This might surprise you but World Series of Poker Main Event winner Pius Heinz will not have to pay any U.S. taxes on his $8.7 million first prize. Why is this? Two words – tax treaties. Heinz is a German citizen, and the U.S. has a tax treaty with Germany – as they do with many foreign countries. Residents of these countries are exempt from U.S. taxation on gambling income. (I don’t know German tax laws, but it is probable that he may be required to pay German taxes on this win – so he may not get off completely tax free!)
Speaking of gambling and taxes, Marissa and I are now hard at work updating Tax Help for Gamblers. There haven’t been major IRS changes since the original hard copy book was published in 2007, but there have been some minor ones. We have added and/or changed some material in the eBook since it came out, but now we want to bring out a new edition in both hardback and eBook formats that has all the up-to-date information you might need on this oh-so-complex subject. Hopefully this new edition will be available in January or February, in time for you to have it for reference before you file your 2011 tax returns.
Some of the parts that will have new or changed information will be those about online gambling, especially poker; how various states handle gambling income; and tax treaties. All the sample forms will be updated.
We will be adding a couple of tax memos that have come down since 2007, ones that show the IRS might be looking at gambling tax issues a little more logically. A shock, I know! 🙂 Incidentally, I used the information in one of these memos to help a friend save a big chunk of money when he and the IRS had a difference of opinion a few years ago. And just this year, some of this new information helped me convince the IRS that my “session method” of reporting was more accurate than their assuming everything must be based on W2G’s.
Now, please don’t write and ask me how I won this major battle with the IRS. It took a lot of time – innumerable phone calls and the toughest writing project I’ve ever attempted. Everyone’s situation is different, and most people wouldn’t want the bother – or the stress. And maybe I was lucky and hit an IRS employee who “gets it.” But I do know that the more informed a gambler is the more likely he – and his professional tax preparer who might not be a gambler or doesn’t understand all the details in this special area – will be able to avoid gambling tax problems and/or solve them when they do pop up.
I don’t know what “you’ve been told” about rake in the WSOP, but maybe you shouldn’t be arguing about it with someone who actually plays in the WSOP and knows it firsthand. 😉 Rake in the $10k main event is 6%, of which 4.2% goes to the house and 1.8% goes to the staff pool. If you have winnings, they ask you, once, “would you like to leave anything extra for the dealers?” You say no, they don’t ask again.
Also, you are confused about gambling taxes; you most certainly CAN deduct losses from wins when determining federal taxable income even when not filing as a professional. I do so every year; I am eligible to file as a professional, but choose not to.
For a successful gambler who has substantial wins on the rest of the year, the WSOP main event is a gamble of $10000 that would otherwise be taxed – so only 60%-70% of that in after-tax dollars – for potentially hundreds of thousands or millions in winnings that will be taxed – so 60%-70% of those winnings in after-tax dollars. If the player is +EV in the WSOP, the tax implications subtract a little of that EV; if the player is -EV in the WSOP, the tax implications give a little back. The tax issues will not change whether or not the event is +EV. There’s a 6% rake to overcome, but that is a very minor factor compared to player skill which can easily range from -80% to +300%.
For an unsuccessful gambler who does not have wins on the year, the WSOP main event is a horrible gamble. But almost by definition, most unsuccessful gamblers make bad gambles on a routine basis; the WSOP is nothing special.
You are actually agreeing with me, fivespot, because I said that roughly 75% of winnings would be taxable (the other winners being from foreign countries). $17 out of $70 million is pretty close to 25%.
I also would imagine my 28% figure is low because many winners would be in an even higher tax bracket. If they file Schedule C, then they are liable for 15% (roughly) Self Employment Punishment Tax before they even compute their income tax liability. The result is that the feds and the state, if applicable, grab half or more of a player’s winnings. And if they aren’t Schedule C filers, the horrible losses they’ve suffered up to that point cannot be used to offset their wins.
Of course, the WSOP would have about 12 entrants if people realized that less than half of the winnings, one way or another, wind up in the players’ pockets.
I don’t know what CE grabbed this year in gross amount, but I’ve been told the dealer 3% is levied on TOP of the 6% or 9% they rake away. Then, the big winners are pressured to toke the dealers some more.
Regardless of the actual bottom line, the IRS makes the WSOP a negative EV event, especially because of their gross unfairness in evaluating gambling winnings. CE’s take is small by comparison; only in the tens of millions.
Germany doesn’t tax gambling wins, so Heinz is getting his full $8.7M.
Kevin, CE “only” takes 6% from the prize pool for $10k events, the 9% cut is for $1500 events. The 6% is split about 4% for the house and 2% for mandatory gratuity. A full 94% is returned to the players. CE makes a boatload off the WSOP, and probably should rake less than they do, but let’s not exaggerate here.
And speaking of not exaggerating, the IRS isn’t getting a full 28% of the prize pool. They get nothing from any win by players from many foreign countries, including the 1st place (Germany), 2nd place (Czech Republic), 6th place (Ireland), 8th place (Ukraine), and 9th place (UK) finishers this year. Just the tax-exempt final table winnings alone are over $17M that the IRS can’t get their hands on.
Many other winners have gambling losses they can deduct to reduce their tax liability; many other losers have gambling wins that they can deduct those losses against. All of this reduces the IRS’s share.
Let’s see. The WSOP main event had 7,000+ players. Call it a gross prize pool of 70 million dollars. CE took a massive cut of 9%, as well as 3% mandatory gratuities for the dealers. Let’s further estimate that 75% of the net prize pool went to those who are liable for taxes, i.e., Americans. The prize pool after CE’s bite would have been, based on 7,000 entrants, just 60,900,000, Call it 60 million. Even the smallest of the prizes would have shoved a player into the 28% tax bracket at least. So let’s have a prize list of the REAL winners of the WSOP, shall we?
1st: The IRS @ $16.8 million
2nd: Heinz @ $8.7 million
3rd: CE @ 6.3 million
4th: Stasko @ 5 million (don’t remember the exact figure)
I suppose we should also add in the profit from all the $10 sandwiches and $4 bottles of water to CE’s take, which might vault them into second place, behind the 8 billion pound gorilla.
for whatever it’s worth, last year i used what i expect is the same memo to convince the IRS to accept my friend’s session-based accounting, and it wasn’t a struggle at all. (however, her tax liability would have been exactly the same if we’d tacked on large amounts to both the gross win and gross loss to match the W2Gs, so that may have made them more receptive to our argument.)