I am a US resident and file a tax return. At a US live tournament, I recently was given a chop offer among four players which would have awarded me $6,800 and the other three players $4,600. I calculated my ICM to be roughly $7,200 so I turned it down. Ultimately, I didn't run so well and lost chips but one more and player busted and then we chopped 3 ways for $6,850 each.

Afterwards, I was told that the casino is required to report tournament prize payments of $5,000 or greater. This was only brought up later, but somebody suggested that normally what tournament players do is saddle one person with the tax burden, and pay that person extra to help pay the tax bill.

Assuming all players are US residents who file a tax return, does it make financial and/or tax sense to let one person take a disproportionate share of the winnings? If so, is that an acceptable practice?

Yes, taxes will come into play in negotiation chopsfor live tournies. If you were heads up and the payouts were $5100 and $3900 it would make a lot of sense to chop it $4500 each.

Why? Just to avoid the casino reporting? You're supposed to report it all on your taxes anyway, so it shouldn't make a difference.

If you're following the tax laws correctly then this is pretty silly.

Assuming you do not file as a pro ....... You're required to report your gross gambling wins (add up all winning sessions) for the year on your 1040 anyway and you have the option of either taking your standard deduction or itemizing your deductions and deducting your gross gambling losses (add up all losing sessions). The fact that a casino reports some of your gambling wins or even withholds some of it shouldn't make any difference at all at the end of the year.


What it sounds like is those players are all not reporting their gambling wins on their taxes (committing tax evasion) and instead are making deals so that one person wins more than he would otherwise and enough that the casino reports that income and supposedly the extra is supposed to be taking care of all of their taxes. These people are inventing their own tax system.

It makes a big difference because in my casino every tourney score over $5k gets 25% withholding taken right out. So if the casino doesnt facilitate the chop and the players agree, one has to sign for $5100 the other guy signs for 2nd and gets the full $3900 while the first guy only gets $3850. It makes a huge difference as the guy taking first has to wait the entire year to deduct the loss to get the money back ( assuming he loses over the year) Obviously if the casino facilitates the chop and correctly reports that they each got $4500 then it doesn't matter. Thats assuming OP is reporting the income as he should be doing. It must be seriously considered though when making a deal when the casino doesn't get involved and only reports whatever 1st, 2nd 3rd, etc whether a deal was made or not. Hate to chop a tourney 9 ways and have to sign for 1st at $35k and only be getting 7k and being responsible for the whole $35k at tax time. Lots of paperwork if done properly showing the breakdown of the deal. I usually just don't chop at casinos that operate like this

Yes, that would be the only thing. If the casino withholds the money then you wouldn't get the portion of the withheld amount that you are entitled to until after you file your taxes.

If you are a winning player (and you win enough and don't have enough unrelated deductions so that you would end up owing a good amount of tax) then you should be making quarterly estimated tax payments in order to avoid owing interest and/or penalties later so in that case a withholding such as this can cover some or all of your estimated taxes so it's not too big a deal.

If you're a losing player or otherwise don't really have to make quarterly estimated tax payments (or at least don't have to in such a big amount) then yes, you'll likely be getting this money, but now because of the withholding you have to wait until you file your tax returns. I still wouldn't make any chop deals to give up some of my money in order to avoid having to wait to get it all.

Say the withholding is done at $5K and I basically have $5.1K locked up and I could chop for $4.8K, so I lose $300 but I get it all now. Well even over the course of a whole year I don't think I can take that $4.8K and make another $300 with it. Even a 5% return on $4.8K is only $240. Do you know any banks currently offering 5% interest? You can't even get 5% interest on a certificate of deposit right now.

No, I would just allow the withholding to take place so that I can have more money even though I wouldn't get some of it until later.. Then at the end of the year I would file my taxes properly, like normal, and I would put the amount the casino withheld as an already made payment of tax. Then I'd see how the taxes come out and possibly get a refund.

Of course, if you really really need all of that money right now then maybe it would be worth it to chop. Of course, this may call into question whether you should have been playing the tournament in the first place.


I'm not sure what the guys in the original post are doing, but it certainly seems like they do not file their taxes properly, with respect to gambling income and loss. It kinda seems like the people who win and get this withholding don't even deduct there other gambling losses. I wouldn't be that surprised if they were completely clueless of the tax system and thought that the casino withholding at $5K profit was the entire tax system.



NOTE:

Any time I say "you" above I am not referring to a specific person. It is a general you.







And obviously if you're breaking the law by not correctly reporting your gambling wins then most, if not all, if the above may not apply.

To add to Lego's good info:

The casino is not obligated to do any withholding on your tournament winnings if you provide them with an IRS Form W-9. Whether or not they still do 25% withholding, you are not required to report the full amount paid to you as your gambling winnings if you are doing a chop deal even if the casino won't adjust their reports. But you really need proper documentation - like a written agreement with the other winners - to back up your tax return.

Obviously, this isn't very practical as most players would refuse to make such a written document (probably because they aren't properly reporting poker income). Your solution to refuse to chop is likely the easiest method to avoid the mess. Alternatively, each player assuming the full amount of the tax on their official payout and adjusting chop amounts accordingly is not exactly kosher, but it is unlikely to be detected by the IRS and doesn't overall evade taxes (except possibly a little bit for differing tax brackets amongst the players).

Imagine if they didn't withhold on the big tournament scores some of these degen poker players would be in big trouble after they bust all the $$$ during the year and are left with a bill in april. I think for the majority of players with huge scores, it benefits them as a lot of them will blow the money throughout the year. At least this way they won't owe much if any after the withholding whereas in the past they would have already gambled it away. Sad but true I'm sure

How do you figure? In the federal system you can deduct gambling losses to the extent of gambling winnings.

If you win $50,000 in one big tournament and later you have 50 -$1K sessions you:

1.) Report $50K of gross gambling wins as gross income;

2.) Itemize your deductions and deduct $50L of gross gambling losses =

$0 taxable income.


Of course it is possible for this to mess up other portions of your tax return such as if this causes your gross income to be artificially high enough it may cause you to lose the ability to take certain other deductions or if you otherwise would have taken the standard deduction you now lose that deduction amount.


But in my example above the player does not have to pay taxes on $50K of gambling winnings because he can deduct his $50K gambling losses against said winnings.

Now, there are some states that for the state income taxes they do not allow you to deduct gambling losses, so if our hypothetical player lived in one of those states he would have to pay state income taxes on the $50K.





EDIT:

What would suck if if someone won a ton of money in, oh say, November and there was no witholding and then the same player lost it all in January - March. Well, he can't deduct those losses against the big win because they occured in different tax years. So then that guy would have some big trouble.

ooops your right I goofed, I was thinking if they lost the whole million they would still owe but duh they can deduct the whole million. Your example is correct it would have to be late in the year and bust it Jan- april when its due. I bet it has happened

Lego, you have some good info above, using the $4,800 versus $5,100 scenario. But don't forget that you'd also have to pay extra taxes on the difference as well. Say you're in the 25% tax bracket, you'd have to pay $75 extra in taxes on the $300. Of course that's an approximation, since nothing is ever so clear cut, but just another factor to consider.

My main concern with a chop would be for a very large win, which the casino doesn't report as a chop. If the amount that the casino reports as my win is too high to offset by other wins/losses throughout the year, then what do you do?