Just for fun, let's see if we can make a reasonable estimate of this.

In what ways can a U.S. poker player end up owing more money in tax due to his or her poker activity in a year than he or she made at poker? The two biggest ones are probably those that will cause even losing and break-even players to owe tax due to their poker play:

#1: Loss of Standard Deduction outweighs wins
Every losing player who would otherwise take the Standard Deduction and loses it for having to file, say, $6,000 in Gambling Winnings and $6,700 in Gambling Losses, will end up paying more in tax for losing at poker than he or she would by playing no poker. This will also apply to players who win only a small amount and don't file as professionals.

#2: Players in "bad tax states"
All losing players in states which disallow Gambling Losses as a deduction will owe tax on their net loss. Winning amateur players in this state can owe more tax than they made if their gross is much higher than their net.

Let's ignore the winning players who trigger these (hard to estimate) and just focus on the losing players.

My personal guesses of the relevant parameters:

# of U.S. poker players: A PPA survey claims 55M U.S. poker players. I don't know how broadly this survey went, but it's safe to assume not all of these individuals play poker more than a casual game a few times per year. Let's assume that somewhere between 50%-80% of these players play poker at least every month or so (even a small player can trigger the above tax issues). My estimate: 27,500,000 to 44,000,000

% of such players that lose money on the year: I remember reading somewhere that somewhere between 80%-85% of PokerStars players are down money on PokerStars lifetime. To be conservative and to account for different types of games, the range could be wider. My estimate: 65%-90%

% of people who take standard deduction if their poker weren't taxed: I have no idea, and I couldn't find anything on the internet. My understanding is that many people do just take the standard deduction, but maybe that's just among young people. My estimate: 25%-90%

% of the above who lose their standard deduction due to proper poker tax accounting: Hard to estimate for the casual player, as it depends on frequency and stakes of play, so I keep it broad. My estimate: 10%-50%

% players living in a bad poker tax state: These 10 states comprise about 30% of the total U.S. population, but they probably have fewer poker players per capita than states like Nevada. Also, some of these states merely limit itemized/gambling deductions, which won't affect the low-volume losers and break-even players. My estimate: 10%-35%

With these estimates, restricting our consideration only to losing players who fall into #1 or #2, we are looking at 3,141,875 to 27,907,000 Americans who currently owe more tax on their poker play than they made at poker in a given year. Adding in the consideration of winning players owing more than they made via #1 or #2 adds another 200,000 to 4,000,000 based on some loose assumptions. I welcome more informed estimates of some of these parameters. I tried to be conservative with the low end, and even if I was off by a bit, I think we're looking at at least a million.

Naturally, of these million+ Americans, I suspect that somewhere between 11 and 13 of them are actually dutifully paying their taxes correctly right now.

With a potential future of online poker sites that report all players' tax information to the IRS, it might be useful for some organization to make a more formal estimate of this to demonstrate the impending disaster of these million+ people suddenly all being forced to pay their taxes properly. I see this as an important argument towards an internet poker bill which includes a change in the tax code for internet, if not all, poker winnings (if this is politically possible). Note that the only change necessary is allowing poker players to net their entire year's play instead of reporting gross winning sessions and deducting losing sessions, which is easily demonstrable as a reasonable and practical approach for a game like poker anyway.

Cliffs: I estimate that at least a million (possibly much more) Americans currently owe more tax because of their poker play than they make at poker.

Yea, I'd say you're probably right that a lot of losing players owe more tax than they would owe if they never played poker.


But I'd also say that probably very very few losing players and I'd almost say 0 (or at least really few) losing recreational or casual players ACTUALLY pay more tax due to it because they don't report it and nobody ever knows.

Your conclusion is correct, right now. One of the big reasons why there is currently so much concern about this is that under the federal regulation bills there will be some reporting to the IRS for tax purposes. If the handling of taxes for poker players isn't changed ignoring the tax implications of playing poker (whether through ignorance or to avoid the tax consequences) will no longer be feasible. If the reporting is a total winning sessions and total losing sessions number and at least the winning sessions aren't reflected in your tax return the IRS will come looking for an explanation.

Repulse, as you know some of your numbers are broad guesses. One of them (the percentage of those taking the standard deduction) can probably be narrowed down. The main determination for most people is whether they have a mortgage. This wikipedia page ( http://en.wikipedia.org/wiki/Homeown..._United_States ) talks about percentage of homes in the US that are "owner occupied." The percentage is 68%. However that doesn't really give us the answer because it's measuring homes, not people. Also some of those people who live in owner occupied housing aren't the owner with a mortgage deduction. The 19 yo poker player who lives with Mom and Dad for example. Also the demographic of who plays poker probably figure into this number. And some non-trivial percentage of home owners don't pay enough in mortage interest to itemize or don't have a mortgate. In any case your wide range to probably be narrowed down to somewhere in the middle of your range. Maybe 50-70% take the standard deduction.

Also you should keep in mind that someone who currently uses the standard deduction is not going to pay taxes on the full amount of the deduction they lose. Any player who has losing and winning sessions equal or more than what their standard deduction would have been (or close) will have some additional itemized deductions they'll be able to take. At a minimum they will all be able to take a deduction for either state income tax or state sales tax. A large number will have a deduction for property tax on their car. Some will have deductions for charitable contributions and potentially other deductions as well.

Great post.

Scary and ironic, the fastest way to kill online poker may be to regulate it.

However, I think this problem is easier to fix than getting a regulatory regime in the first place.

The thing about regulating online poker is they needa focus on taxing the sites that are making millions a day not the players who are struggling to make a dime..

Yea I was kinda mulling that over. If the IRS would actually go after everybody for that then the U.S. regulated sites would die pretty quickly IMO. And there'd probably still be a bunch or at least some play on some U.S. unregulated sites.

I don't think the big casinos in Vegas, and other corps located in the U.S. maybe, that would be likely to open these sites would like that much.

Actually I think that what would happen is the tax code would get modified, at least for poker, to something that made sense. This would be a win for all poker players, not just those who play online. I really expect that if and when regulation happens the change in the tax law is inevitable. The problem is that if it doesn't happen in conjunction with regulation there will be a lot of financial pain to a lot of people who won't see it coming between the two changes happening.

Well it would be one of:

1.) IRS would just do nothing and let it be.

2.) U.S. Regulated sites would quickly die.

3.) Tax law would get changed.


And I don't think the big businesses that would be the poker site operators would like #2 nor would the politicians/lobbyists who are looking for more revenue.

And obviously the whole gambling is evil or whatever crowd would prefer outright illegality but if it were to be regulated they would prefer #2 (I guess).



It really doesn't make any sense to regulate it without changing the tax laws because the end result would be #2 which would mean no sites that submitted to U.S. regulation would be viable for U.S. citizens because the losers would end up losing money and owing more money in taxes and so they would stop playing there after some tax bills came due and they figured it out and once enough of the losing players stopped playing the winning players would stop winning starting from the bottom and moving up and then as it went they would stop playing and that would be that and the only people left would be tax cheats (and they'd have to be kinda clever I guess since the sites would be reporting their results to the I.R.S.), the absolute best players there are (and that's only if they would move down a bunch probably), super rich people who just really like playing poker online and don't care, and I guess gambling addicts who don't know/cant figure out that there are other places they can play online that don't report to the I.R.S.

I think we agree. #1 is unlikely (the IRS doesn't normally ignore information that has been reported to them). Once the government is getting revenue they aren't going to allow #2 to happen and the lobbyists for the sites are going to make sure they're aware of the issue.

Yep. That looks how it is. Hopefully they deal with both at the same time.

Or even I hope they at least make the tax changes even if nothing else though I think that being done by itself also seems unlikely..

I would bet that there are far more live players "owing" taxes than online players.

When I use to play strictly live, there were always lots of degenerate players who played all the time, and when they weren't, they were looking for a stake to do so. If I understand the tax laws these guys would "owe" taxes. I'm using "owe" because its really ludicrous to have to pay taxes losing money-not to mention the majority of small stakes players are playing with money that was already taxed from their job.

All is just speculation-just thought I would add to the subject

Everybody who plays any poker during the entire year is supposed to report their net winning sessions on their taxes.

So basically your assertion in your first sentence boils down to: More people play live poker than online poker. Unless you actually mean something with use of "owe" that would change it .... I can't tell.

I think he's saying that more live players cheat on their taxes than online players.

Edit: He's probably talking as a percentage, not raw numbers.

Good reasoning, thanks! It doesn't change the estimates too much. Good point. This could be accounted for by lowballing the % of the standard-deduction-takers who lose their standard deduction due to proper poker tax accounting, which again doesn't change the estimates by much. The "bad tax state" case dominates the calculation for now.

I think (I hope, at least) that #1 is unlikely given the massive number of affected taxpayers. I think we can ensure that #2 is unlikely by making sure that the appropriate parties know about this tax issue before a bill or its regulations are put into place.

It seems to me like a pretty obvious tax axiom should be that the tax on any investment or financial transaction should never exceed the profit from that activity. Even the IRS should have to agree with this, right?

Then it's just a matter of people realizing that poker has short-term swings that are vastly in excess of overall upward (or downward) trends and year-end net results, and therefore that the "gross wins" figure for poker players does not IN ANY WAY represent an amount of money that the player has earned or even ever had at any given time. This shouldn't be too hard -- while congresspeople and courts may sometimes have trouble fully understanding the element of skill in poker, nobody seems to be having any trouble seeing the element of luck in poker!

If/when the U.S. passes a internet poker domestic licensing and regulation bill, the stated purpose of doing so will most likely be to generate revenue from taxing the sites. If someone stepped in and said "Hey, this bill you're passing to generate revenue from internet poker businesses is going to cause millions of Americans to owe more taxes than they make at poker, so all of these businesses will lose almost all of their customers", I think that's the time that the U.S. would realize that poker tax laws have to change in a way that only tracks net wins/losses.

Well, from what I have read, it seems that you can lose money and still owe taxes. If this is the case, my educated guess is that live players owe a bundle. If not, I still think that live players have larger tax burdens.

Like I said, if u can be a loser and still owe, that's simply ludicrous.

In the past from my live play, I think there were maybe 5 guys that paid taxes-all of whom were winners. Most of the long-term winners never paid a dime in taxes. They simply just keep chips and never cashed out enough to have to fill a form out.

I'm not condoning or condemning any of these practices-just my observations.

I think, currently, the majority of both online winners and live winners (except those who trigger W-2Gs) are evading taxes. Some of them don't realize they owe tax because Americans are used to all of their taxes being withheld from traditional sources of taxable income, and most are just criminals.

Among losing players, I think close to none are paying their taxes properly, for both online and live play. Overall, I think losing online players may be more likely to have higher tax burdens of this type than losing live players because of the ability to put in higher volume and higher frequency play online. In particular, since tournaments have to be accounted for as distinct sessions, an online multi-tabling SNG or MTT player is racking up a much larger gross win relative to his net than the live player at comparable stakes is.

Regardless of which type of player suffers due to unfair poker tax rules more often, the online player is going to be the one who is forced into compliance under a future regulatory scheme. There will still be no accountability for all live poker play since it is simply impractical to do so.

No if you lose money you won't owe any tax on poker income if you itemize and deduct your losses up to your winnings.

The problem comes in if you have other income such as a job. Most people who play poker recreationally just don't do anything with their poker wins/losses on their tax returns. If they were forced to include it they wouldn't owe more money because they are paying taxes on anything earned from poker, but the actual logistics of how they have to report it will cause them not to be able to take their standard deduction and for people who normally wouldn't have itemized deductions in excess of the standard deduction this will cause them to owe more money than they otherwise would have. It is also possible that adding all of their winning sessions to their gross income could subject them to the alternative minimum tax or could preclude them from taking certain deductions or credits which would also increase their tax burden.



EDIT:

Unless possibly (if you have no income from a job or anything else and it is just poker) you lose at poker but your winning sessions added up make your gross income so high that you qualify for the alternative minimum tax. Maybe then you'd owe tax on poker "winnings" even though lost. I'm not sure. I would think that anybody who found himself in this situation though would cheat on his taxes (and just report lower numbers or not report or w/e) out of necessity since he doesn't have any money with which to pay the tax.

Thanks for clearing this up-I think I have a better understanding of the issue.

I would think that they would tax the sites as a whole and not bother going after individuals-assuming the eventual legalization.

We can debate this all day long, but no one really knows what the powers that be will decide-common sense doesn't seem to apply to most of those in charge-so I guess will just have to wait and see.

Well I don't think Congress will levy any additional taxes on players, just on the sites (which could possibly cause rake increases), but what we are talking about is just current income tax law. And I think it is unlikely the IRS would just let people not pay income taxes that the IRS knows the people owe.



Hopefully everything will get worked out with good results though.

unless you make over like 5,000 for the year, you probably can't make any money following the letters of the law.

Don't forget the states that don't allow you to deduct gambling losses even though the IRS does. I know CT and MA do this, and I believe there are others. So if you're dumb enough to tell them you made, for example, $10,000 in winning sessions over the course of the year, but overall you were a net loser, you will be paying state tax on that $10,000 as if you actually had that money. Crazy. I can't imagine any losing players comply with these laws.

i have thought a lot about this issue, great thread. i think ultimately this will be the reason for the demise of poker now that regulation is becoming a possibility.

Yep, regulation will be the thing that kills online poker

Most players make FAR LESS than a dime. They LOSE money playing poker. Is this not correct ???

Certainly. But, what about the percentage of players who are break even players and exist solely on making a profit from the player incentives (rakeback and/or bonuses).

One could have wins of $200,000 and losses of $210,000, resulting in a net loss of $10,000. But (and for simple sake of numbers), what if one makes $30,000 in bonuses and rakeback?

In the real world of profits, this player would have banked $20,000. According to current tax laws, though, this player would owe a certain percentage of the $200,000 at first, though, resulting in a net profit loss. 20% of $200,000 is $40,000 in taxes
(rough estimate), which is far from the true profits made. Intuitively, that is illogical and unfair.