Gambling Taxes: Poker and "Windfall" Income

Poker winnings are taxed in the United States. In fact, all gambling winnings are. Lottery winnings, slot jackpots, large exotic wins at the race track are all taxed when they exceed certain thresholds. The IRS regulations can be found here. In a country where one major political party makes lowering taxes its primary goal this is just weird. It also conflates poker with other forms of gambling, a problem I’ve addressed elsewhere.

Most industrialized countries have sensible and progressive income tax codes in place. And in virtually all of these gambling winnings (including poker — though there’s a subtlety that I’ll get to in a bit) are not taxed for the simplest of reasons: they’ve already been taxed.

Slot machines only pay back at rates from around 80% (penny slots) to 95% - 96% for the high roller machines ($10 a spin and upwards). The casinos’ drop on them is substantial and they pay corporate taxes on these profits.

Payouts at the race track have a similarly high vig with the so-called exotic bets only returning some 75 to 80 percent. The rest goes into the state coffers.

Lotteries are the worst of the bunch with the states taking out fully half of the pool.  

In short, these winnings are being double-taxed — and, as noted above, one of our major political parties screams bloody murder at inheritance taxes claiming that they’re unfair because the money is being taxed twice.

What most sensible countries do is to declare these large wins as “windfall” income and not subject to tax.

To get a felling for how bizarre the situation is consider this: If you hit the lottery for $10 million in the United States you’ll be lucky to get 3 million to spend. First, the actual pool was 20 million, so 50% is gone already. Second, the jackpot is paid out over a twenty year period during which the state will hold the principle (and keep the interest). Third, your annual return is degraded by inflation and, of course, subject to income tax. If you choose to take it in a lump sum the state will reduce the win by some amount (usually around 30%). If you live in a high-tax locale like New York City the burden is significant since the money is triple-taxed (Federal, State and City).

If you win a $20 million dollar lottery in Canada or the UK you’ll get the full twenty million up front and untaxed.

It’s hard to fathom the situation in the US. The GOP, the guilty party in the tax screw-ups, seems more than a little comfortable with hypocrisy here. I can only guess that it stems from another of their odd perspectives: gambling is a sin and should be taxed and taxed and taxed. Where did all the Libertarians go?

Okay, how about poker? Well, poker is a game of skill that more than a few play professionally — and, that, sports fans, is the key on how the tax issue should decided. If you’re a professional poker player and derive all or most of your income from the game then you should be paying taxes on it. And, because you’re declaring your tax status in this manner, you get to deduct business expenses. These would include travel to tournaments, business expenses when away from home, tournament entry fees. In short, you should be treated by the IRS like other professionals — tennis players, golfers and bowlers who play games for a living.

But if you’re an amateur who plays recreationally and manage a big payday (like Neil Blumenfield just did in the WSOP Main Event) then it should be treated as windfall income and not taxed. In this year’s Main Event the final table paid a total of $24.8 million to the nine players and, according to an analysis by Russ Fox, some 34% of it will go to taxes. The only player to be able to enjoy his full windfall is Pierre Neuville who lives in Belgium.

The same principle should apply to other “gambling” forums where skill triumphs like sports betting, horse racing and, if the dust ever settles, fantasy sports.

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[satta king]

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