As
taxdood discussed in a recent blog post, in the event that a poker site fails to repay their players, it appears that the method of handling this for a hobbyist is by taking that amount as a casualty loss (professional gamblers can just deduct on Schedule C). Taxdood also points out that
casualty losses can only be deducted to the extent that they exceed 10% of the taxpayer's AGI.
Even if we forget about the "phantom income" AGI inflation that active amateur poker players have, this is a pretty big problem for the vast majority of American online poker players, whose online bankrolls are likely well under 10% of their actual salary, let alone AGI.
That's a big problem, but there may be nothing to be done about that now, and taxpayers in that situation can't undo their previous activity. There's another problem that could arise from this, however, that is very relevant to our current decisions as law-abiding American poker players.
Americans who continue to play on U.S.-facing sites, knowing that there is a risk of never seeing their money, could be putting themselves in a situation that is much more -EV than any tax-ignorant analysis could have projected. Winning amateur players could be really, really screwed if a site runs off with their money.
For example, let's say a successful amateur poker player assesses that he is good enough to make $1,000/month playing in the games on Merge/Cake/Bodog/etc., and,
after assessing the risks of not being repaid, he decides to throw $1,000 on there to do so, and expects to still be +EV or close enough to breakeven.
He plays for a few months and has turned his $1,000 into $10,000. Great, right? Sure, he may not be able to ever cash it out, but there's a chance he will be able to -- and maybe the ability to keep his game sharp alone would have been worth a one-time initial investment of $1,000.
But, if the poker site goes under, it seems that this player has a casualty loss of $10,000 that he likely can't deduct at all…
despite having a net of $9,000 in gambling winnings! So, come tax time, he has to claim $9,000 in gambling winnings (sessionwise, as usual, but that effect can be ignored for now), and his income will increase by $9,000. If he can't take any portion of the $10,000 casualty loss deduction, he's going to lose out on way more income than the $1,000 he initially risked! Essentially, by such a player willingly choosing to play on a risky site, he's not only facing the extra site-specific risks of closure that might make him unable to ever collect his winnings, but also facing the possibility of his winnings actively counting against him.
Or am I not understanding the situation?
If I do understand it correctly, this seems particularly messed up, even as far as taxes go. Consider the extreme case where the player is
certain that he will never be paid by a rogue site, but would still want to throw a few hundred dollars on there just so he can practice his game… every session he plays there can NEVER gain him any income, but will sometimes create additional tax for him.
So, if this is how it works, is there any workaround? Here are a few ideas I thought of, and I appeal to the actual tax guys to see if any of these would work.
1) Some way of accounting for risky site funds as if they were a "currency", devalued at an appropriate risk of ever being able to convert them back to USD? Such an assessment would probably have to be made in advance (otherwise it would be abusable).
2) In the extreme case where the player is certain that he will never be able to cash out, can he just write off his $1,000 initial deposit as a loss (gambling or otherwise) as soon as he makes it? What if he were only near-certain, which would cause a problem if he did end up being paid?
3) Any other way of claiming such a loss as something other than a casualty loss? For example, is there any creative but legitimate argument that could give our player here simply a $1,000 gambling loss, because he was knowingly "gambling" on trusting his funds with a risky operator?
It seems very complicated but I hope I have conveyed the importance of the situation. I hope there are solutions, otherwise not only will former FT/UB/AP players be ruined if those sites end up not paying, but current would-be online poker players in America will probably ALL be forced out of the current market for presently-available risky sites by this effect.
CLIFFS: If I'm understanding the nature of deducting unretrievable online poker funds correctly, then an American who chooses to deposit on a risky poker site and never is able to withdraw any money, can run up a massive tax bill
BY WINNING, causing him to owe more in taxes than his initial deposit into the site.