By: James Chong
The World Series of Poker (“WSOP”) Main Event has concluded for 2015. The biggest winner of the WSOP will not be Joe McKeehen, but rather the United States Internal Revenue Service (“IRS”). McKeehen was awarded a life altering $7,683,346 dollars. From paper and simple glance, it seems the poker tournament has helped make the finalists into millionaires. Each of the finalists navigated through a grueling field of 6,420 participants, which included professional poker players, recreational players, and celebrities, although, the IRS will ultimately win the most money per tax liabilities. The nine finalists that participated in the poker tournament (with six players from the U.S.) will owe the IRS an estimated and combined total of $8.5M in tax liabilities based on the estimated table pot of $25M. It is assumed that all of the poker finalists will pay their tax liabilities stemming from their table pot winnings. However, it should be noted that the nine finalists will owe more than the combined $8.5M in total tax liabilities because an additional amount of taxes to their smaller state and/or local authorities will be owed.
Gambling Tax Exemption for Non-U.S. Citizens
The United States IRS considers gambling winnings as earned income. But, two players of the nine finalists are exempt from US tax liability–Pierre Neuville and Federico Butteroni, who are citizens of Belgium and Italy, respectively. Neuville and Butteroni might be liable for taxes in their own country, but neither will owe taxes to the United States IRS. Why are these two poker finalists exempt from United States taxes? Tax Treaties.
The United States (“U.S.”) has entered in tax treaties with 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. Under these treaties, residents of the aforementioned countries, not necessarily citizens, are taxed at reduced rates or are tax-exempt from specific categories of income, including gambling. Moreover, treaty provisions are usually reciprocal and apply equally to U.S. citizens, who receive earned income within treaty countries.
When U.S. Poker Players Fail to Pay to the IRS
Many highly successful poker players have tried to evade taxes, but paid the price. In 2007, Jerry Yang won a staggering $8.25M for winning the WSOP Main event. But, Yang failed to pay his federal taxes. After Yang’s non-payment of tax liabilities, the IRS filed a federal tax lien for $571,894.54 against him. Another professional poker player, Michael Mizrachi, had earned $6.9M dollars in career winnings by 2010. But, Mizrachi owed almost $340,000 in federal taxes to the IRS. The IRS collected Mizrachi’s owed taxes, when it filed a lien against his Hollywood condo. Mizrachi’s Hollywood Condo had been jointly owned with his brother, but the IRS’s lien forced foreclosure and the subsequent auction of said home. And, another professional poker player, Erik Lindgren, had earned $9.6M in career earnings by 2012, but owed $3.8M to the IRS.
Clearly, professional poker players should always pay their taxes, especially with how publicized high buy-in poker events are today. It is difficult to hide millions of dollars in gambling winnings when poker tournaments are televised on ESPN or other television channels. Since tournament sponsors are not required to withhold the tax amounts from table pot winnings, it becomes the player’s responsibility to pay taxes on their winnings. One way or the other, the IRS will get their cut.
Avoiding Trouble: Player Professionalism
Professional and amateur poker players can avoid trouble with the IRS by hiring a tax professional or by educating themselves on both federal and state gambling tax laws. Either way, professional poker players should always keep accurate and detailed records of their wins and losses to aid in compliance with applicable laws and regulations. Moreover, players should maintain records detailing how many poker tournaments they entered, including the buy-in amount to participate. For cash game players, players should always record the casino name, table numbers, and wins or losses. Maintaining detailed records will not only show how profitable a poker player truly is, but will also assist a player in their year-end taxes and any potential tax audits. In other words, playing poker can be extremely profitable and lucrative when treated as a business. Soft games will always exist in every stakes, but poker players must always remember that skill is not the only factor to being successful.
James Chong is a 3L at the Sandra Day O’Connor College of Law at Arizona State University. He is an associate editor for the Sports & Entertainment Law Journal.
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