be is if I lose that entire $1,000 and have to put even more money in. That should be a viable option. And it is far more honest and far better for the treasury department than the way every other 25-cent video poker player in the country does it.


Now that's a very interesting idea! There is some language around cashing out in court opinions on gambling sessions that supports this. Assumes our gambler would know he'd come back to Vegas before the ticket expires, but that's quite possible.
ChumpChange
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December 30th, 2019 at 8:16:53 PM permalink
In this era of slot vouchers, I wouldn't even bother with machine numbers. I'd keep track of how much I contributed to a voucher(s) and how much was on it when discarded either in the trash or at the voucher redemption. Maybe just add up all the vouchers if I'm a litterbug.

Since tables want me to color up instead of take a pail of chips around, I'd keep track of how I do on each table if I stick around a table for long, or how much I bought in for and colored up for at each 'type' of game during the day. (If I'm not gonna be winning any tax forms that day, I probably shouldn't give a damn about taxes.)

I would usually keep track of how much I brought to the casino, and how much I left with when I leave each day/trip.

For tax purposes, try to end up at even or above so I don't have to figure out losses. Not always so lucky. Next year is a new year.
TomG
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December 30th, 2019 at 8:45:59 PM permalink
Quote: FiliusBruce

No tax form asks for itemizing every single bet. If you are not filing as a professional gambler, you are supposed to add up all your winning sessions and arrive at a number (let's call it W) and write that in Schedule 1, then add up all your losing sessions (let's call it L) and write the smaller of L and W in Schedule A..



Based on this, there really shouldn't be too much of a problem. Determine total gambling income for the year, using whatever method of tracking the player wants. List that number on tax returns as income and pay the tax on it.

$1,000,000 with a 1% edge is only $10,000 in income per year, before taxes. That is probably not the majority of a persons income. With a ~0% edge, there will be some years with wins and some years with losses. Depending on the average bet, could only be a few bets per day on average, which would only takes a few minutes. Can easily bet that much and still clearly fall on the amateur side of things
gordonm888
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December 30th, 2019 at 10:01:55 PM permalink
In my opinion, OP is correct. The revisions in tax laws change everything. Gambling is different than other activities because you will have winning sessions and losing sessions, but the details of the standard deduction, etc makes it very difficult to write off the losing sessions against the winning sessions.

If you pay a $1,000 entry fee to a poker tournament each of seven times (in a given year) and don't win any money on any of those tournaments and then on the 8th tournament you finish well and earn an $8,000 payout, then you have broken even for the year. You lost $7,000 and then won ($8,000 -$1,000 entry fee =) $7,000 on the last tournament. But the tax laws require you to declare the $7,000 of winnings from the last tournament as income (indeed the casino will issue a W2-G to you and the IRS) and you will only be able to declare the $7,000 of losses from the other 7 tournaments as gambling losses if you have at least $24,000 of other itemized deductions.

Indeed, it is now fundamentally different. This has now been discussed at great length in a number of threads on this forum. I don't understand why some respondents are answering as if they don't understand this issue.
So many better men, a few of them friends, are dead. And a thousand thousand slimy things live on, and so do I.
FiliusBruce
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December 31st, 2019 at 1:08:33 AM permalink
Quote: gordonm888

In my opinion, OP is correct. The revisions in tax laws change everything. [...] Indeed, it is now fundamentally different. This has now been discussed at great length in a number of threads on this forum. I don't understand why some respondents are answering as if they don't understand this issue.


Thank you so much for the confirmation. It's great to know I'm not missing something critical.

I've been trying to model some of the more complicated cases, but the code slows down pretty quickly as I increase the number of hands or number of different payouts. For example, I've been trying to figure out the actual expectation of, say, 800 hands of 50-play 9/6 Jacks or Better for a given marginal tax rate, and I can't find any computational shortcut. It will take days to compute. If you're interested, I can share more details about my implementation to see if anyone can find a faster way to calculate the EV.
DogHand
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December 31st, 2019 at 5:38:03 AM permalink
Quote: FiliusBruce

<snip>I've been trying to model some of the more complicated cases, but the code slows down pretty quickly as I increase the number of hands or number of different payouts. For example, I've been trying to figure out the actual expectation of, say, 800 hands of 50-play 9/6 Jacks or Better for a given marginal tax rate, and I can't find any computational shortcut. It will take days to compute. If you're interested, I can share more details about my implementation to see if anyone can find a faster way to calculate the EV.



FiliusBruce,

Have you ever tried Dunbar’s Risk Analyzer for Video Poker?

https://www.lasvegasadvisor.com/shop/products/dunbars-risk-analyzer-for-video-poker-v-2-0-cd/

Dunbar's program might be just what you need for your analysis.

Hope this helps!

Dog Hand
FiliusBruce
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August 11th, 2021 at 3:06:32 AM permalink
I ended up creating a personal blog and posted this as the first post there. Here it is:

https://blog.vidpoke.com/2019/12/taxes-changed-everything.html
camapl
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August 13th, 2021 at 3:42:09 PM permalink
Quote: FiliusBruce

…Let’s look at them again: you planned to play a thousand hands of your Full Pay Deuces Wild in a session. You expected to wager a total of $1250, you expected to win $9.52, and you assumed the government would take some of that. You thought you still had a positive expectation. But when you consider your taxes properly, even with perfect play, the actual expectation is losing $11.50 in your one-thousand-hands session…



I understand your point regarding the changes to the Personal Exemption and Standard Deduction, and that lumping them together raises the bar on claiming losses to offset wins. This was already a potential problem in prior years if you didn’t have a substantial amount of Itemized Deductions, and even then, only the amount above the Standard Deduction would affect your bottom line for the year.

What I don’t understand is your calculations in the clip above from your OP. You only apply your tax rates (CA plus IRS) to your actual win, if any, at the end of the calendar year. If you are up $400 at the end of the year (over all of your visits), then that is your reported win. If you are down, break even, or are up <$1, then you have 0 gambling wins for the year. As someone who is self-reporting (I.e., no W-2G’s), that’s all you must do to comply. The only mention of sessions in the tax code are with respect to record keeping. The Total Gambling Wins that you report is your total profit for the year, not the sum of winning sessions!

Where the Standard Deduction affects gamblers adversely is for those who have wins reported to the IRS that they must jump now over the Standard Deduction bar in order to claim losses against. Clunky sentence, I know, but hopefully you get the idea…
Expectation is the root of all heartache.
ChumpChange
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August 13th, 2021 at 4:43:26 PM permalink
So if you win $20K on a $5 VP Royal Flush, you can't deduct your losses because the standard deduction is larger (if a filing jointly), unless you have significant other deductions you can itemize. Then you can only deduct your losses down to the standard deduction after all other deductions limit at the standard deduction.

If you win 5 such Royal Flushes for $100K, and you have losses of $120K, you can only claim losses down to your standard deduction level.
So rack up those W-2G's to well over your standard deduction!
Dieter
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August 13th, 2021 at 9:05:54 PM permalink
Quote: ChumpChange

So if you win $20K on a $5 VP Royal Flush,



This does not sound correct.

The denomination of a video poker machine would refer to the value of one game credit (coin).
On a common 5 coin game, a 4000 coin royal flush would be worth $100K, not $20K.

If you win $20k on a $5 VP Royal Flush, you got shorted $80k.


edit: I made a horrific thinking error after too many long days in a row.
Original post spoilered, in case you want a chuclkle at me, but please don't rely on this math.
Last edited by: Dieter on Aug 14, 2021
May the cards fall in your favor.
mcallister3200
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August 13th, 2021 at 10:27:22 PM permalink
Quote: Dieter

This does not sound correct.

The denomination of a video poker machine would refer to the value of one game credit (coin).
On a common 5 coin game, a 4000 coin royal flush would be worth $100K, not $20K.

If you win $20k on a $5 VP Royal Flush, you got shorted $80k.



PM’s are open if you find that pay table.
rsactuary
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August 13th, 2021 at 11:23:59 PM permalink
Quote: Dieter

This does not sound correct.

The denomination of a video poker machine would refer to the value of one game credit (coin).
On a common 5 coin game, a 4000 coin royal flush would be worth $100K, not $20K.

If you win $20k on a $5 VP Royal Flush, you got shorted $80k.



You sir, are very very very wrong.

If you get a royal flush, it's 4000 times the denomination you are playing. so 4000 x 5 = 20K. It is not 4000 times your bet.
Dieter
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August 14th, 2021 at 3:19:48 AM permalink
Quote: rsactuary

You sir, are very very very wrong.

If you get a royal flush, it's 4000 times the denomination you are playing. so 4000 x 5 = 20K. It is not 4000 times your bet.



Ahh, I see my error.

Thank you both for the correction.
May the cards fall in your favor.
camapl
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August 22nd, 2021 at 4:07:21 PM permalink
Quote: camapl

…If you are up $400 at the end of the year (over all of your visits), then that is your reported win. If you are down, break even, or are up <$1, then you have 0 gambling wins for the year. As someone who is self-reporting (I.e., no W-2G’s), that’s all you must do to comply…



I stand corrected! After reading Revenue Procedure 77-29, the OP’s version of how to report winning sessions and losing sessions is in fact correct. To add further injury to insult, the taxpayer must exclude sessions that are not tracked by a players card. Yet using win/loss statements will not help, and can even be used against you!
Expectation is the root of all heartache.
SOOPOO
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August 22nd, 2021 at 6:50:02 PM permalink
Quote: camapl

I stand corrected! After reading Revenue Procedure 77-29, the OP’s version of how to report winning sessions and losing sessions is in fact correct. To add further injury to insult, the taxpayer must exclude sessions that are not tracked by a players card. Yet using win/loss statements will not help, and can even be used against you!



"The taxpayer must exclude sessions that are not tracked by a players card."

Are you saying if you have a WINNING session but did not use a players card you don't have to report it? There is NO WAY that is correct. Did I misinterpret your post?
camapl
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August 23rd, 2021 at 10:16:34 AM permalink
Quote: SOOPOO

"The taxpayer must exclude sessions that are not tracked by a players card."

Are you saying if you have a WINNING session but did not use a players card you don't have to report it? There is NO WAY that is correct. Did I misinterpret your post?



I wondered the same thing… According to example #6 on page 9 of Revenue Procedure 77-29, I would say yes; however, I am no tax attorney.

I find it interesting that the gambler must exclude sessions that aren't tracked electronically, yet he may not use a win/loss statement either…
Expectation is the root of all heartache.
ChumpChange
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August 23rd, 2021 at 10:21:51 AM permalink
Throw your card away, and don't play for the W-2G's!
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