Tonight, wsop.com will be giving away a “free” entry into a $111,111 buy-in tournament that begins on Wednesday. To be eligible for the free entry, you had to sign-up in person for the new online poker site wsop.com at the World Series of Poker at the Rio Hotel and Casino here in Las Vegas. (You also had to sign-up no later than yesterday.) wsop.com will open for “real money” online poker play to individuals within Nevada sometime in the coming weeks. The promotion is to gain signups for what will likely be Nevada’s second legal online poker site.
How can anyone turn down a free entry into an event where first prize figures to be over $1 million? Taxes.
What, you say? If I were to win $1 million, paying taxes wouldn’t be an issue. And you’re right, of course. As long as you put aside about 40% of what you make (more, if you reside in a tax-disadvantaged state like California), you should be fine. The problem is that no matter how good a poker player you are, your most likely result is a loss; only about 10% of the entrants will “cash” (win money in the tournament). Even the world’s best tournament poker players lose most of the tournaments they enter.
What’s the issue, you might ask? After all, I was “comped” the entry, so who cares if you win or lose. The problem is that you won a prize with a value–the value is clearly $111,111. Under the Tax Code, Caesars (owners of the World Series of Poker and wsop.com) will have to send you a Form 1099-MISC for $111,111. And that’s income to you. If you’re in the 25% tax bracket, that’s $27,778 of tax you will owe (plus state income tax, if applicable). Is playing that tournament worth that to you?
Well, it’s a gambling loss, so I’ll be able to offset it with my loss in the event. No, you can’t. Your winning the entry was not the result of a wagering activity. Instead, it was a contest. wsop.com will be randomly selecting one of the people who signed up for their site to win the prize. I personally went through a similar situation when I won a free trip to the Bahamas. My tournament entry was a prize, and could not be offset by the loss in the event. (And yes, I didn’t win any money in that event.) However, I could use the gambling loss to offset other gambling winnings from that year. If the winner has other gambling income and doesn’t cash in the event, he or she can use the $111,111 as a gambling loss.
I suspect that the individual who wins the entry won’t consider the tax impact of accepting the prize. Caesars likely won’t issue the 1099-MISC until December or January, so the lucky winner will likely savor his experience of playing with the high-stakes pros…until next January when he gets the bill.
Tags: WSOP
Hey Russ-
Turns out, the winner of the drawing is a player who already has about $235K in prizes in 2013 (Owais Ahmed).
If you would, help me clarify his overall situation. If I’ve read this and the referenced blog posts correctly, Ahmed will have three outcomes should he decide to play:
1. DOES NOT CASH: in this case, he will be able to deduct $111,111 as a gambling loss against his gambling income, which is already three times that amount (the $111,111 value of the prize plus the $235K in prizes won before).
2. MAKES A DEEP RUN: the overall profit (prize money minus the $111,111 entry) gets added to his Other income. But he would not include $111,111 to his gambling losses on Schedule A, as it is already accounted for when filling out Line 21 on the 1040. The good news is that the prize money is so large that he’ll be quite happy with all of the results.
3. MIN CASHES: this is the worst outcome for him. The overall profit will not make up for the enormous additional tax liability of having won the $111,111 seat. Furthermore, he cannot include the $111,111 in his deductible gambling losses because it will have been accounted for.
Do I have it about right?
For what it’s worth, there is now a thread discussing this topic in NVG over at 2+2 (which is how I found this blog post).
Thanks!
Oops, never mind… I worked out some hypothetical scenarios. Min-cashing vs. winning the event is neutral from a tax consideration, except that winning might put him in a higher bracket for 2013. (But wouldn’t we ALL enjoy being in a higher tax bracket?)
Great blog, by the way. This topic got me to poke around to some of the other subjects on here.
[…] not physically anteing up the $111,111 entry fee, Fox wrote on taxabletalk.com that “under the Tax Code, Caesars (owners of the World Series of Poker and wsop.com) will have to […]