Introduction

So, you're considering a partnership where someone backs you to gamble, but you get to keep a smaller percentage of the winnings. While such arrangements can seem appealing, they come with complex tax implications. This article will explore how to report these earnings to the Internal Revenue Service (IRS) and the necessary steps you should take for accurate tax filings.

Understanding Your Obligation to Report to the IRS

According to IRS guidelines, if you're gambling and receiving a share of the winnings, you'll generally need to report the entire amount to the IRS, regardless of the split. The IRS will not typically distinguish between your share and the backers' share. However, your tax obligations can depend on the type of gambling and the amount you win.

Casino Gambling and Tax Rules

If you're gambling in a casino, your earnings, regardless of the split, will be reported to the IRS in your name. Here are some key points to consider:

If your share of the winnings is over $1,200 for slots or $10,000 for table games, the casino will report the entire amount to the IRS using Form W-2G.

You'll need to report your winnings on your tax return. You can then claim a deduction for 90% of the winnings as gambling losses, but this deduction is limited to the amount of gambling losses you actually incurred.

The casino will also withhold a portion of the winnings for taxes, which you can claim as a credit against your income tax liability.

If your backer claims the remaining 90% of the winnings, he must also report it to the IRS, even if it's not part of your share.

It's important to ensure that both you and your backer understand the tax implications and comply with all reporting requirements to avoid any penalties or audits.

Legal and Financial Considerations

When entering into such an agreement, it's crucial to have a written contract that clearly defines the split, stakes, and other terms of the arrangement. Without a formal contract, you may face legal challenges and be seen as having a side agreement that could lead to the cancellation of the entire deal.

Be wary of any situations where you feel coerced into an agreement or where there is a significant power imbalance. If you ever feel uncomfortable or coerced, it's best to avoid the deal altogether.

Tax Advice for Professionals

If you're involved in professional gambling activities, it's advisable to consult with a tax professional or an Enrolled Agent (EA), Certified Public Accountant (CPA), or another licensed tax professional. They can provide guidance on how to report and manage your taxes effectively.

For professional gamblers, some recommend having the casino withhold taxes on behalf of the backer as well, similar to the arrangement used in larger tournament series. This approach can simplify the tax compliance process.

Conclusion

Participating in a gambling arrangement with a backer requires careful consideration of the tax implications. Understanding the rules and seeking professional advice can help you navigate these complexities and avoid potential legal or financial issues.

If you're involved in such an agreement, ensure that you have a clear understanding of what you're signing up for, and seek professional help if needed. The IRS guidelines are strict, and proper compliance can save you from costly mistakes.