Taxable Talk

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.