[Editor’s Note: This answer is provided by Blair Rodman, poker-pro extraordinaire, co-author of our book Kill Phil, and long-time man about Las Vegas.]
The quick answer is yes: Poker tournament winnings are subject to reporting on W2Gs. But the $1,200 figure you mention is for slots and video poker and does not apply to poker tournaments.
The threshold amount for poker tournaments and how it came to be is a long, interesting, and rather convoluted story. I’ve researched it, talked to several people from the old days, and pieced it together as best I could.
In 1976, Congress passed a Tax Reform Act, a part of which dealt with gambling winnings. It read, "Gambling winnings that exceed $5,000 are subject to 31% withholding. The winnings must arise from a sweepstakes, wagering pool, or lottery, or from a transaction offering at least 300-1 odds."
Poker tournaments were non-existent before the WSOP was born in 1970. When the 1976 law was passed, poker tournaments were still in their infancy and not on the IRS’ radar. Throughout the ’70s and part of the ’80s, a player just paid his entry and, if he won, got paid in cash, regardless of the amount, with no tax paperwork.
In 1987, when hold ’em and stud were legalized in California, the state wanted its share of taxes from poker tournaments, so it instituted paperwork and withheld a percentage. (For years, California’s Commerce Casino, to alleviate the hassle and player backlash from this, paid the state tax for players. Sadly, no more.)
Whether California’s tax policy spurred the IRS to act federally is unclear, but in 1992 it all hit the fan. The Las Vegas IRS office informed Binion’s that it would be required to withhold federal income tax from all poker-tournament payments of $1,000 or more. If the withholding provision became universal, removing that cash from individual bankrolls and the poker economy would be devastating to the future of poker tournaments. Indeed, Jack Binion said that if this were the case, he’d cancel the upcoming Hall of Fame tournament.
The public outcry and resulting horrible public relations for the IRS led the agency’s local gaming specialist, Jim Perlowski, to sit down with Jack Binion and poker manager Jim Albrecht to hammer out an agreement. The two main points of what was called the "Binion’s Closing Agreement" was that there would be no withholding on any payout, but a W2G would be issued for any payout of $600 or more. This agreement was only binding on Binion’s, but if other tournament venues didn’t also comply, they could be subject to IRS scrutiny.
There was a lot of ambiguity in the application of the law to poker tournaments (and there still is). If they’re "wagering pools," then the 300-1 provision would exclude most winners, as most payoffs are far less than 300 times the entry fee. If not, where do they fall? The law has never been challenged in court. Some tournament venues followed the Binion’s agreement, but many ignored or finagled the reporting process. It was a bit of a mess.
In 2007, the IRS revisited the issue, and again sought withholding on wins, this time of $5,000 or more. The American Gaming Association lobbyists got involved and reached a compromise that if a venue met the requirement of reporting $5,000 or more in winnings on W2Gs , they wouldn’t hold the venues liable for not withholding. Strange!
According to gaming-law expert I. Nelson Rose, "The IRS has now declared that when Congress required withholding from ‘wagering pools,’ it meant to include poker tournaments. But the IRS is giving a free pass to every card room and casino which openly violate a law passed by Congress, so long as they voluntarily turn in their big winners." This is where it stands today, and most venues follow this standard.
Non-U.S. citizens are treated differently. Some countries have tax treaties with the U.S. and withholding isn’t an issue. For countries without a treaty, winners are subject to 30% withholding. Many Scandinavian players stopped playing U.S. tournaments for that reason.
Regardless of whether forms are filed, every player is responsible for keeping track of his winnings and for paying taxes accordingly, just as in cash games, where there are no reporting requirements.
