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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4177
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I live in California and I was wondering about taxes on online

Resolved Question:

I live in California and I was wondering about taxes on online gambling
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

HI,

NPVAdvisor :

Under the US Tax Code, all income for US citizens is taxable, whether earned in the US, overseas or on the Internet. Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).

Customer:

My problem is that I lost more than I won

NPVAdvisor :

IN terms of policy, IRS say all net increase in wealth is taxable, capital gains, wages, earned income lottery winning, gambling winnings, etc

NPVAdvisor :

:)

Customer:

So i won't need to report if I have a net lose?

NPVAdvisor :

That's right

NPVAdvisor :

You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. Claim your gambling losses on Form 1040, Schedule A (PDF), as a miscellaneous itemized deduction that is not subject to the 2% limit. A nonresident alien of the United States cannot deduct gambling losses on Schedule A of Form 1040NR (PDF).

NPVAdvisor :

It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses. Refer toPublication 529, Miscellaneous Deductions, for more information.

Customer:

My other problem is that since this is an offshore gambling site, my deposits are in the form of a charge from an out-of-country online site. And when I get a check for my winning, they also come from outside the country. I cannot really prove that this is gambling loss and winnings

NPVAdvisor :

Believe me, if you report it truthfully, you'll be find

NPVAdvisor :

There are lots of situations where you don't get the Form W-2G , etc but you are still required to report

NPVAdvisor :

Mainly having your own written records and SOMETHING that you've getten from the company to substantiate is what really matters

NPVAdvisor :

If they audit you believe me, they'll be able to connect the dots

Customer:

So, for example, if one of the charges I deposited to the site was shown on my credit card account "www.gamermodz.com" for lets say 500, and then I pull a check out form the site from Canada for the amount of 500, I'm worried they are going to wonder about the 500 check I received and not believe me that the "gamermodz" charge was for the deposit.

NPVAdvisor :

I hear this one all the time ... "If I gamble online, it's overseas, and I don't have to pay tax on it."and it's absolutely false. Again, under the US Tax Code, all income for US citizens is taxable, whether earned in the US, overseas or on the Internet. Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).

NPVAdvisor :

Here's another one: "I didn't receive a W-2G, so I don't have to report the gambling income." Another falsehood. Whether you receive paperwork or not, all gambling income is taxable.

NPVAdvisor :

This on's true SOMETIMES ,,,"I can net my gambling wins and losses." Some gamblers can net their wins and losses—if they are professional gamblers. Most gamblers, however, must put their gambling income on line 21 (Other Income) and take their losses, up to the amount of their winnings, as an itemized deduction on Schedule A. This deduction is not subject to the 2% AGI limitation

NPVAdvisor :

Finally, "I don't have to claim my online gambling winnings until the money is repatriated into the United States." This is yet another falsehood for gambling income. When you win your wager, you have gambling income, no matter if the bet is in the United States, the United Kingdom, or any other country. This falsehood, though, deserves a complete debunking and that will be the subject of the next installment of this series.

Customer:

I found this information online, I'm asking you to make it easier to understand.

NPVAdvisor :

Sorry, don't really see what's so unclear.... maybe you can ask me some very specific questions/scenarios

Customer:

say 500, and then I pull a check out form the site from Canada for the amount of 500, I'm worried they are going to wonder about the 500 check I received and not believe me that the "gamermodz" charge was for the deposit.

Customer:

that

NPVAdvisor :

Very quickly: here's the IRS guidance:http://www.irs.gov/taxtopics/tc419.html

Customer:

since my net is 0, what do i get taxed on

Customer:

?

NPVAdvisor :

OK, when I said connect the dots before .....

Customer:

this doesn't show that its gambling losses or winnings. thats my problem

Customer:

yes but I don't want to get audited for them to have to connect the dots. how is this avoided

NPVAdvisor :

I mean't that you should report as I've instructed ... and only if you are audited will they have to figure out that gamermodz" charge was for the deposit.

NPVAdvisor :

The IRS will have no problem connecting the company with what they do

Customer:

how much is taxes on any income anyways?

NPVAdvisor :

All countries no )even where we don't have double taxation treaties DO had information treaties

NPVAdvisor :

That information will be very easy for them to verify

NPVAdvisor :

Further ....

NPVAdvisor :

Once you have provided the receipts the burden of proof is on them to prove that this wasn't a gambling deposit

NPVAdvisor :

income is income

NPVAdvisor :

If you made 50,000 lasyt year, and then won 10,000... you mad 60,000

NPVAdvisor :

Do you file as singe or married filing jintly ... I can get the brackets for you

Customer:

Okay, that makes sense, but lets say I deposited 12,000 and made only 10000. and i file as single

NPVAdvisor :

  • 10% on taxable income from $0 to $8,925, plus

  • 15% on taxable income over $8,925 to $36,250, plus

  • 25% on taxable income over $36,250 to $87,850, plus

  • 28% on taxable income over $87,850 to $183,250, plus

  • 33% on taxable income over $183,250 to $398,350, plus

  • 35% on taxable income over $398,350 to $400,000, plus

  • 39.6% on taxable income over $400,000.

NPVAdvisor :

.

NPVAdvisor :

In terms of your question ... do you still have 12,000 on deposit? ,,, or do you owe them 2000?

NPVAdvisor :

sorry still have 2000 on deposit

NPVAdvisor :

It depend on the terms of your contract with the site (called terms of service)

NPVAdvisor :

If, for example ...

Customer:

i don't know the exact amount buts its all documented on the site. but its around these figures. I regularly receive checks for about 2000 every month or 2. But within those couple of months I put 2000 or more as deposits. This has been going on for about 6 months.

Customer:

I overall upside down a couple of thousand

NPVAdvisor :

Just a sec let me see what the rega are on that ....

NPVAdvisor :

"regs"

Customer:

ok

NPVAdvisor :

OK, what you do is report all of your winnings for the year on your 1040 online 7 ... then

NPVAdvisor :

report losses on schedule A,

NPVAdvisor :

at the end of the for, it will net out

NPVAdvisor :

"form"

Customer:

ok that makes sense. I was just worried because I thought I understaood that even though you have a net lose, you can still be taxed on the winning.

NPVAdvisor :

First one's the schedule A ..... that's where you'll get the benefit of the loss

NPVAdvisor :

You'll put it under "miscellaneous itemized deduction that is not subject to the 2% limit."

Customer:

what is the 2% limit?

NPVAdvisor :

certain deduction are limited, but gambling losses are not, so you get to report 100% of the losses on that section of schedule A

Customer:

I see.

NPVAdvisor :

Unreimbursed employee expenses, for exanple, are only deductible once you get above that 2% of agi limit

NPVAdvisor :

DO you enjoy it? ... (may ave to give it a try)

Customer:

Its around 12,000. So lets say I received checks over the last 6 months for about 12,000 or so from outside the country. I would add that to my jobs income as overall income, correct? Then I would add up all the charges which are around 200-400 each, which total up to more that I had received (even though these are from random websites) as my deposits.

NPVAdvisor :

Thats right

NPVAdvisor :

What the form will do though is limit the losses to the winnings

Customer:

Then I wouldn't have to pay any taxes since I have net loss? wouldn't they have to do extra investigation to see if the "losses" are from gambling?

NPVAdvisor :

you won;t be able to deduct net (overall) losses against income from other jobs, for esample

Customer:

okay, so the net loss just disappears, but I wont have to pay extra taxes on my gambling?

NPVAdvisor :

that's exactly right

Customer:

ok almost done. you said ,"What the form will do though is limit the losses to the winnings"

NPVAdvisor :

Now if you decuded to set up a business... do a schedule C and report everything as a professional gambler, THEN you can carry forward losses and use them again income in future year

Customer:

I only pay taxes if I have net winning, correct? thats basically what I would like to know.

Customer:

and thanks, XXXXX XXXXX do that if I continue gambling

NPVAdvisor :

Yes, again let me give it to you for the horse's mouth (IRS)

NPVAdvisor :

You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. Claim your gambling losses on Form 1040, Schedule A (PDF), as a miscellaneous itemized deduction that is not subject to the 2% limit.

NPVAdvisor :

So, I need to correct myself... you WILL have to only REPORT the amount of losses up to your winnings

Customer:

so if I lost 12000 and gained 10000, I can only report 10000 in loses?

NPVAdvisor :

But the effect is exactly as you said... you only have taxable income if your winnings esceed your losses

NPVAdvisor :

That's exactly right

NPVAdvisor :

Otherwise you'd be deducting some of the losses against other income (if you have other income that year)

NPVAdvisor :

my apologies

Customer:

so I have to be taxed on the excess 2000?

NPVAdvisor :

NO

Customer:

ok, i get it now thanks

Customer:

haha

NPVAdvisor :

if you lost 12,000 and won 10,000 then you will report the 10,000 of winnings and 10,000 of the losses

Customer:

that statements basically means that the losses disappears, unless I say im a prof. gambler, which can be added tot he next year

NPVAdvisor :

thats right they disappear, unless you turn pro

NPVAdvisor :

one other thing on that

NPVAdvisor :

As a pro...

NPVAdvisor :

you can also deduct other legitimate expenses like treavel to contests, etc

Customer:

got it, or even, internet use?

NPVAdvisor :

Yep, as long as you do it as a business and use schedule C or 1120S or C-crop... depending on how you decide to set up your business

Customer:

okay, I just feel like I'm going to get audited just for them to make sure that those online websites are actually loses and not just random sites I purchase items from.

NPVAdvisor :

That IS possible

NPVAdvisor :

but you'll win

NPVAdvisor :

just keep good records

Customer:

Yes, I know, I do everything correctly. no one wants to be audited however.

Customer:

okay. my record is on my credit card statement, is that good enough?

NPVAdvisor :

honestly, so many people don't even report, and they already know about all of the sites and companies... you's probably be having to show some pretty big numbers before you'd stand out

NPVAdvisor :

yes, credit card statements are good recordkeeping

NPVAdvisor :

there's an IRS pub on that too

Customer:

yea I played max like 20,000 and won probably like 18000. so hopefully that doesn't count as big numbers

NPVAdvisor :

In my experience, that would not

Customer:

okay thanks for the help, I will be rating this as excellent service.

NPVAdvisor :

And if they did, it would probably come in the form of an information audit where you'd just send in your record in response to a letter

NPVAdvisor :

Thanks much

NPVAdvisor :

Name's

NPVAdvisor :

Lane

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

NPVAdvisor :

Also,


If you'd like to work with ME again just say "For Lane only," at the beginning of your next question

NPVAdvisor :

Enjoyed working with you

Customer:

so I shou

NPVAdvisor :

I recap really quickly ... Report winnings on your 1040, report losses up to that amount on schedule A

Customer:

how do I save this congo?

Customer:

convo?

NPVAdvisor :

You can bookmark (by the way all the links, like to the forms will stay active) , or copy and paste to a document, or file print

NPVAdvisor :

I'd recommend bookmarking (save as a favorite in your browser) ...

NPVAdvisor :

Here's the link you could also just save this eomswhere: http://www.justanswer.com/tax/7ux42-live-california-wondering-taxes-online.html

NPVAdvisor :

Also? Turbotax does a nice job of just asking all the questions and putting things in the right places (schedules) for you

Customer:

I just exited and opened up the link, but I cannot see the history of the conversation

NPVAdvisor :

Hmmm ... may be because you haven't rate and we haven't saved yet

NPVAdvisor :

try save and exit

Customer:

I rated and clicked submit and it says

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4177
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

I can see it all now, thanks

Expert:  Lane replied 1 year ago.

Good deal Joseph

Thanks for the positive rating

Let me know if I can help further

Lane
Customer: replied 1 year ago.

I one more question actually. The amount I won is about 24,000 over the course of a year and half, but I have input about 25-26000.


 


I was just wondering, does the accuracy of the amount lost matter. Meaning if I lost 25,000 as opposed to 26,000, since these loses would both put be at a net loss, as long as I could prove that the lose is at least the amount that I won?

Expert:  Lane replied 1 year ago.

Not in this situation, since you don't get to use all of the losses.

Just be sure that you can substantiate enough to cover the winnings


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