Three-in-one book review: taxes for gamblers

I have now read three books about income tax issues for gamblers, both recreational ones and professional ones. Since these may be the only books in print on the subect, and since I may be one of the few people who has read them all, I thought it might be worthwhile to do a little comparison here. I will refer to them by their authors' names: Lewis, Johnston, and Scott/Chien. They are listed in the order in which they were published (2003, 2005, and 2007, respectively), which also matches the order in which I read them. I read Lewis shortly after moving to Vegas about two years ago, Johnston roughly a year ago, and I just read Scott/Chien last week.

Not surprisingly, the three books cover approximately the same ground, and hit the same basic points. I don't think anybody really needs to read all three. From any one of them, you will learn the most important facts and have common false beliefs dispelled. Still, each has distinct strengths and weaknesses.

Lewis is the most disorganized. About half of it is a collection of essays by various authors on taxes and gambling, many of which are conceptual (e.g., about how the authors think the system should be). These are interesting, but not especially practical. And although Lewis guides the reader through the essentials, he doesn't emphasize the traps and common errors made by both recreational and professional gamblers nearly as effectively as the other two books do; you could miss something important. Still, there's a lot of interesting material here. Some of it is not covered elsewhere, such as what happens to your heirs if you die shortly after scoring a big gambling win (i.e, the intersection of gambling taxation and estate taxation).

I think Johnston's book is horribly mis-titled. It sounds like it would be a guide on how to conceive of and start up a poker-oriented business. It is not that. It is focused exclusively on tax issues. Her main theme is the question of whether to declare oneself a recreational or a professional gambler. There are major implications for how one's tax returns have to be prepared. She goes through in detail how to work out which one is most advantageous from a tax perspective, although you may not get to choose on that basis. The biggest strength of Johnston's book over the others is the detailed focus on deductions that are allowed and not allowed for professional gamblers. I also liked her folksy style of writing, and how most chapters start with an anecdote from her own poker and accounting experiences of the mistakes poker players make and the misconceptions they have, which she then spends the chapter dispelling (e.g., that if you win money from poker on a cruise, or while in another country, or in an illegal game, or online, that you don't have to pay taxes on it, or that you can just "net out" your wins and losses and declare only the difference, if positive at the end of the year).

I found Scott/Chien to be the most interesting read. They are the most explicit about the huge gaps in tax law as it pertains to gamblers. For example, they spend an entire chapter dissecting what constitutes one gambling "session." The IRS wants gamblers to report the sums of winning sessions and losing sessions, but offers no guidance as to what a "session" is, and there are no court cases clarifying it. Scott/Chien do an admirable job discussing different ways of defining "session," their advantages and disadvantages, which ones are likely or unlikely to pass IRS scrutiny in case of an audit, etc.

They also give a lot more detail than the other two books on group wins--for example, several people pooling money to buy lottery tickets. At first you might think this has no bearing on poker, but it can. Some casinos won't help poker tournament winners with negotiated deals, and will only give the prizes as per their published payout schedule. You thus might end up with the casino showing you to have won either more or less than you actually received. The situation would also come up if you had backers buying a "piece" of your action in a poker tournament. This book details the ways you can legally handle such a situation, which I don't recall either of the other books talking about.

Scott/Chien emphasize how much uncertainty there is about all of this stuff. The IRS has dragged its feet in providing any help to gamblers, so there is a lot that just hasn't been decided by anybody in a position of authority. To make matters worse, as Scott/Chien repeatedly remind the reader, most tax preparers have no training or knowledge about the whole gambling tax issue--and neither do many IRS employees who are supposed to know about it! They relate many anecdotes about mistakes made by tax preparers or IRS people that they had to fight to get corrected. But as reassurance, they also stress that where there is uncertainty, reasonableness is what rules the day, and they spend a lot of space explaining what would likely be considered reasonable or not in various situations of legal uncertainty.

Scott/Chien, being the most recent publication, is also the most up to date--and that's important in an area that changes rapidly. They are also the only authors who address state income tax issues. For example, I didn't know until reading this book that there are ten states (CT, IL, IN, LA, MA, MI, OH, OR, WV, and WI) in which you cannot itemize gambling losses in order to offset gambling wins as a recreational player. They note that this unfair system makes it "almost impossible to gamble with an advantage, no matter how skilled you are" (p. 103). Yikes! Finally, Scott/Chien uniquely have a section of practical advice for what to do in case of an audit.

Overall, if you're going to buy just one book on this subject, I'd make it Scott/Chien, as the most thorough treatment. If you're willing to invest in a second book, then also buy Johnston if you want more rubber-hits-the-road details on how to fill out the forms, allowable deductions, deciding whether to file as a professional or recreational player, etc., or go with Lewis if you just want to read more broadly and kind of theoretically on the whole subject of gambling taxation. And remember--the purchase price of all three is deductible!