Taxable Talk

Back in 2007, I wrote this post regarding staking and the World Series of Poker. Five years have elapsed and nothing has changed. Caesar’s (Harrah’s changed their name a year ago), which operates the WSOP at the Rio Casino here in Las Vegas, still refuses to accept Form 5754. While this is an inconvenience to some, it can cause tremendous tax headaches for others.

For those wondering about the headaches, you can read this post I made last year. The three situations I noted regarding backing (staking) remain the same for 2012 as they were in 2011.

The only update isn’t a good one: The IRS is moving towards strict compliance regarding the issuance of Form 1099s and withholding requirements. I strongly urge anyone who is backed to have your agreements in writing. Further, if there’s a possibility you will need to withhold enroll in EFTPS and obtain an Employer Identification Number (EIN) as soon as possible. (Note: You can only apply online for an EIN from 7:00am – 10:00pm EDT on business days.)

Hopefully, Caesar’s will see the light and begin to accept Form 5754. After all, IRS regulations state they are required to accept the form. Until then, Caesar’s actions will continue to make sure that I’m fully employed.

There’s another part to the story of this year’s World Series of Poker main event winner: backing. And it has one tax agency smiling even more, while another will miss out on 50% of an unexpected bounty.

This year’s main event winner, Joseph Cada, was backed when he entered the main event of the World Series of Poker according to this news story in the Detroit News.

Backing is fairly common in large buy-in poker tournaments. Playing poker professionally, especially tournaments, involves a lot of what poker players call variance. No matter how good a player you are, sometimes luck is not with you. Your aces may lose to kings, as will happen about one in seven times. Most poker players do not have enough money in their bankrolls to handle the variance, so they seek investors who have large bankrolls to help finance their entries. In return, the investors demand a percentage of the player’s winnings.

Mr. Cada was backed by a pair of investors from New York, Eric Haber and Cliff Josephy. The pair will receive 50% of the winnings of Mr. Cada. That’s good news for the New York Department of Taxation and Finance which will receive an extra windfall of $383,335. It’s bad news for the Michigan Department of Treasury which loses $185,898.

Here are the adjusted numbers for the various tax agencies:

That’s a total tax bite of 39.64%.

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

The New York Department of Taxation and Finance should send a thank you card to Mr. Cada. After all, he could have chosen backers from a state like Nevada (which has no income tax). Instead, because of Mr. Cada’s good fortune and his choice of backers, New York ends up with an extra $383,335. I’m sure the politicians will spend that money in two seconds or so….

Nine individuals came to Las Vegas this past weekend to compete for the championship of the World Series of Poker. Who would be the lucky winner? And who really got to keep the money?

This year’s World Series of Poker concluded early this morning at the Rio Hotel and Casino in Las Vegas. The winner of the main event won $8,547,042 but would he actually end up with all that money?

A Michigander, Joseph Cada of Shelby Township, is this year’s champion. Mr. Cada is the youngest main event champion ever. Congratulations to him on his victory and his $8,547,042.

Let’s see how much of the prize Mr. Cada will actually keep. Mr. Cada is a professional gambler so he’ll have to pay self-employment tax. Michigan has a flat income tax of 4.3%. Michigan also has a business tax. However, given that Mr. Cada earned this income outside of Michigan it is unlikely that he will owe the Michigan business tax on this income. The business tax has both gross receipts (0.8%) and net income (4.95%) components, along with a surcharge of 21.99% of the business tax. This would effectively increase his Michigan tax rate from 4.3% to 11.31%. Again, I do not believe Mr. Cada will owe that tax and I am not including it in my estimate. Overall, I estimate Mr. Cada will owe $371,796 to the Michigan Department of Treasury. He’ll also owe about $3,184,940 to the IRS. His actual take-home winnings are $4,990,806—almost 42% of his winnings went to taxes.

Darvin Moon from Oakland, Maryland finished in second place. Amazingly enough, this was Mr. Moon’s first poker tournament. When he traveled to Las Vegas in July to participate in the first stage of the World Series it was the first time he had ever flown on a jet plane. Mr. Moon is part owner of a logging company and is an amateur gambler and won $5,182,190. I estimate that he will owe $1,794,966 to the IRS and $319,637 to the Maryland Comptroller of the Treasury. That’s an overall tax bite of just under 41%.

Antoine Saout of Saint Martin des Champs, France, finished in third place. The United States and France have a tax treaty; under this treaty the IRS will not get any of Mr. Saout’s winnings. France does tax gambling income and does tax the worldwide income of its citizens. The French income tax, like that in the United States, has progressive rates; Mr. Saout will owe 40% of his income in taxes. That works out to $1,391,868 of his $3,479,670 prize.

Eric Buchman of Hewlett, New York finished fourth. Mr. Buchman is a professional poker player, so he must pay self-employment tax as well as income tax. Of the $2,502,890 he won he’ll likely have to pay $949,618 to the IRS and $221,149 to the New York Department of Taxation and Finance. It’s likely I’m underestimating his New York Tax; because his income is over $500,000 Mr. Buchman will lose half of his itemized deductions. Mr. Buchman will lose at least 46.78% of his winnings to taxes. Mr. Buchman is the winner who will lose the most (by percentage) to tax.

Jeff Shulman, the publisher of CardPlayer Magazine, finished fifth for $1,953,452. Mr. Shulman is a resident of Las Vegas so he won’t owe any state income tax. He also is an amateur gambler, so he won’t owe self-employment tax. I estimate he’ll owe $671,695 to the IRS.

Sixth place went to another New Yorker, Steven Begleiter of Chappaqua. Mr. Begleiter, who use to work for Bear Stearns, won $1,587,160 for his efforts. Mr. Beglieter is an amateur, so he won’t have to pay self-employment tax. Still, he’ll likely owe $569,231 to the IRS and $139,008 to New York. That’s a 44.62% tax rate. The New York Department of Taxation and Finance is especially pleased with the performance of New Yorkers in the WSOP this year.

Finishing in seventh place was perhaps the most well known of the November Nine, Phil Ivey of Las Vegas. Mr. Ivey is a professional gambler, and is widely considered the best player in the world. However, even the best player doesn’t win every tournament he enters and Mr. Ivey must make do with $1,404,014 for finishing seventh. Of this prize money I estimate he’ll have to fork over $524,996 to the IRS.

The eighth place finisher was Kevin Schaffel of Coral Springs, Florida. Mr. Schaffel is a retired business owner. As a Floridian, he doesn’t have to deal with state income tax. He’s an amateur gambler, so he also doesn’t have to worry about self-employment tax. I estimate that the IRS will grab 35% of his $1,300,231 prize, or $455,081.

James Akenhead of London, England finished in ninth place. Under the U.S.-U.K. Tax Treaty, Mr. Akenhead won’t owe a penny to the IRS. Currently, the United Kingdom considers poker a game of chance; there is no tax on games of chance in the U.K. So Mr. Akenhead’s take-home winnings will be equivalent to his prize money: $1,263,602. Interestingly, if you look at net income after tax, Mr. Akenhead effectively finished in sixth place despite actually finishing ninth.

Here’s a table summarizing the tax bite:

That’s a total tax bite of 38.92%.

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

As you can see, taxes make a big difference in the true amount of winnings. The real winner at the World Series of Poker was the Internal Revenue Service with Mr. Cada finishing over $3,160,000 behind.

So congratulations to the winners. Just remember that a winner—perhaps the biggest winner of all—is the taxman. As we all know the house always wins.

Congratulations to this year’s winners at the World Series of Poker, run by Harrah’s, and hosted at the Rio Hotel & Casino in Las Vegas. The Main Event, the World Championship of Poker, has just been completed. This year, 6,358 contestants ponied up $10,000 each to enter the event. The total prize pool was $59,784,954 and is the largest prize pool in a sporting event held in the United States.

Jerry Yang, of Temecula, California won $8,250,000. That’s what you will read on the Internet and in tomorrow’s newspapers. But did he really win all of that money?

Well, that was his gross win. However, there’s the matter of taxes. Tournament poker falls under other gambling in the tax regulations, so withholding is required if the win is both more than $600 and at least 300 times the entry fee. So first through third place must have 25% of the prize withheld for US taxes (unless a tax treaty overrides this provision).

Mr. Yang, hailing from California, had $2,062,500 withheld to the IRS right off the top of his prize. Given the marginal tax rate he will likely face, he will probably owe another $825,000 in federal taxes (a total of $2,887,500 to the IRS). He will also California tax, so the Franchise Tax Board figures to rake in $849,750 of the win. Mr. Yang’s actual win is probably $4,512,750 or so. The Franchise Tax Board is especially grateful. This is the second year in a row that a Californian has won, and given California’s budget issues, any and all revenues will be quickly spent.

Tuan Lam of Mississauga, Ontario finished second. He won $4,840,981 for his efforts. Under the US-Canada tax treaty, he had $1,452,294 withheld. He may be able to get some of that back, if he can show other gambling losses. He also faces Canadian tax on his win–as a professional gambler, his winnings are taxable under Canadian law. Luckily for Mr. Lam, he will likely not owe any Canadian tax because he will probably get a credit for the US tax paid (at 30%) on his Candian tax return (a tax rate of 29%).

Raymond Rahme of Johannesburg, South Africa, finished 3rd and earned $3,047,025. He’s the luckiest winner. He faces no US withholding per the US-South Africa tax treaty. He’s also an amateur, and it appears he does not owe any tax under South African law.

Alex Kravchenko of Moscow, Russia, finished 4th and walked away with $1,852,721. Like Mr. Rahme, the US-Russia tax treaty allows him to head home with all of his funds. Russia has a 13% flat tax, so he will probably owe about $240,854.

The other final table participants owe tax to Inland Revenue (United Kingdom), the IRS, and two state tax agencies (Virginia Department of Taxation and the New York Department of Tax & Finance). Here are the totals for the various agencies:

That’s a total tax bite of 31.95%.

So congratulations to the winners. Just remember that a big winner—perhaps the biggest winner of all—is Uncle Sam. Because we all know, the house always wins.

Suppose you’re a poker player, and you are backed (sponsored) by a friend. You’ve agreed with your friend that for the money that he has given you, you will give him 50% of your winnings. You complete the IRS Form that has been created for this exact situation (Form 5754), enter a poker tournament, play well and win a prize. As you are ready to receive your prize, the casino asks for your social security number so that they can issue you a Form W-2G). You give them the Form 5754 and the casino tells you, “Sorry, we only issue the W-2Gs to the recipient. You are responsible for the tax situation for your win.”

Well, that exact situation will be facing entrants into this year’s World Series of Poker held at the Rio Hotel & Casino in Las Vegas and run by Harrah’s. I was told yesterday by the Assistant Tournament Director that while the casino will have copies of Form 5754 at the Cashier’s Cage, they will issue the W-2Gs and prize winnings only to the actual winner of a prize.

For the professional gambler who is backed, this is only an inconvenience. His accountant can, at year-end, create W-2Gs to correctly appropriate the winnings. However, for the amateur player this could be a lot more than an inconvenience.

The amateur gambler is now on the hook for the taxes on winnings that aren’t his. It’s even possible that the gambler will have to pay taxes on “phantom” winnings. Say that the gambler won $5000, but $2500 of it belongs to someone else. During the remainder of 2007, the gambler has losses of $3000. If the gambler completes his tax return without making any adjustments, he’ll show $5000 of winnings on line 21 (Other Income) and $3000 of an itemized deduction on Schedule A—he’ll pay tax on $2000 of income that he didn’t earn! And if our “lucky” gambler happens to reside in a state that doesn’t allow gambling losses, he’ll pay state tax on the full $5000!

I received an inquiry today asking,

“We have a small group of players who put up equal shares of money to create a pool sufficient to pay for a main event entry. We give the winner of a private tourney 50% of the equity in any win (and the right to play with the group’s money) and the remainder is divided evenly between the rest of us. In the past, we have provided them with a Form 5754 that spelled out the various equity holders and received individual W-2Gs from Harrahs.

What is the correct way for us to handle this in the future? Should the winner issue 1099-MISC or W-2Gs to the stakeholders? What if the winner was a net loser in gambling for the year prior to the win at the WSOP? Can he still write off the payments to his backers or can he only do that to extent of his winnings, like a gambling loss.

Besides lobbying Harrah’s to change the rules (and perhaps complaining to Nevada gaming regulators, there’s little you will be able to do to change this policy. But I think there are ways for the amateur gambler to still appropriate his winnings, should he be lucky enough to cash at the World Series of Poker.

First, make sure your syndicate/backing agreement is in writing. It should be signed and dated by all participants before the event(s) that the gambler will play in. You may even want to get the document notarized to prove that it was signed and dated before the event.

I would still before the actual event complete Form 5754, and bring it with you to the casino. Harrah’s is supposed to obey the rules (and that includes paying people based on what’s on Form 5754). When you cash, bring the Form 5754 to the Cashier. Harrah’s will likely tell you that they won’t look at it and that it’s your responsibility to do the taxes. You have two choices at that time. You should have a witness at the cage who can swear that Harrah’s refused to honor the Form 5754.

You could at that time call the Enforcement Division of the Nevada Gaming Commission/State Control Board (their Las Vegas phone number is (702) 486-2020). Based on information I have from various gamblers, it’s very doubtful that the NGC will do anything about this problem. And since Harrah’s has the right to refuse entrance into any other tournament should you criticize the World Series of Poker, you risk not being able to play in anything else ever again at the WSOP if you choose this path. But it is available; one of the responsibilities of the Enforcement Division is to “arbitrate disputes between patrons and licensees.”

Alternatively, the winner accepts the W-2G. When he returns home, he gives his accountant the correct payout information (the Form 5754). The accountant then splits his winnings: his share remains as gambling winnings (line 21); the portion belonging to others is moved to a Schedule C as receipts (income) (and the accountant or the winner mails checks to the other participants). The accountant issues W-2Gs (or Form 1099-MISC’s) to the other participants; the total of these are listed as expenses. The net income from this “business” is zero (so there’s no self-employment tax owed).

NOTE (Added in 2013): Based on how the IRS handles W-2Gs from individuals, individuals should issue Form 1099-MISC’s, not Form W-2G’s.

The accountant should attach an explanation to the return explaining exactly what was done and why; I would file a paper return and not file electronically.

This should pass muster with the IRS because the income is being moved to the individuals who really received the income. This is what the law requires—individuals are supposed to pay tax on their income, not the income of others.

For the record, I believe that Harrah’s is required to issue W-2Gs as per a correctly submitted Form 5754. Nevertheless, I’m not surprised at all by Harrah’s new rule. In 2006, Harrah’s would only follow Form 5754 if the other recipients were physically present (this is not a requirement of Form 5754); I had to send out W-2Gs for clients impacted by that rule. Unfortunately, it will take Nevada regulators and/or the IRS complaining to Harrah’s for this bad policy to change.