Taxable Talk

Nine individuals came to Las Vegas on Monday and Tuesday to compete for the championship at the World Series of Poker (WSOP). Who would be the lucky winner? And who really got to keep the money?

You will notice a theme to this year’s winners: London. Four of the players reside in the capital city of the United Kingdom yet none are from London. Indeed, they’re all from other European countries. The reason they’ve chosen the United Kingdom is simple: taxes.

Tax rates in Europe are notoriously high. But citizens of the European Union are allowed to move and reside in another E.U. country (as long as they pay that country’s taxes). The United Kingdom beckons to poker players for a simple reason–gambling income is not taxed in the U.K. A tax rate of 0% looks quite good in comparison to tax rates of 75% in some E.U. countries.

One other note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis. Now, on to the winners.

Congratulations to Martin Jacobson. Mr. Jacobson’s pair of tens beat an Ace-Nine to win the championship. The native of Sweden won an even $10 million. Mr. Jacobson resides in London, and the reason is obvious. Had he still been living in Sweden he would have faced a 56% marginal tax rate to Sweden’s very aggressive tax agency, Skatteverket. Being able to enjoy 100% of your income rather that 44% sure sounds good to me! Saving $5.6 million in taxes by residing in London sounds like a no-brainer to me.

Finishing second was yet another resident of the United Kingdom, Felix Stephenson. The native of Norway has to console himself with $5,147,911 for finishing second. Had he still been living in Norway, he would owe $2,007,685 in tax to Skatteetaten, the Norwegian tax agency (39%). Instead, he owes nothing.

In third place was Jorryt van Hoof for $3,807,753. He didn’t earn sponsorship income from poker sites, though. While he could accept such income, the sites were informed by the Dutch gambling regulator, Kansspelautoriteit, that such sponsorship would be considered advertising to the Netherlands under Dutch law and is illegal. As for residing in London, that saved Mr. van Hoof $1,104,248. The Netherlands taxes gambling at a flat 29% rate. For an extra $1.1 million, even I would take the weather in London.

Finishing fourth was William Tonking, a professional poker player from Flemington, New Jersey; he won $2,849,763. Unlike the first three finishers Mr. Tonking does not get to enjoy all of his winnings. He will owe an estimated $1,073,024 to the IRS and $242,733 to the New Jersey Division of Taxation–a combined tax rate of over 46%.

An obvious question arises: Why doesn’t Mr. Tonking also move to London? Unlike his European competitors, Americans owe tax on their worldwide income. An American living abroad still must file a tax return with the IRS. Taxation for expatriates can be reduced by the Foreign Earned Income Exclusion, tax credits on income taxed by other countries, and tax treaties. For an American playing poker in the United Kingdom, the Exclusion is available. However, for a poker tournament in Las Vegas there are no legal means to reduce that taxation.

Billy Pappaconstantinou of Lowell, Massachusetts finished fifth for $2,143,794. But that’s before taxes. Mr. Pappaconstantinou is an amateur poker player (he’s a professional foosball player), so he’s not subject to the self-employment tax. I estimate he’ll owe $771,827 to the IRS and $111,477 to the Massachusetts Department of Revenue.

In sixth place was Andoni Larrabe. Mr. Larrabe earned $1,622,471 for his finish, and he’ll get to keep all of it. The native of Spain is the last of our London residents. Given the top marginal tax rate of 52% in Spain, I can understand why he now calls London his home. Interestingly, Mr. Larrabe effectively finished in fourth place; his after-tax income puts him ahead of the fourth and fifth place finishers.

Daniel Sindelar of Las Vegas ended up in seventh place. The professional poker player earned $1,236,084 before taxes. Nevada does not have a state income tax, so Mr. Sindelar will only owe tax to the IRS. I estimate he’ll owe $494,397 in tax (40.00%)

Finishing in eighth place was Bruno Politano of Forteleza, Cera, Brazil. The second amateur of the final nine players, Mr. Politano won $947,172. The US-Brazil Tax Treaty does not exempt gambling winnings from withholding, so an even 30% of his winnings ($284,152) were withheld and remitted to the IRS. It appears that Brazil taxes some gambling at 30%. It’s unclear if the poker income would normally be subject to taxation. However, even if it is it’s unlikely Mr. Politano will owe any tax to Brazil given that he can claim a tax credit on the money withheld to the IRS.

Mark Newhouse of Los Angeles finished in ninth place. A professional poker player, Mr. Newhouse did not win anything additional to the $730,725 he took home in July. I estimate he’ll lose just over 44% to tax ($324,167). If that name looks familiar to you, it should: Mr. Newhouse finished ninth last year, too. That’s an incredible accomplishment though I’m sure Mr. Newhouse is disappointed in not finishing higher.

Here’s a table summarizing the tax bite:

Amount won at Final Table	$28,485,673
Tax to IRS	$2,869,698
Tax to New Jersey Division of Taxation	$242,733
Tax to Massachusetts Dept. of Revenue	$111,477
Tax to Franchise Tax Board (California)	$77,869
Total Tax	$3,301,777

That’s a total tax bite of 11.59%.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner	Before-Tax Prize	After-Tax Prize
1. Martin Jacobson	$10,000,000	$10,000,000
2. Felix Stephenson	$5,147,911	$5,147,911
3. Jorryt van Hoof	$3,807,753	$3,807,753
6. Andoni Larrabe	$1,622,471	$1,622,471
4. William Tonking	$2,849,763	$1,534,006
5. Billy Pappaconstantinou	$2,143,794	$1,260,490
7. Daniel Sindelar	$1,236,084	$741,687
8. Bruno Politano	$947,172	$663,020
9. Mark Newhouse	$730,725	$406,558
Totals	$28,485,673	$25,183,896

While Andoni Larrabe finished in sixth place, he ended up in fourth place based on his after-tax income. Unlike the fifth through ninth place winners, Mr. Larrabe gets to keep all of his winnings. It’s always nice when your after-tax income equals your before-tax income.

I’ve been doing this analysis for several years, and this is the first year that the IRS didn’t finish in first place. Indeed, the IRS’s take of $2,869,698 puts it in fourth place. The tax agency can only hope that next year’s winners will not include individuals from the United Kingdom.

For the past several years I’ve ended my post on the WSOP with, “That’s because we all know that the house–the IRS–always wins.” This year, that’s not the case for our four European winners. This year, the house doesn’t always win–when you’re a resident of London. The winners residing in London saved $9.55 million in tax! London is definitely calling for European professional poker players:

UPDATE: A commenter on Twitter asked about Caesars Entertainment’s tax bite. The results from the WSOP should be included in Caesars’ third quarter results. Caesars withheld 6% of each $10,000 entry fee ($600). There were 6,683 entrants, so Caesars earned from the players $4,009,800 before expenses of running the event (dealers, staff, incidentals, etc.). Caesars also has a contract with ESPN for televising the event.

That said, Caesars Entertainment lost $908.1 million in the third quarter so the $4 million in rake that Caesars made on the WSOP was hugely overshadowed by Caesars’ huge debt payments (there is no tax owed by Caesars). Indeed, there are reports that Caesars is heading toward a bankruptcy filing as early as January.

This entry was posted on Wednesday, November 12th, 2014 at 6:25 am and is filed under Gambling. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.