For poker tournaments completed during 2007 and before March 4, 2008, casinos and other sponsors are not required to report the winnings to the IRS or withhold tax on the amounts. But beginning March 4, 2008, the IRS will require all tournament sponsors to report winnings of more than $5,000, usually on IRS Form W-2G. (Some sponsors voluntarily did this in the past.)

Tournament sponsors who comply with this reporting requirement do not need to withhold federal income tax at the end of a tournament. (If a tournament sponsor does not report winnings, the IRS announced it will "enforce the reporting requirement and also require the sponsor to pay any tax that should have been withheld from the winner if the withholding requirement had been asserted." The withholding rate is normally 25 percent of amounts that should have been reported.

To enable compliance, a winner must provide a taxpayer identification number, which is usually a Social Security number, to the tournament sponsor. If he or she fails to do so, the tournament sponsor must withhold federal income tax at a rate of 28 percent.

Taxes and Gambling

The IRS reminds tournament winners that, by law, they must report all winnings on their federal income tax returns -- regardless of the amount and regardless of whether the winner receives a Form W-2G or other reporting form. This is true for 2007 and earlier years, and will be the case after the new reporting requirement goes into effect.

However, you may be able to offset winnings with losses. Under the tax code, you cannot claim an overall tax loss for gambling activities, but amateur gamblers can claim losses as an itemized deduction — up to the amount of winnings. Professional gamblers report their activities on Schedule C.

As you might imagine, it's important to keep accurate records. And keep in mind that you may have to pay estimated tax on gambling winnings.

Best advice: Maintain a diary or ledger of all your gambling activities that shows the type of gambling activity, the location, and the amounts won and lost.

You can support those amounts with receipts, tickets, statements or other records that substantiate your claims.

Note: The same basic rules apply to online gambling. Despite a common misconception, Internet-based gambling activities aren't exempt from tax.