Taxable Talk

The 2018 World Series of Poker (WSOP) begins today here in Las Vegas. There are also several other tournament series that have either begun or will soon begin at the Venetian, Wynn/Encore, Aria, Planet Hollywood, Binion’s, Golden Nugget, and Orleans hotels. Very little has changed from 2017, but I am updating the post I did last year with some new information.

The WSOP has made one change that could impact some Americans: If you use a passport for identification, you must bring a second piece of identification (such as a state ID card). From the WSOP FAQs:

What Photo ID’s are acceptable?
The following forms of ID are acceptable:
US Passport [and Passport Card] (A second form, an unexpired governmental ID verifying physical address such as a valid Driver’s License will also be required with this first form of ID).

(A driver’s license or state ID by itself is sufficient.)

Good luck to those participating in this year’s WSOP! And now on to the meat of the post:

The tax environment has changed, so I’ve decided to do a thorough update of the tax situation for those attending the WSOP (and other summer poker tournament series here in Las Vegas). I’ll cover the basics of the tax situation, backing, foreign (non-US) backing, and non-American winners and what they will face with taxes. This post will be somewhat long, so I’m going to break this into sections that you can click on to open. The focus is on tournaments where tax paperwork is issued.

The Tax Basics

Backing by Americans of Americans

Backing: Non-Americans

Non-Americans and ITINs

[Note 1]: I recently became aware of a lawsuit in the Midwest where Caesars’ policy is being challenged. The lawsuit is scheduled for trial in late January 2018.

[Note 2]: It is likely the IRS would reject a Form 1040NR filed by Jon noting his extra withholding. The IRS won’t understand the issue given that there is no tax treaty issue (say, Jon is from Australia) and say, “Take it up with Caesars.” It’s a classic Catch-22.

I’ll be heading to the Rio Hotel and Casino tomorrow for three days of continuing education. In a little over two weeks, the poker world will be descending on the Rio for the annual World Series of Poker. (I’m probably one of the few individuals who is in both groups.) The 2016 WSOP consists of 68 “bracelet” events culminating in the championship event that begins on July 9th. There are also daily tournaments, satellite events, and cash games at the Rio. Other Las Vegas hotels run poker tournaments, so there are tournaments for almost any size of buy-in available.

I’ve been writing about the tax impacts of the WSOP for years. The first post, back in 2007, noted that the Rio refuses to follow the rules regarding issuing W-2Gs when a poker player presents a correctly completed Form 5754. In 2011 I looked at staking and the WSOP. I presented “updates” in 2014 and 2015 (though essentially nothing has changed).

And that’s still the case today. The Rio won’t issue multiple W-2Gs (though they’re getting closer to admitting the real reason: cost) and the IRS hasn’t come after them (yet). The onus remains on the player to issue required paperwork and withhold taxes when required when the player has backers. (See the 2011 and 2015 updates.)

I have received several inquiries from non-Americans who plan on playing at the WSOP regarding withholding of US taxes and if there’s any means of avoiding this. As noted in IRS Publication 515, withholding is required on gambling winnings (for poker tournaments, of $5,000 or more net) except for residents of these countries:

Tax treaties. Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.

Gambling income of residents of Malta is taxed at 10%.

If you’re from one of these countries, you should not have tax withheld from your winnings. My understanding is the Rio is authorized to issue Individual Taxpayer Identification Numbers (ITINs) to winners. (If you already have an ITIN, make sure you bring that number with you.) You may still owe tax to your home country for those gambling winnings; be aware that the IRS does share information with other countries’ tax agencies.

But what if you’re from a country that does not have a tax treaty with the US? Suppose you’re from Portugal, and you play in a WSOP event and are lucky enough to cash. Let’s say your net win is $100,000. Will you get the full $100,000 or not?

The Rio is required to withhold 30% of your net win, so you will receive $70,000 in my hypothetical. You will also receive paperwork showing the withholding (IRS Form 1042-S). If you owe income tax to Portugal on your gambling winnings, you should be able to claim a tax credit for the double taxation.

I’ve been writing about this for nearly a decade and almost nothing has changed. Eventually the WSOP will be called out by the IRS for their violation of the rules on issuance of W-2Gs (and 1042-S’s). It doesn’t look like that will happen in 2016, though.

The poker world is about to descend on Las Vegas. Over the next several weeks, many players who enter the myriad of poker tournaments from expensive tournaments at the World Series of Poker to more affordable tournaments at Binion’s and the Venetian will be “staked.” Instead of the player putting up 100% of his or her buy-in, he or she will have backers who have put up part of the entry fees. Since some tournaments will cost upwards of $10,000 (there are $25,000, $50,000 and a $1 million buy-in this summer), staking is commonplace.

There are rules you must follow when you’re staked. You must make sure proper IRS paperwork gets to your backers. A lot depends on where you will be playing. If you’re at the Venetian playing in their Deep Stack Extravaganza, you’ll find a cooperative cage ready and willing to accept Form 5754. (Form 5754 is used when you have backers). The same is true for Binion’s. However, if you are playing at a Caesars property–and this includes the Rio Hotel & Casino, where the World Series of Poker takes place–you are on your own; Caesars will issue one W-2G (or Form 1042-S) to the winner. This is a decidedly player-unfriendly attitude; it also violates IRS rules. What does this mean for the player?

Back in 2007 I wrote about this situation. It has now been seven years and nothing has changed. If you’re backed, you have to send out 1099-MISC’s or 1042-S’s for your backers:

1. If you’re backed by an American get a signed and completed Form W-9 from him before you pay him. If someone refuses to complete a Form W-9, you are required to withhold.
2. The issuance of 1099s is based on you backer profiting $600 or more for the entire year.  So realize that if you have backers who profit $600 or more, the onus is on you for sending out Form 1099-MISC’s. (The 1099s are not sent until year-end.)
3. If you’re backed by a non-American, the situation is far more complex.  You will need to obtain a Form W-8BEN; make sure it’s the new version that was released this year.  The form must be complete in order for you not to withhold.  It must have an ITIN, a Tax Treaty Article noted, with reasoning why there is no withholding, and it must be signed and dated.  If you don’t have the complete paperwork, you must withhold even if your backer is from a Tax Treaty friendly (for gambling) country.  If you don’t, you could be held liable for the tax plus penalties and interest!  For specific scenarios, see this article I wrote in 2011.

As I’ve said before, eventually Caesars will be called on the carpet for their policy. Until they are the onus is on you to obey the law. When the casino ignores the rules, you effectively become the casino for your backers.

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?

Congratulations to Ryan Riess of Las Vegas. Mr. Riess, a professional poker player, beat out amateur player (and casino VIP host) Jay Farber and took down $8,359,531…before taxes. Mr. Riess, who went by the nickname “Riess the Beast,” kept holding good hand after good hand and came from behind to beat Mr. Farber. Riess’s final hand was AK (which dominated his opponent’s Q5). When neither player made a pair, Riess’s Ace-high won him the hand, and the tournament.

Gambling winnings are taxable in the United States for both amateurs and professionals. Mr. Riess doesn’t have to deal with state income tax (Nevada doesn’t have a state income tax). However, he does have to pay both federal income tax and federal self-employment tax. I estimate that Mr. Riess will owe $3,478,818 to the IRS (a 42% tax rate). Mr. Riess, who in interviews say he has trouble in the past saving money, will hopefully save up the $3.5 million he’ll owe in taxes.

Mr. Farber didn’t do badly by finishing second; he earned $5,174,357. As an amateur gambler he doesn’t have to worry about self-employment tax. Still, he’ll have to fork over an estimated $2,026,527 in tax (39%)

In third place was professional Amir Lehavot from Weston, Florida. Mr. Lehavot will have to be satisfied with the $3,727,823 he received (before taxes). A professional gambler, Mr. Lehavot (who is married) will lose an estimated $1,549,200 to federal taxes. Mr. Lehavot, a resident of Florida, does not have to worry about state tax on his winnings.

A note before I move on: Mr. Lehavot sold pieces of his action (backing). It’s likely that his true winnings will be significantly less than the amount shown above. Unless I know with certainty from public sources regarding backing, I ignore it for this analysis.

Finishing fourth was the man who I think was the biggest winner, Sylvain Loosli. Mr. Loosli, a Frenchman, relocated to London, England. I suspect taxes were definitely one of his motives with his move: The United Kingdom does not tax gambling winnings from its residents including professional gamblers (Mr. Loosli is a professional). The tax climate in France is anything but pleasant; Socialist President François Hollande has asked for a 75% marginal tax rate! While President Hollande has been rebuffed on that rate, the current maximum French marginal tax rate is 49%. That nice round zero in the United Kingdom sure sounds good in comparison to that! While Mr. Loosli finished fourth, his net winnings put him into third place. (The US-UK Tax Treaty exempts gambling income from UK residents from US tax.) His gross (and net) winnings were $2,792,533.

J.C. Tran, a professional poker player from Sacramento, finished fifth for $2,106,893. Mr. Tran led the final nine players going into final table action but had a disappointing day on Monday. Mr. Tran may also be disappointed when he learns how much of his income will go toward taxes; he faces the highest tax bite for an American at the final table (47.56%). Mr. Tran will end up with a very high 13.3% marginal tax rate on his California taxes; he must also pay federal tax (including the new 39.6% rate) and self-employment tax. Mr. Tran will owe an estimated $1,001,977 in tax.

The sixth place finisher was Marc-Etienee McLaughlin of Brossard, Quebec. Mr. McLaughlin will lose 30% of his winnings “off the top” to US tax withholding (though he can file a return to recover some of this based on his other US gambling losses). Additionally, he probably owes Canadian and provincial tax on his winnings.

The tax regime in Canada for gamblers is not as certain as it is in the US. The Quebec tax authorities are more aggressive than other provinces in collecting income tax from professional gamblers. Additionally, the rulings of Canadian courts on the taxation of gambling have not been consistent. For example, a professional gambler in British Columbia was recently found not to owe Canadian income tax on his gambling winnings. (That ruling may be appealed, though.)

Still, given that Mr. McLaughlin lives in Quebec I think he’ll end up having to pay tax on his winnings. He should get a full tax credit for the tax withheld by the US. Unfortunately, Quebec has the highest marginal tax rate in Canada for income–50%. Overall, Mr. McLaughlin will likely owe over 49.5% on tax ($792,935 of his $1,601,024 of winnings).

Michael Brummelhuis of Amsterdam finished seventh. The US-Netherlands Tax Treaty exempts his income from US taxation. The Netherlands taxes gambling winnings at a flat 29%; thus, Mr. Brummelhuis will owe $355,353 on his winnings of $1,225,356. Note that while Mr. Brummelhuis finished in seventh place, on an after-tax basis he finished in sixth.

Finishing eighth was David Benefield of New York City. Mr. Benefield, a student at Columbia University, is a former professional poker player. While he won’t owe self-employment tax, Mr. Benefield does have to pay both state and city income tax on his winnings. Of the $944,650 he won, I estimate he’ll owe $437,201 in tax (46%).

Mark Newhouse of Los Angeles finished in ninth place. A professional poker player, Mr. Newhouse did not win anything additional to the $733,224 he took home in July. I estimate he’ll lose just over 44% to tax ($322,879)

Here’s a table summarizing the tax bite:

That’s a total tax bite of 37.18%.

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

Once again the big winner was not the man who came in first; rather, it was the Internal Revenue Service. The tax agency has been rocked by scandals this past summer but it did very well at the Rio. The IRS will collect $8,626,311 for the United States Treasury. That’s more than the pre-tax first place prize of $8,359,531, over $3 million more than the after-tax first place prize, and more than the combined first and second place after-tax amounts. That’s because we all know that the house–the IRS–always wins.

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.