Poker Backing and U.S. Tax Law
By CPAEvil - Published on July 19th, 2010
Being a CPA for poker players is becoming more and more challenging. It?s hard to keep up with some of the craziness that goes on. I have learned many interesting and somewhat unbelievable things from my clients/poker players. One guy told me about a coin flip for $30,000 per flip while at the Atlantis in Nassau. Yes, this is a heads or tails kind of thing like they do before football games. Perhaps the Caribbean sun melted some reality section of the brain when this bet occurred. Another client said that credit card roulette is routine for going out to dinner and wanted to know if it?s deductible. However, the latest craze is backing other players in tournaments.
Well, more and more players (especially my clients) are backing or being backed. I found out the other day that one of my clients is the biggest backer around. That scares me to death, as I am a deep-down conservative person and risk-adverse (except at a poker table where I am top donk). So, I have decided that it?s best to quit cringing and start helping, at least from a tax perspective. If you can?t beat 'em, teach 'em? Yeah, okay.
Let?s say you have a lot of cash and instead of playing the ponies, you want to back another poker player. And, let?s say that you want to play poker, are a pretty good player but can?t afford the big buy-ins. This would be a dude marriage made in poker heaven.
Before you both make that verbal commitment that no one will remember later once a win or a knockout occurs, write it down on paper and discuss it. It doesn?t have to be fancy, just something short and sweet. Just make sure you have the terms down and you both sign and date it ? if it takes more than one page, both people should initial the bottom of the non-signed pages. You don?t have to pay an attorney, unless you want to, but for your CPA?s sake, have an agreement in writing.
Now, here is the nasty part. We want to keep the IRS happy, or at least off our backs. The agreement will help to show the flow of money in case of an audit. Believe me, if an audit occurs, you as a poker player do not want to try to convince the IRS to take your word for it. The best thing for you to do is to get the person you are (hopefully) going to pay to fill out a Form W-9 (available at
www.irs.gov) and have it with the agreement. The Form asks for the person?s name and Social Security Number. They then have to sign under ?penalty of perjury? that this is really their name and social.
Now, just when you think you?ve done enough tax crap, at the end of the year, you have to prepare a Form 1099, stating how much you paid this backer. This form goes to him and to the Government to prove that you paid the money out. This also makes the backer claim this on their tax return. Otherwise, if you get audited, the IRS will make you pay the entire amount that you won.
Now, what if some guy from another country backs you? This is someone that is not a US Citizen but read about you and thinks he can make some money off of you. What now? This is a little more complicated. You still should have something in writing (make sure it?s in English!), and then you need to get their full name and address. (a copy of their passport would be awesome but not required). If they happen to have an SSN or TIN, you need that (but most probably don?t).
At the end of the year, you have to do a Form 1042-S, which a copy needs to be sent to them and to the IRS. This gets you guys out of paying tax on money you paid someone else. (This is similar to the Form 1099 that we give US Citizens).
Here is the important part ? get all of this info BEFORE you pay these guys or you will end up on the wrong end of the tax bill. As with all my poker clients, you can call or email me about any of this confusing stuff!
One last piece of advice ? keep good records if you are doing multiple deals. Record-keeping is a pain but it?s so important and you won?t realize how important until it?s too late.
Good luck and make lots of money!
