Home > Gambling, Gambling Tax Basics, IRS > taxdood’s Mailbag: Constructive Receipt of Online Poker Winnings

taxdood’s Mailbag: Constructive Receipt of Online Poker Winnings

Taxpayer asks:

I initially deposited $100 into a PokerStars account sometime in 2007.  I played poker on the site once a week or so, gradually building my bankroll each year.  Throughout this time, I did not withdraw any funds from the account, and never reported any income from gambling winnings.  On April 15, 2011, when the Department of Justice seized the PokerStars U.S. internet domain, my PokerStars account balance was $9,000.  This past Tuesday, after learning that PokerStars was accepting withdrawal requests from U.S. players, I immediately requested withdrawal of all funds.  As of this morning, the $9,000 is sitting in my U.S. bank account.  I have $9,000 in taxable gambling winnings in 2011, right?

Answer:  Wrong.

I’ve been asked this type of question countless times; it’s clear there will always be is still significant misunderstanding in this area of the tax law.

Almost all individual taxpayers use the cash method of accounting for tax purposes.  Under the Internal Revenue Code, the cash method requires a taxpayer to include an item in income (e.g. cash, services, or property) on actual or constructive receipt.

The doctrine of constructive receipt sometimes requires cash method taxpayers to include an item in income even if no cash, services, or property are actually received in hand during that year.  The pertinent Treasury regulation (§ 1.451-2) states that a taxpayer has constructive receipt of income in the taxable year during which it is:

  • credited to the taxpayer’s account;
  • set apart for the taxpayer; or
  • otherwise made available such that the taxpayer may draw upon it during the taxable year if notice of intention to withdraw had been given.

A critical litmus test for constructive receipt is whether the taxpayer has the immediate power to receive the income.

Back to the question above.  Withdrawal of gambling winnings from your PokerStars account is actual income for a cash basis taxpayer, but only if there wasn’t constructive receipt of those winnings in a prior year.  In this case, there is constructive receipt in years prior to 2011.

From 2007 to April 15, 2011, as far as I recall, there was no limitation on the ability of a PokerStars account holder to request cash outs.  The money sat in the account, available for withdrawal.  Sure, it may have taken several days for the amount to appear your bank account, but it almost always safely arrived.  These circumstances squarely fall into both the first and third bullet points above.

As a recreational gambler, you must separate all of your online gambling activity into separate “sessions.”  Then, for each tax year, combine all gambling winning sessions and report the amount as Other Income, and combine all gambling losing sessions and report the amount as an itemized deduction.

What if you weren’t aware of constructive receipt and haven’t reported any of these winnings and losses?  Consult a tax professional to comprehensively review your situation.  It’s likely the recommended course of action will be to file amended returns for 2007, 2008, 2009, and 2010, if you filed for any of those years.  If you didn’t file for a year, you may or may not be required to file, depending on certain factors (one being your total income for the year).

If you are amending any returns or now filing past year’s returns, be sure to put some funds aside to pay the additional tax, interest, and penalties for not previously reporting the income.  As I always say, it’s better to voluntarily come clean with the IRS than to be discovered by the IRS for wrongdoing.  In this case, peace of mind comes with a price.  In my opinion, it’s worth the cost.

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