CJP711 admonished us by saying
what you guys are failing to realize [is] all money EARNED from poker is considered EARNED income
You are correct. I did not realize this. In fact I had often considered that until 1986 all money EARNED from poker was NOT earned income.
To some degree that was changed, depending upon which agency you ask and under which conditions. In 1986 future poker hall of fame inductee Billy Baxter sued the government in the case Baxter v. United States to try to get the government to reverse the idea that poker winnings were UNEARNED INCOME. Baxter wanted them to be treated as EARNED INCOME, which the IRS refused to allow. Baxter's concern was that UNEARNED INCOME is taxed at a maximum 70% rate, while EARNED INCOME is taxed at a maximum 50% rate. This was a difference of $178K in taxes on his $1.2 million in winnings.
Poker tournament winners tend to qualify for the maximum tax rate :)
Earned income is income based on active work you do - wages, tips, etc. Unearned income is based on passive earnings such as rental properties, interest, and dividends. For the average person the EARNED distinction allows the income to be applied towards an IRA. So generally, a poker player wants his earnings to be EARNED income.
However, even with the court ruling, it would appear that poker winnings are generally UNEARNED income. In the court case Baxter's attorneys attempted to apply the question of was he engaged in a trade or business with personal services income. The court noted that "if Baxter derived his gaming income actively from his expenditure of time, energy, and skill rather than passively from his use of his property, then his gaming income constitutes 'earned income'."
The government argued that his bankroll was a capital investment in his passive activity of playing poker.
The trial court considered two tests - the goods and services test, and the facts and circumstances test.
Based on the circumstances test, the court sided with Baxter and declared that Baxter did in fact have EARNED income. But for other people this only applies in some circumstances. For many, income from poker is still UNEARNED income. Unless you can tell me of a later ruling that encompasses all poker winnings.
And yes. People do think I am crazy. But not because I don't know enough, but because I know too much.