Consider the following scenario:

(We implicitly make the very bold assumption that neither Adam nor Bob is a scumbag, so neither one of them is interested in evading taxes on their poker winnings or violating the tax code in any way.)

Adam is a high-stakes, winning poker player. He files as either a professional or an amateur. If he files as an amateur, he happens to suffer no major adverse effects as a result of his artificially large Adjusted Gross Income from his high volume of online play.

Bob is an amateur poker player who makes a consistent small profit by grinding online poker at night. He has a day job and plays poker in an indisputably casual manner and is not able to file as a professional. Unfortunately, Bob's play patterns are such that his Adjusted Gross Income is much higher than his true profit, and Bob happens to be in a situation where the artificially high Adjusted Gross Income generated by his play has a major adverse effect on him, such as:

• Bob lives in a bad tax state for amateur poker players that forces him to pay tax on his gross, rather than his net, poker income, and his AGI is sufficiently inflated such that the tax he owes is over 100% of his actual profit from poker, or
• Bob relies on private or federal need-based assessments of income for his college support, and these assessments look at his AGI instead of his net taxable income, causing Bob to owe additional money towards his college expenses in excess of his true poker profit, or
• Perhaps Bob would take the standard deduction in the absence of poker and he is a micro-stakes player whose profit is so small that the net tax effect of his poker activity causes him to owe more in tax via the loss of the standard deduction than he made in profit from poker.

Problem: Bob is completely unable to play poker without realizing a tax liability that exceeds his winnings, so he has to stop playing poker at the games and stakes he prefers.

Possible Solution: Adam and Bob happen to be trusting friends. Adam decides that he is willing to enter a long-term staking contract with Bob's entire upcoming tax year of online play, with the following terms:

• Bob plays all of his poker with Adam's money.
• If Bob is a net loser on the year, Adam suffers 100% of the loss.
• If Bob is a net winner on the year, Adam and Bob split the winnings according to some predetermined percentage arrangement.

I believe there is only one way that Adam and Bob can handle their session accounting under this arrangement: Adam realizes winning and losing sessions from all of Bob's poker sessions as Bob plays them, and Adam realizes a loss for the amount he pays to Bob at the end of the year if Bob has a winning year. Bob has one single gambling session on December 31st at the settlement of the contract. The winnings from this gambling session are zero if Bob had a losing year at poker and are equal to his portion of the winnings under the contract if Bob had a winning year at poker.

The results of the contract are win-win:

• Assuming that Bob is a strong enough player and is unlikely to have a losing year, Adam has chosen the percentage arrangement such that Adam has a positive expected value in his investment in Bob.
• Bob has eliminated his artificial AGI inflation and no longer suffers from his prohibitive tax situation. Instead of being forced to realize zero or negative after-tax profits from his poker playing, he instead gets a portion of his true profit and has no chance of realizing a loss. Bob ends up paying the same tax rate on his poker winnings as he does on normal income.

If there are no issues with this type of contract, it provides an opportunity for amateur players facing unfair tax situations to eliminate their negative tax effects by "outsourcing" their risk to a trusted friend who has no adverse tax effects from his or her poker play.

Issues and questions to discuss:

• If such a contract were entered explicitly for the purpose of eliminating Bob's prohibitive tax situation, would the IRS frown upon it or attempt to penalize Bob for it in an audit? In an extreme case, if Bob were sufficiently likely to be a winning player over a year, Adam could take an arbitrarily small percentage of Bob's winnings, in which case, 99% of the time, the only effect of the contract is, essentially, to allow Bob to net his winnings as an amateur.
• Is there any different way Adam or Bob might be expected to account for this contract for tax purposes? (Is there even any different way they possibly could account for it differently?)
• Actually, is it even correct for Bob to record his gains from the contract as Gambling Winnings? Bob has no risk of losing money, therefore his activity fails to meet the definition of gambling.

Please read the sticky, thanks.




j/k. This is a really interesting scenario. I am not going to try to give you any sort of conclusive answer to this though, because there likely isn't one (yet). How you would get such an answer is basically a question of tax procedure.

There are definitely a whole host of "issues" with the arrangement that the IRS could choose to raise if you were to try this. To get these resolved you could either:

1) discuss it with the IRS before filing - i.e. try to get a PFA (pre-filing agreement) with them; or request a PLR (private letter ruling) - both of these things can be very expensive.

2) file a tax return, making a full disclosure of the arrangement and your legal basis for believing it is acceptable; wait for the IRS to challenge the arrangement, and perhaps end up in tax court with them.


Anyway, I just mention this stuff as an aside. This is much like an exam question you might get in law school, so I could easily spend several hours/days/weeks writing a full answer to this (maybe I will once tax season is over) - but it still wouldn't count for much as far as giving guidance to anyone who wants to give this a shot.

Unlike ChubbyFunsta I'm not a tax professional. Take what I have to say accordingly.

At first glance this seems like a potentially good idea. As I see it there are three possible issues.

First, I'm not sure what the normal *default* way staking should be reported for the stakee. I would have thought it would be to record a session or tournament with the impact of the staking arrangement reflected in the results. Even if that is the case it might not be an issue since the stakee would reflect no profit from a session if he lost (a break even session). If he won there is essentially a make up provision so that he would still only show winning sessions and then only when he was in the black for the year. This still ends up basically in the same place as you want. I don't think your contention that this is "not gambling income" would probably pass the scrutiny of the IRS despite the stakee not having any risk. It also seems that the proper way to report income when staked might depend on the specific arrangement (your facts and circumstances as the tax guys like to say). If the contract says you settle up at the end of the year your one year session might fly.

Second, the IRS is likely to frown on this if they perceive it as just a scheme to lower the tax liability for the stakee. An extemely low sharing percentage for the staker would be a big red flag in that regard. What is too low would depend, but if it is too far out of line compared to the norm for a staking arrangement then I think it would run into problems *if* the IRS looked at it for some reason. I think this is where the idea probably falls apart as formulated. Any reasonable sharing agreement from the standpoint of a good staking arrangement is likely to give the staker more than would be lost from the adverse tax situation.

Third, you'd have to show the money going from staker to stakee as claimed to support the actual play or it would demonstrate that it wasn't a legitimate business arrangement.

After posting this, I realized that the same result can also come about through more "regular" staking arrangements, rather than ones that pay out only at the end of the year. For example, a player who plays only live tournaments could have a standard backing agreement for each of them individually. Instead of one "session" on Dec 31 when the contract was settled, he'd have "sessions" for each tournament he played, but under the backing arrangement, he could never have a losing session, so his AGI will still equal his true profit at year-end.

With that in mind, there are likely poker players out there in the real world right now who are in contracts such as this one. Their motives in being backed for all of the poker they play are probably because they have no bankroll or are risk-averse, and this removal of AGI inflation happens to be an unintended consequence, perhaps one they don't even realize.

This makes this issue interesting and practical for reasons other than speculating about entering such contracts deliberately for tax reasons. If people are in these contracts anyway, for other reasons, then what ends up happening on their taxes?
Thanks for weighing in with the professional perspective here. This process sounds pretty complicated, though I am not surprised. It looks like the rest of the discussion on this idea is going to have to be purely speculative and non-professional, unless someone out there wants to actually look into getting a costly answer out of the IRS. The fact that there may be players out there right now in long-term staking agreements with other motivations, however, could make this interesting. If anyone were to provide the poker world with an IRS precedent on such contracts, perhaps it'd be one of these players who happens to get audited. Yea, I agree, and none of this seems to impact the consequences of the contract. Whether or not this should be filed as gambling income is more of a curiosity, as I don't think this would have any tax consequences (except triggering an audit because you filed gambling winnings with no gambling losses as an amateur).
I expect this red flag would be true in practice, except I think there are plenty of people in adverse enough tax situations where a reasonable % payment to a staker would still leave them with more money than paying taxes on a large amount of phantom income. I agree that explicit records of the money transfers would be essential. I have no personal experience with it, but I imagine that people currently involved in various staking arrangements are already very careful about this.