Preparing Taxes for Poker and Crypto/Bitcoin

At year’s end, lots of poker players are asking the question, “How do I pay taxes on my poker and cryptocurrency earnings?” Zak Zimbile from Kondler & Associates breaks down the ins and outs of doing just that in the most financially responsible way you can. This podcast is pure gold for anyone who scored in poker or Bitcoin/cryptocurrency this year and is facing tax time with a big question mark over their earnings.

Featuring: Zak Zimbile and Doug

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Doug: Alright. So, this is Doug and …

Zack: This is Zack from Kondler and Associates.

Doug: And so, they’re our favorite tax preparer here at Red Chip Poker. And what we want to talk about is a very hot topic right now, cryptocurrency. That’s stuff like Bitcoin. And what are some of the others that fall into that group?

Zack: There’s a ton. There’s Ethereum. There’s Dash. There’s Ripple. I mean, you name it, there’s over probably 5-600 types of cryptos out there right now.

Doug: Right. And of course, when people are getting involved with that, there’s going to be tax implications. And we’re trying to figure that all out, as is the IRS. And this is particularly important for poker players, because we’re the kind of people that are attracted to this kind of- Whether it’s an investment or whether it’s a gamble is up to debate. And then the other thing is, there’s definitely poker sites like SWC that are Bitcoin based, that are going to attract a lot of poker players. So Zack knows a lot about this area, and taxation in general. That’s really important for poker players. So we’re gonna take some time and talk about crypto and the implications of that.

Zack: Yeah. So in general, the IRS does not have a lot of guidance regarding cryptocurrencies, as I’m sure most of you are aware. The IRS is usually a little bit slow to adopt new guidelines and regulations, and it’s the same for cryptocurrencies. So although there’s nothing out there right now, I can assure you, within the next year or two, that the IRS will slowly start to unveil some type of guidance that’s going to affect everybody who owns any type of cryptocurrency. The biggest question that we get right now, since there’s not a ton of guidance out there is, “Why should I even report my cryptocurrency transactions? The IRS doesn’t know how much I own of Bitcoin, or Dash. And they don’t know what kind of transactions I’m making. So what’s the point of even reporting it?”

Obviously, any type of income that you make, whether it’s from gambling or from trading cryptocurrency, needs to be shown somewhere on your tax return, because all income is taxable. So it doesn’t matter if the IRS knows about it, or if it’s reported to the IRS or not. It still needs to show up somewhere on your tax return. And we can get into this a little bit later. But the IRS did just take Coinbase to court. So, they actually might start knowing a little bit more about your transactions than they currently know right now.

Doug: So, it sounds like, “Render onto Caesar, what is Caesar’s.”
Right?

Zack: Exactly.

Doug: “Just pay the man.”

Zack: Yeah. It’s very similar to cash games. When you got to play a cash game, no one from the IRS is there, issuing you a tax form. So it’s kind of on you to report the winnings and the losses from those activities. So having said that, it’s pretty well known that cryptocurrency is treated as property. A lot of people want it to be treated as a currency. But right now, the IRS is treating it as a capital asset, which is pretty much the same as a stock. So, when you deal with those type of things, you’re going to deal with capital gains and capital loses.

Doug: Wait. You … That’s actually new to me. I’ve been following Bitcoin from the edges. Is this new?

Zack: This is the only way that the IRS has been able to classify Bitcoin, right now, as a capital asset. So it’s one of those things where it’s very simple. If you’ve held your coin for under a year, then it’s going to be a short term gain or a short term loss. If you have a gain, that’s gonna be taxed anywhere between 0-40% depending which, tax bracket you fall in. You get a little bit more favorable treatment if you’ve held it for over a year. You get the long term capital gains rate. And that’s anywhere between 0-20%. So it definitely is in your best interest to have these long term transactions.

Doug: Okay. Now, this gets a little bit more complicated because, some people are honest to goodness, using it as a currency. Right?

Zack: Absolutely. And if you’re buying things with cryptocurrency or if you’re trying to invest in altcoins, this is where the holding period time gets pretty confusing. Technically any time you transfer one cryptocurrency to another- So, if you use Bitcoin to purchase an Altcoin, or if you even use Bitcoin to purchase an object or some type of asset, it’s going to be a transaction. If you bought Bitcoin on January 5th, and you decided you wanted to get into an Altcoin in the middle of February, technically your holding period for that Bitcoin would be January 5th, to the middle of February. And you’d have a short term transaction. And then, which ever coin you bought, your holding period would start in the middle of February, and would go on from there. A lot of our clients, a lot of people that we deal with trying to say that, “I had the Bitcoin January 5th, and I never really sold it. I didn’t transfer into US dollars.”

But you know, it doesn’t really matter. You’re changing the effect of the Bitcoin since you’re buying that Altcoin, or you’re buying something with it. And it’s going to have to be a transaction at that date.

Doug: Wow. It sounds like we are going to need to really keep track of this. And I know there’s got to be a few of our listeners that decided to take a flier and buy $1000 worth of crypto a few years ago, that are going to be dealing with some really big decisions right now. Because it has gone up so much since then. And it starts to become real money.

Zack: Yeah. And that’s the thing. There’s not really a good way right now to track all of everything you do in the crypto world. If you made one transaction, and you bought and you held, then you’re in great shape, because you know what you bought at. You know what it’s at right now. Once you sell, it’s going to be a pretty easy transaction. But for most people out there, at least the ones that I’ve talked to, they make a decent amount of transactions every year, even every day or month. And there’s no good software that I know. There’s one or two out there, but it’s really hard to track every transaction that you make. And it’s harder for you to determine, “Hey, what did I buy this Bitcoin for? Or what was I in Dash for?”

To kind of determine what your total taxable gain is. That’s kind of the biggest issue for people, especially right now, who are trying to cash out when they’ve had so many transactions in the past.

Doug: Yeah. I imagine there’s more than a few day traders out there of this kind of thing.

Zack: Absolutely.

Doug: And, some of them ran good, and now have to figure this all out. But, that’s what you guys can help with.

Zack: Ah. Definitely. And it’s tough to go back and recreate the accounts of all the trades that you made, but at the end of the day, if we can try to come up with a figure as close as possible to what the trades actually were, then that’s going to be something that we can at least throw on the tax return to show that, “Hey. You know, I might have not have every single transaction that I made, but I know roughly how much my gains were, or how much my losses were. So I can substantiate it in that fashion.”

Doug: Excellent. Now, there’s such a thing as a miner versus a guy that just bought Bitcoin. Is there any difference in this?

Zack: Right. So there’s one difference. I don’t know how many people out there are mining. But just to make it easy, lets’ just say you were able to mine a Bitcoin, which I know won’t happen. But if you were to mine one Bitcoin today, what would happen is you would generate Bitcoin today is worth $16,000, you would generate $16,000 worth of ordinary income whichever day you received that Bitcoin. And then from there on out, it would be like you’re an investor. If you had a capital gain when you sold the Bitcoin- If it went up to $17,000 and you decided to sell, then you’d have $1,000 of capital gain. And if it went down, you’d have a capital loss. So really it’s just earning the Bitcoin is where you’re earning the income. Everything else, you’re basically treated like an investor.

Doug: So, when you’re mining, it’s just like finding $10,000 on the street essentially.

Zack: Exactly. You still have to report it. There’s no such thing as free money. It’s very similar to the hard forks that occurred this year. If you had Bitcoin and you were part of the hard forks, there’s no such thing as free money. So if you received the coin, the value of the coin that you received, would be ordinary income. And then, any income after that was generated above or below your purchase price would then be capital gain or capital loss.

Doug: Okay. Now, you had mentioned something about Coinbase, and their records. What was that about?

Zack: Yeah. The IRS just went to court with Coinbase. They essentially were trying to subpoena them for records of their biggest users. And it was recently ruled that Coinbase does have to divulge that information. And that’s going to be about 14,000 accounts. And these accounts are for people who traded about or over $20,000 worth of coins. So these accounts, they’re going to know your names, your addresses, your tax ID number. So the IRS is going to have a lot of information on you. It’s not really that surprising that the IRS went after Coinbase. I think between 2013 and 2015, only 1,000 or so tax returns even mentioned some sort of cryptocurrency activity. And with how big crypto today is in the news, and Coinbase alone has more users than Charles Schwab. It was just a matter of time before the IRS said, “Okay. It’s time to try to figure out who’s using this service and what amount of money here is taxable. There clearly are a decent amount of taxable gains.”

Doug: Okay. So now, bringing this back to more traditional poker, we’re getting onto tax season right now. I know you guys are going to get busy. And I’ve talked to a lot of local grinders. And they’re just not filing their taxes like they should. Then, what happens to them? Your average 20 something that has been playing in Vegas for a few years now, is getting married, or that kind of thing. What happens to him?

Zack: It depends. There’s a lot of people that can fly under the radar if you want to call it that. And the IRS will never really reach out to you, because you don’t have any income that they know about. But there’s also a decent amount of people that come in. They have five, six, seven pretty big tournament scores, and they’ve never filed their taxes. Well, the IRS knows about those tournament scores, because they’re issuing W2G’s. So then, it’s up to us to kind of get everything in order. Definitely a frowned upon way of doing things. If you’ve won any money in a tournament, absolutely need to get your taxes done in that year. Regardless of if you had a winning year or not, the IRS will assume that you had a winning year if you don’t file your taxes.

We get a lot of people who are starting quote unquote, ‘their life,’ and they wanna buy a house. They want to establish credit. They’re getting married. And what they need to do, is show two, three, four, years of tax returns. So we have plenty of people that come in. We try to determine what the best outlook for them is. If playing poker is their sole source of income, we can always file them as a professional gambler. If you file as a professional gambler, you’re going to have earned income on your tax return. If you go to a credit agency or a back to try to get a loan, the loan agency will see that you have earned income for these past two or three years. And it will definitely be easier for you to establish the credit. Where as, if you are an amateur player and they just see other ‘income; gambling winnings,’ it’s going to be a lot harder for the banks to sign off on the loan, because they know that’s not as stable of income as if you were a professional pursuing it full time.

Doug: Yeah. So you guys have been doing my taxes for a long time now. And I’ve actually had the IRS come back after me because I just forgot to send you a form. And then literally five years later, the IRS catches up. That’s the kind of time bomb that you’re setting for yourself if you don’t turn in these tournament winnings.

Zack: Yeah. It’s just really not something that’s pleasant to deal with. It’s always going to kind of be looking over your shoulder. And the IRS doesn’t forget. If you have income that’s sitting on the books, the IRS will never forget. It doesn’t matter how many years have gone past, if you don’t file your tax return, the IRS will remind you, and eventually lien or levy your property. It’s one of those things where, even if you don’t have the money to pay the IRS, you should always file a tax return. You can never go to jail for not paying your taxes, but you can go to jail for not filing your taxes.

Whether it’s figuring out a payment plan, or coming up with some sort of agreement with the IRS on how much money you owe, it’s always better to get those taxes filed, especially timely. That way, when you get on a payment plan, or you try to figure out how to deal with the IRS, they can look back at your history. They know you’re a timely filer. The only issue is payment, so they’ll try to work with you, whether it’s a payment plan, come to an agreement. You’ll at least avoid the 5% to 10%, even up to 25% penalties for failure to file your taxes.

Doug: Okay. So, to wrap this up, if you were in the situation where you’ve been in Vegas for a couple of years. And you just haven’t bothered, or known what to do with taxes, what are you going to do? And also, if you were coming out to Vegas, what would you do so that you do it right from the get go?

Zack: If you’ve you’re a little behind on your taxes, and you need to try to get caught up the last couple of years, the best thing that you can do is just try to recreate the year the best you can. If you don’t have great records, that’s fine. It would be easier if you have records. But I would go back through credit card statements, through bank statements, through previous tournament records with those buy in receipts that you have, and just try to determine what happened in the years in question. Sometimes, there’s are two, three, four years ago, so it’s very challenging to do that. But, what we can do to help, we can always get your tax transcripts from the IRS.

We can call the IRS. We can determine what income that they have on file for you for the past 10 tax years. You can take a look at it. It can spark your memory to let you know, “Oh. This is the income the IRS has on file. I also have income from X, Y, and Z. But then I have these cash game losses. I have tournament receipts to help offset potentially, some of those wins.”

Now, if you’re just coming out to Vegas, and you want to start everything from scratch, and you want to have it perfect from the get go, I can’t emphasize enough how important record keeping is, not only for taxes, but just for personal well being.

Doug: Oh, I agree entirely.

Zack: Yeah. I mean, it’s one of the most overlooked aspects. Even though it’s preached by everyone, it’s just so few people do it, that you have to come back to it. It really is that important.

Doug: It’s funny, because to me, 100% of the people that are losing players, don’t keep records. I have yet to meet any potential student that came in with records that was a losing player.

Zack: Yeah. And really, it helps not only your tax situation, but it helps you develop as a poker player. If you can consistently see your losing, then maybe you’re going to go work on your game instead of keep doing exactly the same thing that you’re doing. But from a tax perspective, let’s say it’s January, and you decide that you’re going to keep great records, all the sudden March comes around. You kind of fall off. And then it’s the end of the year, and you don’t have anything. And you’re thinking to yourself, “Why didn’t I do that?”

It is so hard to go back and recreate a tax year from scratch, especially if you’re playing 100, 200 tournaments, cash game sessions a year. It’s just impossible. What I would say is, although it is time consuming, take a day, two, three days, a week, whatever it is, and just think about the sessions that you had. Do it on a daily basis. If you move tables or you hit multiple tournaments up in the day, don’t worry about that. Take a daily net win or net loss, just write it down somewhere. Note where you were playing. Something very simple, just so you at least have notes. It can be in an app on your phone. It could be in Excel. Write it down. It doesn’t matter, as long as you track it. That way, you know, “Okay. January’s over. Let’s see what happened in January.”

You can roll the same thing forward for the next months. And when December rolls around, you will not only have a net income figured for yourself, but you will be in a much better position to file your taxes, because you can just take a look at your net winnings. If you have any expenses related to poker on your credit card, you can dock those as well. And you can just hand your stuff off to someone like me. Or you can prepare your own taxes. It’s just so much easier.

Doug: Now, how important are those little receipts that you get when you buy into a tournament and you lose?

Zack: Buy in receipts are important, and they’re not. If you have the buy in recept, it’s just kind of a reminder to yourself that, “Hey, I bought into this tournament. It was $150 daily. And it was on January 5th. I can write that down.”

But if you have a journal or a log book, and you write down $150 buy in, there’s really no need to keep the buy in receipt. For you, you can definitely keep it, but at that end of the year, if you ever needed to prove that you played in that tournament, you need a player’s card to play in the tournament anyway. They can easily- Whatever casino it is, MGM, Caesar’s, they can easily print out your player’s history and every tournament that you bough into will be listed nicely there for you. You can definitely hold on to the tournament receipt. It will give you a sense of knowing where you were at. But at the end of the year, if you don’t have them all or you think you might have misplaced some, very simple to get a print out from the casino.

Doug: Oh. That’s an interesting note, because I’ve got a big old shoebox full them that I just keep adding. It used to say, “receipts from 2010.” And I just keep throwing more of them in there.

Zack: Yeah. And it doesn’t hurt to keep them. There’s really nothing negative about keep them, it’s just a storage thing. At the end of the year, if you want to keep all your receipts nicely bundled up, that’s fine. But most people won’t go through all your receipts. They’d much rather just have a nice little summary. And those receipts will be for your records in the off chance that you do get audited.

Doug: Awesome. So this makes a lot of sense. And how would people find you guys?

Zack: You can go on our website. You can go on pokercpa.com. You can also find us on Twitter @pokercpas. That’s plural. Or you can give us a call. Our number is 702-433-7075. We have our main office in Las Vegas. We also have a secondary office in New Jersey, and San Diego. But we prepare tax returns for people all throughout the country, and we also prepare a number of international returns as well.

Doug: Awesome. Well, you guys have treated me well over the years. And thanks for coming on and telling us about crypto and taxes.

Zack: Absolutely. It was a pleasure. Thanks for having me.