Taxable Talk

Yesterday afternoon, the 2022 Main Event of the World Series of Poker concluded. First, congratulations to Caesars for putting on a mostly great series at the Paris and Bally’s casinos on the Strip. This was the first year the events ran on the Strip (previously, they were held at the Rio Casino about one mile west of the Strip), and the events attracted near-record crowds.

This year, the Main Event had 8,663 entrants, each ponying up $10,000. The prize pool was $80,782,475 (the difference is the funds kept by Caesars for running the event). We focus on the final table of ten, but 1,300 of the 8,663 received winnings from the prize pool; a minimum cash was worth $15,000. The winner received a whopping $10 million…but that’s before taxes.

One important 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 (and/or “swap” action with other entrants). It is quite likely that most (if not all) of the winners were backed (or had swaps) and will, in the end, only enjoy a portion of their winnings. I ignore backing and swaps in this analysis (because the full details are rarely publicized). Now, on to the winners.

Congratulations to Epsen Uhlen Jorstad, a professional poker player and a native of Norway now residing in London. On the final hand, Mr. Jorstad flopped three of a kind (holding Q-2 in his hand, with the flop being 4-2-2). Adrian Attenborough, the second place finisher, flopped top pair (holding J-4); in heads-up play, any pair is usually a good hand. This was definitely not the case this time, with the 8 on the turn changing nothing. The river Queen gave Mr. Jorstad a full house, and when Mr. Attenborough called Mr. Jorstad’s river all-in bet, we had a winner. Mr. Jorstad is a popular poker streamer on Twitch, and he’s also an instructor at the Run It Once poker training site. Mr. Jorstad’s first place prize of $10 million will be his—just his—to enjoy. Had he still resided in Norway, he’d be looking at 39% vanishing in taxes. However, as a resident of the United Kingdom he benefits first from the tax treaty between the United States and the United Kingdom; gambling winnings are exempt. He also benefits from how gambling is taxed in the United Kingdom, or rather, how it’s not taxed. Yes, the U.K. doesn’t tax gambling.

In second place was the aforementioned Mr. Attenborough. A native of Australia, Mr. Attenborough, now resides here in Las Vegas. A professional poker player, Mr. Attenborough will owe US income tax and self-employment tax. Of his $6 million in winnings, I estimate he’ll have to fork over $2,388,875 to the IRS; his actual winnings after taxes are an estimated $3,611,125. State income taxes are a non-issue for Mr. Attenborough: Nevada doesn’t have a state income tax.

In third place was Michael Duek winning $4 million. Mr. Duek resides in Fort Lauderdale, Florida but is a native of Argentina. Mr. Duek, a professional poker player who focuses on pot-limit Omaha, decided to enter the Main Event (the event plays no-limit hold’em). It was an excellent decision, and of his $4 million third-place prize he’ll end up paying an estimated $1,593,064 in tax to the IRS (like Nevada, Florida doesn’t have state income tax) and keep $2,406,936 of his winnings.

John Eames, of Southport in the United Kingdom, finished fourth for $3 million. Mr. Eames is another professional poker player who benefits from the US-UK tax treaty and the United Kingdom’s 0% rate of taxation on gambling. Yes, Mr. Eames gets to keep all of his $3 million.

Finishing in fifth place for $2,250,000 was Matija Dobric of Slatina, Croatia. Mr. Dobric, a professional poker player who mostly plays online, finished 32nd in the 2021 Main Event and bested that this year. The United States and Croatia have just completed negotiating a tax treaty, but it’s definitely not in place today. That means that 30% of Mr. Dobric’s winnings ($675,000) will be withheld and remitted to the IRS. Croatia does tax gambling, but with a maximum tax rate of 30% it is likely that Mr. Dobric won’t owe anything to Croatia: he should be able to take a tax credit on his Croatian tax return to avoid double-taxation of his income. Thus, he should be able to enjoy his $1,575,000 of after-tax winnings.

The sixth place finisher was the first of two amateur poker players at the final table. Jeffrey Farnes, of Dallas, Oregon (near Oregon’s state capital of Salem) ended in sixth place for $1,750,000. As a non-professional poker player, he avoids self-employment tax. However, as a resident of Oregon he owes state income tax on his worldwide income. I estimate he’ll only get to keep $950,312 of his winnings, with $621,968 going to the IRS and $177,720 to the Oregon Department of Revenue.

The other amateur gambler, Aaron Duczak of Kamloops, Canada (in British Columbia) finished in seventh place for $1,350,000. The US-Canada Tax Treaty specifies that Canadians face 30% withholding on their gambling winnings but can get some of this back based on gambling losses. It appears that based on the recent Tax Court of Canada decision in Duhamel c. La Reine that some professional gamblers in Canada will owe Canadian income tax. (Mr. Duhamel, who won the 2010 Main Event, was held to be an amateur gambler in that decision (decision in French); however, it’s clear from the decision that Quebec law would allow for taxation of some professional poker players.) But Mr. Duczak isn’t a professional gambler, so the only tax he’ll owe is the $405,000 withheld to the IRS (he’ll keep the other $945,000).

In eighth place was Phillipe Souki of London. The French professional also moved to the United Kingdom to avoid French taxation. His eighth place finish was worth $1,075,000 and he gets to keep all of it. Had he stayed in France, he’d owe an estimated 47.5% in tax. That’s about 510,000 reasons to be in London rather than Paris.

The ninth place finisher was Matthew Su. A professional poker player residing in Washington, DC, he didn’t have much luck at the final table when his pair of Queens lost to an opponent’s pair of nines. Finishing ninth earned Mr. Su $850,675. That’s before taxes, and Mr. Su will owe an estimated 47.70% of his winnings to tax: $332,898 to the IRS and $72,856 to the District of Columbia’s Office of Tax and Revenue (leaving Mr. Su with just $444,921).

This year, ten players made the final table rather than the usual nine. Day 7 of the Main Event ran so long that the WSOP stopped play with ten left. Finishing tenth was Asher Conniff of Brooklyn, New York. Mr. Conniff’s final table appearance did not last long. On one of the first hands, he went all-in with a pair of tens versus his opponent’s Ace-King. That’s a classic “flip” (a nearly 50% chance for either player to win), but after the flop of three Kings Mr. Conniff was “drawing dead” (he could not win the hand). A professional poker player, Mr. Conniff’s winnings of $675,000 face the highest marginal tax rate of any of the final ten players: 48.21%. I estimate that Mr. Conniff will only keep $349,598 of his winnings, with $253,733 going to the IRS and $71,669 headed to the New York Department of Taxation and Finance.

Here’s a table summarizing the tax bite:

That means 17.81% of the winnings at the final table goes toward taxes.

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

Once Again, players residing in the United Kingdom ended up finishing higher than their actual results (based on after-tax winnings). Both Mr. Eames and Mr. Souki get to enjoy more of their winnings based on the favorable tax regime of Britain. Someone recently asked me why don’t American poker professionals all move to the UK? Ignoring immigration law, the problem is that Americans pay tax on their worldwide income even if they reside outside the United States (subject to tax treaties and the foreign tax credit to avoid double taxation). An American residing in the U.K. would still owe tax to the IRS on their gambling winnings.

The Internal Revenue Service did not end up with taxes that exceeded the first place winnings; the agency will have to be content with finishing in third place (based on pre-tax prizes). With three winners exempt from US taxation, the IRS didn’t rack in its usual haul. Tax agencies are left with “only” $5.5 million of the nearly $31 million awarded at the final table. Still, you can’t say that the IRS didn’t do poorly because the house always wins.

Last night, the Main Event of the World Series of Poker concluded.  (While there are still a few events to be decided in the WSOP, this is the event that everyone thinks of as the big one.)  Before  I get to the winners (and the tax impacts), I want to give some credit to Caesars Entertainment.  Generally, the WSOP ran without hitches.  There were worries about Covid (especially given the past history of the Rio Hotel and Casino), but until this week that was basically a non-issue.

The Main Event attracted 6,650 entrants, each ponying up $10,000.  The prize pool was $62,011,250 (the difference is the funds kept by Caesars for running the event).  We focus on the final table of nine, but in actuality 1,000 of the 6,650 received winnings from the prize pool; a minimum cash was worth $15,000.  The winner received a cool $8 million…but that’s before taxes.

One important 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 (and/or “swap” action with other entrants). It is quite likely that most (if not all) of the winners were backed (or had swaps) and will, in the end, only enjoy a portion of their winnings. I ignore backing and swaps in this analysis (because the full details are rarely publicized). Now, on to the winners.

Congratulations to Koray Aldemir, a native of Berlin, Germany who currently resides in Vienna, Austria. On the final hand, Mr. Aldemir flopped top two pair (holding 10-7 in his hand).  George Holmes, who finished in second place, had a King in his hand.  That was disastrous for Mr. Holmes when a King appeared on the turn.  The remaining money went in on the final card (the ‘river’) which didn’t change the result.  Mr. Adlemir, a professional poker player who is a regular on the high stakes circuit, benefits from the US-Austria Tax Treaty (his income is exempt from withholding by the IRS).  And there’s a taxing reason why Mr. Aldemir moved from Germany to Austria: Austria does not tax gambling income of its residents.  It sure beats the 46% tax rate he’d be facing if he was residing in Germany.

Finishing second place and winning $4,300,000 was (as previously noted) George Holmes. Mr. Holmes, a resident of Atlanta, is an amateur gambler who mainly plays cash games though he plays the Main Event every year.  I estimate he’ll owe $1,802,011 in tax to the IRS and Georgia leaving him with just under $2,500,000 of his winnings to enjoy.

In third place was Jack Oliver. The resident of Manchester in the United Kingdom benefits from both the US-United Kingdom Tax Treaty (gambling winnings are exempt from withholding) and UK law on gambling: His winnings are not subject to tax in the UK. He gets to keep all $3 million of his winnings.  It’s always nice when your after-tax income legally equals your before-tax income!

Joshua Remitio of Gilbert, Arizona (suburban Phoenix) finished in fourth place winning $2,300,000.  Mr. Remitio previously had entered poker tournaments with a maximum buy-in of $300; by far, he was the individual who came out of nowhere.  Arizona is luckily not a high-tax state; I estimate he’ll owe $1,004,393 in tax to the IRS & Arizona and be able to keep $1,295,607 of his winnings.

Finishing in fifth place was Ozgur Secilmis, of Istanbul, Turkey.  The US-Turkey tax treaty exempts his winnings from US withholding. Turkey, like the United States, taxes the worldwide income of its residents.  Also like the United States, Turkey has a graduated income tax.  The top tax bracket (40%) begins at 650,000 TRY (Turkish Lira); the Turkish Lira today is worth $0.09.  I estimate Mr. Secilmis will owe 7,773,055 TRY (or $699,575) to the Turkish Revenue Administration.

The sixth place winner, Hye Park of Holmdel, New Jersey, is a professional poker player who normally plays cash games.  But his foray into the Main Event sure paid off: sixth place paid $1,400,000.  Unfortunately, New Jersey is not a low tax state (plus as a professional gambler Mr. Park must pay self-employment tax).  I estimate he’ll owe just over $650,000 in tax and get to keep just $749,709 of his winnings.  Mr. Park owes the highest percentage in tax (an estimated 46.45%) of any of the final table finishers.

Alejandro “Papo” Lococo of Buenos Aires, Argentina is an MC and also an ambassador for PokerStars (an online poker site).  Finishing seventh earned Mr. Lococo $1,225,000 but that’s before taxes.  The US and Argentina do not have a tax treaty, so 30% of his winnings are withheld to the IRS.  He’ll be able to take a tax credit on his Argentina tax return for the tax withheld to the IRS; that will lower the tax paid to Argentina to an estimated 5% of his winnings ($61,250) and he overall pays $428,750 in tax. His net winnings are $796,250.

In eighth place was Jareth East of Redhill, England won $1,100,000 for his eighth place finish.  A professional poker player, his winnings are not subject to US tax nor does the United Kingdom currently tax gambling.  Yes, Mr. East gets to keep all $1,100,000 of his winnings.

The ninth place finisher was Chase Bianchi. Mr. Bianchi is a former professional gambler (he is now a software engineer), so he won’t owe self-employment tax.  Still, as a resident of Massachusetts he will pay an estimated 37.56% of his winnings in taxes to the IRS and Massachusetts leaving him estimated after-tax winnings of $624,357.

Here’s a table summarizing the tax bite:

That means 20.56% of the winnings at the final table goes toward taxes.

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

The players from the United Kingdom did better than their results with Mr. Oliver finishing in second place and Mr. East finishing in 6th place based on after-tax winnings.  Mr. Park fell to eighth place (from sixth) because of taxes.

The Internal Revenue Service did not end up with taxes that exceeded the first place winnings; the agency will have to be content with finishing in third place (based on pre-tax prizes).  With three winners exempt from US taxation, the IRS didn’t rack in its usual haul.  Indeed, the tax agencies ended up exceeding only second place money this year due to those three individuals also being exempt from taxes in their home countries. Still, you can’t say that the IRS didn’t do poorly because the house always wins.

With the World Series of Poker (WSOP) winding down (the Main Event champion will be crowned Wednesday evening–and, yes, I will have my customary post on the real winners of the WSOP on Thursday), an issue arose late in the series.  Why did the WSOP change the rules on players cashing in lammers?

For those of you not in the poker world, let me explain.  “Lammers” are the nickname for satellite chips.  The World Series includes all sorts of tournaments, from the Main Event (which costs $10,000 to enter), numerous other tournaments costing $500 to $10,000 which award WSOP commemorative bracelets, daily tournaments costing $100 to $500, and satellite tournaments.

Satellite tournaments allow someone to enter a larger buy-in tournament without spending the full price.  Let’s say you have $1,080 and want to enter the Main Event.  You could play a one-table satellite.  This mini-tournament has ten players; $1,000 of the $1,080 entry fee goes to the prize pool with the WSOP keeping $80 per player for running the tournament.  The tournament awards twenty $500 buy-in chips (called “lammers”) that can be used to enter any event at the WSOP.  The WSOP has satellite tournaments costing $100 and up awarding various numbers of lammers.

These lammers have printed on them, “No Cash Value.”  The problem with that is obvious: there is value with the lammers.  If you have 20 lammers, you can buy into the Main Event, so each lammer really has a value of $500.  An individual lammer cannot be turned into cash from the WSOP (the Rio Hotel, where the WSOP is being held, will not buy your ‘excess’ lammers).  However, every year there is a brisk trade in lammers.  Many players just play satellite tournaments, collecting lammers and selling them to other players.  The players buying the lammers simply go to the cashier and use the lammers to buy into whatever event they wish.

Until November 8th the WSOP didn’t do a thing about this.  Then Shane Schleger, a professional poker player, noted:

FYI the @WSOP cage is saying they’re not accepting satellite lammers for buyins unless you can verify that you won them yourself. (Seems ridiculous but I would recommend you don’t buy lammers off people selling them at the registration line). CC @Kevmath @MazeOrBowie

— Shane Schleger (@ShaneSchleger) November 8, 2021

There was lots of speculation about why this happened.  Most of the speculation called it greed by the WSOP (unused lammers are completely worthless once the WSOP is over); I believe that’s almost certainly wrong.  This has nothing to do with greed by the WSOP.  Instead, it has everything to do with tax law.  Indeed, there are two separate issues in play.

For years the WSOP has played “wink-wink” in regards to the active market in lammers.  Unless the individuals running the WSOP were blind (and they’re not), they knew about the active marketplace in lammers.  This benefited the WSOP greatly because more individuals played satellites leading to more entrants in all their tournaments.  If the WSOP could, they would want the lammer marketplace expanded. 

Unfortunately, we have to juxtapose the way poker players want the poker world to work with how the IRS and the Financial Crimes Enforcement Network (FINCEN) demand it work.  We have to go into two areas to understand this: the rules regarding issuance of W-2Gs and FINCEN rules regarding cash and cash equivalents.

The WSOP is required to issue W-2Gs (or Form 1042-S for a non-American) if someone wins a prize in a poker tournament of more than $5,000 in cash (or cash equivalent) net of the buy-in.  Assume those lammers have cash value; that means the WSOP would be required to issue a W-2G if someone wins a one-table satellite awarding $10,000 in lammers.  It takes time and costs money for the issuance of a W-2G.  Indeed, the reason why the minimum prize for the WSOP main event is $15,000 relates to the IRS rule on issuing W-2Gs.  That’s a $5,000 net profit and a W-2G is not required (where it would be at $15,001).

Unfortunately, the IRS, FINCEN, the Nevada Gaming Control Board, or Caesars internal auditing likely noticed the wink-wink.  (Caesars Entertainment owns the WSOP.)  Gambling is heavily regulated, and the amount of paperwork required for a casino is staggering.  (That’s a subject for another day, but whatever you think it is, the correct answer is almost certainly to double or triple what you think.)  Paperwork has to be completed exactly right, too.  If there’s an active marketplace in satellites that the WSOP condones, then paperwork must be issued.  Thus, the order came from ‘higher up’ to put an end to the wink-wink.  If lammers can only be used to buy into another tournament, they truly have no cash value because they cannot be sold and turned into cash.

Second, casinos are financial institutions under the Bank Secrecy Act and are regulated by FINCEN.  Casinos must issue Currency Transaction Reports (for casinos, CTRCs) and Suspicious Activity Reports just like banks.  Indeed, the Bicycle Casino in Bell Gardens, California was just fined $500,000 for not complying with money laundering laws.  If lammers are being used as cash (which they were), then they fall under BSA reporting.  That would be a near impossible task for the WSOP to deal with.  Thus, one of FINCEN, the Nevada Gaming Control Board, or Caesars internal auditing had a second reason to put a stop to the trade in lammers.

If greed had won out, the wink-wink would have continued forever.  Instead, the real world intruded.

The World Series of Poker will begin here in Las Vegas on September 30th.  While attendance is likely to be less than in previous years (it’s still difficult to travel internationally to the United States), thousands of poker players will be heading to the Rio Hotel with the hopes of winning a bracelet.  The biggest news isn’t tax-related; rather, all participants (and spectators) most be fully vaccinated against Covid.  From a tax standpoint, nothing has changed from this update I wrote in 2018.

For those of you attending, good luck!