Video Poker and Taxes - How to Stay Out of IRS Trouble
For those of us who have turned a love for video poker into a steady source of supplementary income, learning the ropes of the federal tax code is almost as important as studying your basic strategy tables.
That's because video poker machines differ from blackjack, baccarat, and other table games in one major way: formal tax reporting.
When you drag a big pile of chips after a successful double down in blackjack, nobody heads over from the cashier's cage to hand over tax forms. It doesn't matter if you take down $1,000, $10,000, or even more in a single hand - table games don't require any documentation with the Internal Revenue Service (IRS).
You'll still need to self-report those winnings of course, but the process doesn't require any paperwork or signatures at the actual casino.
But everything changes for us video poker enthusiasts.
Because video poker falls under the same classification as slot machines and bingo games, at least according to the tax code, players who win large jackpots and hand pays are obligated to complete a specific tax form which covers gambling winnings. That form, known officially as the W-2G, will become a common sight for any successful video poker player - so it's best to know exactly how to handle this situation when it inevitably arises.
The following page was put together to provide video poker players with a handy guide to the tax laws and procedures that govern big wins. With that said, we must state here and now that we're not tax experts, nor are we qualified to dispense legal advice. The information contained here is simply an introduction to paying taxes on video poker winnings, based on our own anecdotal experience, and a careful review of publicly posted IRS information.
On your end, we advise conducting further research to supplement what you learn here. Check out the IRS website's section on gambling winnings, or head over to TurboTax to see what they have to say on the subject.
Now that we've included all necessary disclaimers, let's tackle the process for paying taxes on video poker winnings.
What the Law Says
Whenever you're dealing with a federal agency like the IRS, it's important to apprise yourself of the rules and laws which pertain to you.
Flying blind isn't advisable when you're faced with a close drawing decision, is it? Thus, pursuing big-time jackpots without learning how those wins will be taxed is not the optimal play.
To begin our own crash course on video poker taxes, way back in the 1980s when we started playing this great game seriously, we turned to the actual tax code itself. We know, poring through dense legal language and tax instructions can be a chore - and trust us, this was - but thankfully we can boil it all down to the nuts and bolts here.
Under the provisions of Revenue Procedure 77-29, Section 3 - which was added to the tax code in 1977 - video poker winnings of $1,200 or more must be reported via the W-2G form:
"Temporary regulations section 7.6041-1 (T.D. 7492, 1977-2 C.B. 463), effective May 1, 1977, require all persons in a trade or business who, in the course of that trade or business, make any payment of $1,200 or more in winnings from a bingo game or slot machine play, or $1,500 or more in winnings from a keno game, to prepare Form W-2G, Statement for Certain Gambling Winnings, for each person to whom the winnings are paid."
As we mentioned already, this W-2G form - also known as the Statement for Certain Gambling Winnings - will become a regular part of your video poker journey. After all, you can't claim any hand pay of $1,200 or more without completing a W-2G right there on the casino floor.
For readers who are just beginning to climb the video poker ladder, sticking to $0.50 machines and the like, a big score of $1,200 or more is quite rare. At those stakes, the odds of triggering a royal flush are approximately 1 in every 40,000 hands - at least according to legendary video poker expert Bob Dancer.
Because of those enormous odds, we recognize that not all of our readers have had the pleasure of experiencing a hand pay, so we'll run through those procedures in the next section.
How to Handle a Hand Pay
When you finally connect the perfect combination of cards, landing a royal flush, straight flush, or four aces with a kicker, you'll trigger the machine's largest jackpot payouts.
For players at the quarter stakes, max-betting at $1.25 per hand and landing the 800 to 1 payout for a royal flush brings back $1,000 - so you'll be in the clear* for W-2G reporting purposes.
*While W-2G forms are required for reporting wins of $1,200 and up, you'll still need to report wins like the $1,000 example jackpot to the IRS. We'll cover those reporting procedures in the Additional Reporting Rules section later on.
But when you up the ante to $0.50 stakes and max-bet at $2.50 per hand, that same 800 to 1 payout for a royal flush brings your hand pay amount to $2,000 even. That's well above the W-2G reporting requirement, so the casino attendant will head over with your cash in hand - along with the all-important form.
After they've congratulated you on the big hit, the attendant will immediately ask to see your government-issued identification. It takes a foolhardy gambler to enter a casino without their ID, so we'll assume you're always packing a driver's license (or equivalent form of ID) when playing.
Once they've confirmed that you're of age and eligible to play, the attendant will then ask for your social security number. This aspect of the process is optional, but we recommend forking over the nine-digit number - and here's why.
If you decline to provide your social security number to the casino, they'll be forced to deduct an amount equal to between 28 percent and 31 percent of your total win. That deduction is passed over straight to the IRS, so from a certain perspective this approach is a bit easier, but we like taking home all of our hand pay winnings.
Of course, the taxes will eventually be levied and you'll wind up paying the IRS its "due", but this way allows you to hang on to the cash throughout the year until tax season draws near.
Even better, you get a slight break when reporting through the W-2G form directly from the casino. This method incurs a flat 25 percent tax on your reported winnings, while declining to offer your social security number and reporting later bumps the rate to 28 percent.
When the attendant has your ID verified, and your social security number safe and sound, the next step is to fill out the W-2G form. This is simple and straightforward, and should only take a minute or so to complete.
From there, the attendant will hand over your winnings in crisp, clean $100 bills - before heading back to the cashier's cage to make a copy of the W-2G. The casino will keep the original form, while you'll receive a copy to take home for recordkeeping purposes.
That's it and that's all, so from the time you land your winning hand to now you'll be occupied for about 10 minutes. After that, you can get back in the game, or head back to the room to celebrate.
Scoring a hand pay when playing at the lower stakes is a rare event indeed, but if you grind patiently and play well, you'll eventually run into a big winner. And when you do, you'll be fully prepared to handle your first hand pay situation.
But what about players who max bet at $10, $25, or even $50 per hand? The higher bets obviously entail bigger wins, and it stands to reason that high-stakes video poker specialists trigger several payouts of $1,200 or more per session.
Indeed, when you move up in stakes and begin attacking the larger max-bet denominations, you'll find that hand pays become just a humdrum part of everyday life. Bettors at the $25 max-bet level need only a straight flush to trigger a 50 to 1 payout - and 50 times $25 comes out to $1,250.
Obviously, taking 10 minutes to complete a new W-2G form several times per session would inconvenience high-volume players, so the casinos have taken steps to prevent this waste of time. The following section will guide you through tax reporting as it pertains to high-stakes players who score hand pays on the regular.
Hand Pays at the Higher Stakes
Once you've established yourself as a high-stakes video poker specialist, here's how your typical session begins.
You'll head over to the casino's high-limit area, find a friendly employee, and ask them for a "session log." They'll know exactly what you mean, and within seconds you'll have a blank W-2G form ready to fill out.
By completing the basics of the form in advance, you're now free to grind away to your heart's content, free of any distractions caused by hand pay requirements. When the cards align and you trigger a big win of $1,200 or more, the casino staff will simply enter the time and dollar amount into the form.
When you're done playing, those individual wins will be totaled, and you'll be asked to verify the form's accuracy before signing and initialing on the dotted lines. This method turns several separate tax-eligible hand pays into a single figure encompassing the entire session - which saves valuable time and paperwork for all parties.
But there's always paperwork involved in any passion worth pursuing, so even if you don't plan on playing the high-stakes machines anytime soon, be prepared to track your daily sessions through a personal video poker diary.
Track Your Play
If you're a regular casino player, you should always invest in a Player's Club Card, or the preferred method of player-tracking used by your venue of choice.
When you're in the system, every second of every session you play will be monitored, tracked, and recorded for posterity. Dropping $100 on the first machine, winning $300 on the next, then spew $50 more back before heading to dinner is standard practice for most players - but unless you have a photographic memory, calculating your true win/loss rate for the night can be difficult.
The casino takes care of all that for you when you're in the system, and you'll even receive an annual Win / Loss report which contains precise calculations for the past years' worth of play. Contained on the Win / Loss report is a detailed accounting of your video poker sessions, so you'd be able to look back and see that the example session above produced a modest profit of $150.
You'll be saving those W-2G forms as they accumulate throughout the year, but when tax season rolls around, it's time to dig them out and see where you stand. With your W-2Gs in hand, the final step in the reporting process involves the old Form 1040 we're all familiar with.
Scan your Form 1040 for the section labeled "Other Income" (on Line 21) and enter the win figures from each W-2G you've earned.
That does it for the big winners, but the IRS isn't satisfied just yet. They also want to know about your smaller winnings throughout the year - even a hit for just $5. This may seem like a big burden, but in reality, the IRS is offering to give you a break here - which is quite rare in the world of federal tax collection.
Unlike table games and keno, video poker losses reported via W-2G forms only cannot be written off as deductions against wins. In other words, as the video poker hand pays pile up - along with the taxes applied to them - the times you lost don't come into play.
But by using Form 1040 to list itemized smaller (under $1,200) wins, you can then list the associated losses to balance out the tax bill. This can be huge benefit for video poker players, because as we all know quite well, it takes a ton of losing hands before the jackpot payouts arrive.
In order to take full advantage of the Form 1040 deductions, you'll need to have thorough and accurate records of all wins and losses. That's where the Win / Loss reports provided by the casino come into play, as this data allows you to confidently scribble in exact figures for wins and losses without fear of fouling up the numbers.
According to Publication 529 issued by the IRS, players are free to deduct losses up tothe amount of their wins, a system which is described below:
"You must report the full amount of your gambling winnings for the year on Form 1040, line 21. You deduct your gambling losses for the year on Schedule A (Form 1040), line 28.
You can't deduct gambling losses that are more than your winnings. Generally, nonresident aliens can't deduct gambling losses on Schedule A (Form 1040NR)."
The IRS is also wise to many of the tricks used by gamblers hoping to game the system, so don't try to get one over on them. One of the most common attempts involves listing only big W-2G wins plus a series of itemized smaller losses to help "balance things out." Of course, this is a dishonest way of accounting, because you naturally piled up a series of smaller wins along with those loses.
Trying to report selected information, while concealing the rest, is a surefire way to draw the IRS' ire, as evidenced by their straightforward rules on the matter:
"You can't reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction.
Therefore, your records should show your winnings separately from your losses."
Finally, while the Win / Loss reports sent by the casino are largely accurate, mistakes can always be made. Let's say you forget your Player's Club card at home, or the machine fails to read the card's code, leaving an entire session of wins and losses untracked.
In this case, a few swings in either direction can severely impact your tax obligation, so it's best to keep your own records on the fly. The IRS offers similar advice, directing gamblers to keep a "diary" of their video poker play.
This private recordkeeping can take any form you wish, so long as you keep track of the pertinent information. Where you played, the date and time, the stakes, and even the machine's serial number or code are all useful data points when keeping a video poker diary.
As soon as you receive the casino's official Win / Loss report, be sure to check it against your own records - and in the case of discrepancy, your diary will prove to be invaluable.
That just about does it for our personal advice for paying taxes on video poker, but like we said in the introduction, we're far from certified tax professionals.
With that in mind, here are a few sources to check out as you continue your video poker tax tutelage:
- Tax Help for Gamblersby Jean Scott and Marissa Chien
- Gambling Is My Business: A Financial Organizer for Professional Card Players & Other Gamblers by KiKiCanniff
- The Gambler's Guide To Taxes: How to Keep More of What You Winby Walter Lewis
- All In Against the IRS: Every Gambler's Tax Guide by Stephen Fishman