As we've seen recently, just because you have money on a poker site doesn't mean you're ever going to see a penny of it. So...what income tax considerations arise from the UB/AP situation, and possibly FT?

What fact(s) are necessary before we can say that "income" earned the first 3 1/2 months of the year isn't really income?

What fact(s) are necessary before we can take some kind of write off on a poker site balance?

Generally speaking, any related issues, etc.

Those are some very good questions that I have also been thinking about. It seems we have a good argument to claim we have not earned income until it actually reaches our bank accounts. The poker sites are obviously not bank accounts and the money held in them should not be treated as such. The IRS and US Gov aren't very logical though so that doesn't mean much.

Regarding the income question, I'll begin with a quote from a fairly recent post:

As applied to gambling winnings from sessions on FullTilt or AP/UB from earlier this year (before April 15) that were not actually withdrawn, all those winning amounts are considered income unless the taxpayer can demonstrate that there was an actual limitation on withdrawals in amount that exceeded the taxpayer's total winnings. I did not personally play on AP/UB, but do recall reading that for some time there was a maximum withdrawal amount per request, and that requests were limited to one per a certain period (a week?). If true, then there may be an argument that the amounts a taxpayer could not withdraw due to the restriction are not considered income.

Regarding the deduction question, which I wrote about here, there must be a confirmation that the funds will never be returned to players before a loss may be claimed for the taxpayer's frozen funds. Note that for recreational gamblers, the casualty loss is subject to a $100 deductible and is deductible only to the extent it exceeds 10% of the taxpayer’s adjusted gross income.

Some recent discussion on a related issue, the difficulty of this tax situation for potentially unclaimable poker site deposits for post-Black Friday play, present and future:

http://forumserver.twoplustwo.com/57...riday-1047014/

And yeah, the situation with the already-frozen funds on existing sites is pretty messed up.

In particular, if FTP ends up not paying us back, given that it's been shown that they haven't actually had enough assets to cover all player deposits (and that tens of millions of dollars of player deposits were never even taken from the players), isn't there an argument that our site balances didn't (fully) represent real money, and thus that winnings on those sites never actually represented any profit?

Thanks for the reply and the link. I guess recreational gamblers who try to abide by the letter of the US tax laws have one more area where they could get a bit screwed over here.

Obviously this isn't a tax advice forum, but could you expand a little when you say, "there may be significant tax reasons, beyond the scope of this post, why a loss to property used in a trade or business caused by a casualty should be treated as such."

Also, what if UB/AP keeps "ghost operating" their site for a year or two, until they finally run out of cash and you can't log on anymore. No formal announcement, no bankruptcy proceeding of the operating entity, no official declaration of "US players aren't getting their $$ back." Would that mean no casualty loss for anyone under previous US Tax Court interpretations?

It's certainly an interesting argument. If, at the time alleged gambling winnings were won on the site, it could be shown that Full Tilt was unable at that time and continuously up until April 15, 2011 to pay out all of the winnings, then there may be an argument that the income was not yet constructively received.

But what's the evidence that Full Tilt didn't have enough assets to pay out all winnings if full withdrawals were immediately requested? Anything more than news reports? I think we'd need to see Full Tilt's books in order to better evaluate this argument.

To the first question, the shorthand answer is because of section 165(h)(2) of the Internal Revenue Code. If, in a tax year, a taxpayer has casualty gains exceeding casualty losses, then the casualty gains and losses receive capital, rather than ordinary, treatment. This result may be favorable tax-wise as compared to ordinary gain and ordinary loss treatment, all else equal.

To the second question, I'm not sure offhand if there are any U.S. Tax Court decisions upholding a casualty loss before it becomes "official" that the property in question is permanently destroyed. I'll look into it.

Bump.... Anything we can add to this? I'm going to meet with my CPA this week to discuss some different things...

The madoff et al ponzi scheme allowed for special treatment of the losses in that it was not subject to the limitation and was considered "ordinary", so the DOJ accusation today has some bearing on that.

xpost from the other thread:

The link in the most recent post by repulse to Russ Fox's web site is no longer valid.

Does anyone have any additional thoughts on this matter as the end of the year approaches?

The link doesn't work because it was quoted and broken into dots instead of words, here is a correct link: FT Poker alleged to be massive ponzi scheme - taxabletalk

If the IRS comes after FT "winnings" I'll tell them to look at the Justice Department's description, and tell them to pound sand (ok maybe not pound sand, but I'll write them and try to explain what happened).

If you guys haven't already, get a playing and transfer history audit from Pokerstars.

Mine goes back like 5 years or so, it has everything, in Excel. You need winzip or an unzipping program to open the file they give you.

For something to be considered income you must have constructive receipt (no doubt that the money is yours)

This seems like a grey area, I don't know how the IRS views an account that can be seized at any time, they have been known to take hard lines until the issue eventually gets to the Supreme Court i would imagine that will have to happen before this issue becomes 100% clear

i'm deducting my FTP balance as a loss.

If constructive receipt is the issue then you wouldnt deduct it as a loss, correct? you just wouldnt include your balance in gross income?

I think that your income/loss should be determined without considering the balance in FTP, ie you assume that the your FTP deposit is zero.

When you get your FTP deposit back, you report that as an income (in the year you get back).

If there is any problem in the future, you can amend your return.
If you are amending at a later date, you provide the relevant docs stating that your FTP deposit was held by DOJ and not by FTP... You will get this docs when you receive any money (as a payment of FTP deposit) from DOJ. This will help you getting waiver for fees for late payment of income tax.

My views on the casualty loss and constructive receipt in regards to Full Tilt (and AP/UB).

-- Russ Fox

I'm wondering if the discussion about whether we have constructive receipt should be expanded for U.S. players still on other sites. I would argue that a U.S. player's money on Merge or Cake, as an example, is indeed "subject to substantial limitations or restrictions" and, therefore, is not constructively received.

Constructive Receipt:
“Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.” [3]

My understanding of the issues on Cake and other sites is slow payments, not non-payments. The problem is that the money won is set aside for an individual, and that withdrawals will, sooner or later, be received. This would be a very difficult fight to make using constructive receipt.

-- Russ Fox

The money is "set aside" by Cake, Merge, etc., but there does seem always to be a risk of "substantial limitations or restrictions". Besides slow payments, there are often other issues - requests for additional documents, additional random delays, sometimes bad checks, sometimes sudden refusals to pay out, sometimes all payouts stopped for longer periods, restrictions on the size of payouts, etc. I don't think any of these sites have a consistent history of paying everyone all the time on a set schedule, even if slow. There are plenty of instances of non-payments and other problems that the expectation is generally that withdrawals are a risky element of participating in these sites. A thorough reading of the withdrawal and site scams threads in IP would be a good argument against constructive receipt until the money is actually in hand, imo.

Not to get too fact-dependent, but if you've made more money on FT or AP/UB in 2011 than you had tied up on there as of Black Friday, would it be pretty safe to say there hasn't been constructive receipt? I.e. you're up $20k on FT from Jan 1st-April 15th of this year, but after withdrawals only had a $10k balance on there (you've been diligently pulling money off while the opportunity was there, etc.).

Versus the situation where someone is up $20k on FT from Jan. 1st-April 15th of this year, but had their whole poker roll of $100k on there. They didn't need nearly that amount for their games/stakes, and they've had sufficient opportunity to withdraw most/all of their balance - they've just kept it online vs. in a bank for whatever reason (and it sounds like a number of people did this).

Appreciate the article and your contributions to the forum... I didn't see any mention of how a professional gambler would treat the loss, is it any different?

As a professional gambler, if I report all my FT/UB/AP phantom income in 2011, and wait until 2012 to find out how much I actually receive... can I report the difference as loss on my 2012 Schedule C so I can get more favorable tax treatment -- that is, have the loss deducted from income subject to self-employment tax?

It seems patently unfair (I know, I know...) that I'd pay income and SE tax in 2011 on phantom income and not have an opportunity to get those taxes back if the income is never realized.

I am interested in the answer to the 2nd portion of this question as well. I was put in that situation because I always just cashed out in big chunks every 3 months or so, but late last year when I went to cashout from AP they had reduced cashouts to 8k/week and I was backlogged there ever since.

As I noted in the article, If there is no constructive receipt, there is no income.

As for the treatment of a casualty loss, there will be differences between professional and amateurs...but that's a non-issue until the casualty losses can be taken.

-- Russ Fox

While I see your points (and they're valid), the problem is that it's not me deciding whether or not there is constructive receipt, it's the IRS or a court. It's impossible for an American to argue today that they're unaware of the risks of playing online, and that funds might be seized, that it might be illegal to be offered, etc. I suspect that given the funds are set aside, and funds are being sent to individuals (although, as you say, in a haphazard way), that the IRS would consider there to be constructive receipt.

-- Russ Fox