Last year, two Internet poker players were found by two different Internet poker sites to have cheated. (The players involved had multiple accounts, which was in violation of the sites’ rules.) Both Internet sites confiscated the money that the cheaters won. Do they owe income tax on their alleged ill-gotten gains?
In the first case, cheater #1 won $140,000 in an Internet poker tournament. He bragged to a friend that he had used two different accounts. The information made its way onto the Internet, the site (we’ll call it site A) where he won the money investigated, pronounced him guilty, and seized the $140,000 plus an additional $40,000 that was in his two accounts. The second site (site B) also confiscated an unknown amount of money from his accounts. Site A redistributed the tournament winnings to the players who finished below him.
In the second case, cheater #2 won about $150,000 in an Internet poker tournament on site B. He also told people about his using multiple accounts. The information again made its way onto the Internet. Site A investigated, found he had multiple accounts, and confiscated his money. Site B also investigated, found multiple accounts, and confiscated some of his money; they let him keep the tournament winnings because it was “clean,” in their view.
So who owes tax? And on what?
Cheater #1 never had constructive receipt of his income for his tournament winnings. Because those funds were never really in his possession (and were subsequently redistributed), the $140,000 in winnings weren’t really his and he doesn’t owe tax on the winnings. However, he did have constructive receipt of the other $40,000 (for a while, at least). Technically, the IRS can argue that he had the money, and it was stolen from him. He has a cause of action (tort) against the Internet site (good luck on pressing a case against an offshore entity), and may have a casualty loss. It’s an unusual situation, because he could have taken that money up to the moment it was seized. The same situation holds for the money taken from him by site B.
There’s no question that cheater #2 had constructive receipt on his tournament winnings; indeed, site B allowed him to cash out those winnings. Clearly, he owes income tax on that money. The other seized funds fall into the same grey area as for cheater #1.
There’s no question that the alleged cheaters were stupid in bragging about their actions on the Internet. This also raises serious questions regarding the integrity of offshore Internet gambling sites. Caveat Emptor.
But the moral of the story is simple: If you’re going to cheat, take the money and run.
Links: Very Long Thread from Poker Site on Cheater #1
Very Long Thread from Poker Site on Cheater #2