IRS Increases Withholding Requirements for Poker Tournaments

The War on Poker continues. I wonder if Rep. Ralph Hall collected withholdings at his fundraiser?

Shaniac has argued that for players intent on paying their taxes, the withholding only impacts when and how taxes get collected. Therefore, he argues it’s much ado about nothing.

I disagree.

For the hobbyist like me, if I have a surplus of tournament winnings at some point during the year, I know that I can deduct losses up to my winnings. So, I have an incentive to plow my winnings back into the tournament scene later in the year.

For example, I won $20K in Tunica in January. So, I entered the main event of the WSOP, knowing that the worst that could happen is that I’d have a 10K deduction to apply to my 20K in winnings.

With the new rule, I have a vastly reduced incentive to enter future events after winning some money. I suppose I could still enter, and later apply for a refund of the withholding if my gambling losses equaled my gambling winnings. But after I have already “paid” my taxes via withholding, that’s not very attractive.

For the professional player who:

1. pays quarterly income installments
2. pays self-employment tax, and
3. only owes taxes on his net winnings,

the rule seems counterintuitive.

Income withholding is not imposed on any other business owner. Why should pro poker players be subject? Everyone knows the swings in poker. To assume that a $100K tournament win is all profit before the year is finished is ludicrous.

I expect this rule to get challenged.

Seems like a pretty big chunk to me. I wouldn’t go as far as to say that I am surprised though. My watered-down opinion is that it is pretty ridiculous move for our government, but it isn’t entirely breaking the mold.

So let me play devil’s advocate here. Withholding is generally done because people suck at paying taxes in April on money earned 10 months prior. Rules like this come into place because enough people have defaulted on owed taxes to warrant it. Yes, this withholding will reduce liquidity in the market, but one could argue that the liquidity shouldn’t be there in the first place. That as much money is blown on houses and cars and strippers and blow as in the pits. I’m not sure, as a taxpayer, that I should be funding some 22 year old kids Porsche because he didn’t set aside money to pay his taxes.

In many ways I think it’s a reflection of the maturity of the industry. The mantra of the PPA is regulate and tax, don’t ban. This is a natural extension of that.

That said, I understand the argument that maybe the withholding should only be on the net or that it should be a smaller percentage to reflect the typical win rates in tournaments, etc, etc. I also understand that it may have some impact on the tournament circuit. Though, I don’t know how much more than the other competitive forces like the sheer number of 10K buy-in events that exist.

“I would guess a lot of gamblers don’t keep records like they should, and the IRS is going to audit people who demand $30,000 refunds because their $120,000 tournament win got offset by $120,000 in losses in the $100-$200 NL game. If you can’t document to the IRS’s satisfaction the $120,000 in losses, you may be SOL or at least have your money tied up for even longer than just that 1 year.”

Excellent point, Ed.

Todd – You are wrong. 22 year old poker players are not the cause of the defecit or the need for the IRS to raise funds. Rather, the Republicans’ out-of-control spending and Bush’s Iraq folly + tax cuts are.

Something just occurred to me. Satellites are crippled. Let’s say I want to play a satellite to get into the main event. 10 people sit down and pay $1100 each. Winner gets $10K entry fee and some cash. Except once they withhold 25% for taxes, all of the sudden he does not have enough for the $10K buy in.

So, what’s the solution? 10 players pay $1400 each for the right to a $10K post-tax seat? Horrible implications for satellites.

Hi cougarred,

…snip…
Todd – You are wrong. 22 year old poker players are not the cause of the defecit or the need for the IRS to raise funds. Rather, the Republicans’ out-of-control spending and Bush’s Iraq folly + tax cuts are.
…snip…

I don’t think that these folks are the cause of deficits, etc. You are right that there are much bigger contributors than that. I certainly am troubled about where my tax dollars are going under the current administration. But, we don’t really get to choose where our money goes after we cast our ballots and I’m sure that there are those that don’t share my priorities. Such is representative democracy. It’s more that there are folks that aren’t good at paying their taxes and that does ultimately affect those that do.

In any case, I think this is a step in the road towards legitimacy for tournament poker and poker in the main stream is probably good for casual, non-professional players like me. If you disagree, I certainly respect your position.

Hi Ed,

…snip…
I think it’s the tax code that’s broken if it is written and executed so clumsily that it destroys the economic activity that it intends to tax.
…snip…

You’re 100% right here. I would hope that the rule is structured in such a way as to not kill the industry. I also think you’re right that tournament winnings probably aren’t viewed in the same way that a tournament professional would view his or her winnings and related costs. There certainly will be a loss in liquidity and an impact on the industry.

…snip…
I mean seriously, what would happen if the IRS suddenly declared it was withholding 25% off the top of every trade on Wall Street that netted a profit over $5,000?
…snip…

I have to call you on this one a little bit, Ed. Seriously, even a top flight live tournament player probably has a dozen cashes in excess of $5K. I’m not sure it’s quite the same thing. But you’re right, the investment industry would pitch a fit if they implemented that kind of rule.

I think there is some hope in that the casino industry is a pretty powerful lobby with close ties to the Senate majority leader. I would think that any rule that was killing a profitable venture for a large, US based industry would come under some pressure.

I honestly don’t have a strong interest in any ruling of that nature. I don’t play any large buy-in tournaments or play poker for a living. I’m just pointing out that there are 2 sides to this story. One side an industry possibly or likely damaged and the other side are a group of people that probably aren’t so good at keeping their tournament winnings off the craps table.

I don’t really think the sky is going to fall like most people seem to believe.

OK I admit that a lot of money goes to the IRS for a year before people can file their return and get a refund. So for for the first year (2008) there will be less money for a while.

Then in 2009, the withholdings continue but poker players are getting their 2008 tax refunds to offset that. I grant the argument that a lot of poker players don’t keep good records, but that was before. Now that they realize that a *lot* of their money is at stake, I predict that good records will become more commonplace.

Then in 2010 we repeat. 2010 winnings have the withholding, but the 2009 refunds offset that.

So it should only have a negative effect in the startup year only.

That smiley “8″ followed by “)” sure catches a lot of people unawares doesn’t it…

Horseplayers have been taking the hit on $5000 payoffs for years…welcome to the party.

[...] Noted Poker Authority Ed Miller notes that the IRS has issued a bulletin stating that effective March 2008, tournament directors are to withhold taxes from tournament winnings. The impacts on poker tournaments (notably satellites) would be substantial. But, then, that is the point. To make it hard to play poker. [...]

[...] have read from Ed Miller’s website his take on this. There is an interesting discussion below his post that is definitely worth checking [...]

[...] is a very interesting and intelligent conversation going on now at Ed Miller?s Blog. Go check it out and let me know what you think [...]

Wow I think the blog titles above are kind of scary… “War on Poker”, “New Tax”…

Like I said above this just moves money around but doesn’t change the amount. Before this you could win $10K, use it to enter the WSOP main event, bust out, and come out even.

Now $2.5K gets withheld, so you need to take $2.5K out of your pocket to enter the main event. But if you bust out you get that $2.5K back next year, so it only costs $7.5K to enter the main event the next year.

So in the long run it comes out even. Isn’t that what poker players should think about, the long run?

In fact I see this as no different from the payroll deduction withholding that every employee pays with every paycheck.

Now if they tried to raise the tax RATE on us, higher than on other income – well that would be a real war on poker. Let’s hope it never comes to that.

BTW I like seeing the above remarks about the “interesting and intellegent conversation”. I thought all our conversations here were interesting and intelligent… ;)

Wow I think the blog titles above are kind of scary

But they are accurate. I suppose the one bright side to this development is that if the IRS is getting its piece, perhaps the other strong arm tactics will change.

I am neither American, nor do I live in the states. Therefore I wonder if there is any info/discussion whether the IRS introduced the withholding tax because they fear the tax payer (a “GAMBLER!!!”) might be broke by the time his taxes are due?

BTW, in Germany the withholding of taxes on dividends and interest was introduced years ago. No surprise that by far the biggest share of all literature on the subject of taxes is in German…

[...] have read from Ed Miller’s website his take on this. There is an interesting discussion below his post that is definitely worth checking [...]

I just won the Easter Borgata $300 + $40 Buy-in tournament at Atlantic City for $9,200. They gave me all $9,200, but made me sign a tax form for $8,860 which I’ll have to pay back to the government in 2009. I talked to an accountant about it and they said I can keep the entire amount until 2009 and write off any losses to this whether in cash or tournament buy-ins.