Lottery is -EV because of taxes. Is Poker also -EV because of taxes?

[AA suited]

The powerball jackpot is $340M (~$170M lump sum). The odds of winning is 1:146M.

if you didnt have to pay taxes, then it's +EV. but since you have to pay 40% (fed/state/city) taxes, then you need $500M (lump sum= ~$250M) to be +EV.

Assuming that you are paying taxes, can poker be considered -EV?

Why/Why not? /images/graemlins/confused.gif

[SheetWise]

Your poker winnings are tax exempt up to your losses (and possibly expenses). Most poker winnings are declared voluntarily. If you are a winning player, your losses will be deducted every year. If you are a professional, you can extend the period to carry any losses forward.

If you spent $100 (tax free money) per week on the lottery for 50 years, you would have spent $260,000. If you then "win" $250,000, you will be able to deduct only this years play -- at most, $5,200.

[AaronBrown]

For most US taxpayers, taxes make Poker (and any kind of gambling) very negative EV.

You are not allowed to net losing sessions against winning ones. You must declare the total win for all winning sessions as income. Losses are itemized deductions, meaning to claim them you must give up your standard deduction (unless you qualify as a professional gambler, which is difficult if you have other earned income).

Even if you already itemize, you still have the problem that losses cannot be carried from year to year.

If you decide not to report it at all, you obviously have the risk of getting caught. In addition, the IRS will withold 28% of your big winnings at casinos or tournaments, and you will not have losses to claim against it. If you only play private games for cash, you have the problem that that the IRS can decide your reported income does not support your lifestyle; or you can get turned in for using too much cash; or someone can turn you in for a share of the taxes you owe.

[KenProspero]

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if you didnt have to pay taxes, then it's +EV. but since you have to pay 40% (fed/state/city) taxes, then you need $500M (lump sum= ~$250M) to be +EV.

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The more interesting question is whether, if you do win, it's better to take the lump sum, or the annuity. If you take the lump sum, you're taxed on the whole thing immediately, however with the annuity (assumed to be the PV of the string of payments), the inside build up grows tax deferred (i.e., you don't pay tax till you actually receive it).

What this means is there's an implicit hurdle rate. If you can out earn this rate you should take the lump sum, if you can't you should take the annuity.

My 'guess' is that the hurdle rate would be less than 10%, and I'd be curious if anyone cares to do the math. (Of course, if I win, I'll do it myself and get back you you all.)

[SheetWise]

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You are not allowed to net losing sessions against winning ones. You must declare the total win for all winning sessions as income. Losses are itemized deductions, meaning to claim them you must give up your standard deduction (unless you qualify as a professional gambler, which is difficult if you have other earned income).

Even if you already itemize, you still have the problem that losses cannot be carried from year to year.

[/ QUOTE ]
You can net losing sessions against winning ones in your personal records -- the problem is in recorded transactions such as tournaments. Even there, entrance fees to other tournaments are deductable from a win. It's interesting that the real action at tournaments is not in the tournament, it's in the side games -- where wins are not recorded. In order to carry losses from year to year the money has to be in the form of a loan, which can be expensed when it's repaid.

[AaronBrown]

The rules prohibit netting sessions, whether in personal records or not. You might get away with doing it, but you face signficant risks. In order to claim the losses at all, you need good records, including when and with whom you played. The IRS can go after those people, whose totals will not mesh with yours (especially if they also net). Also, if you report no losing sessions at all, your records will not look credible.

If you're going to cheat, it's probably safest not to report anything at all. For one thing, a conscious scheme to cheat is viewed less favorably than simply non-reporting of gambling income (that's not true of other kinds of earned income where failure to report is as serious as fraudulent records) especially if the net income is not large. For another, non-reporting is harder to detect than fraudulent reporting.

[AaronBrown]

Under Oregon taxes, assuming the winner has no other income, he or she chooses between $110.1 million after tax lump sum or $7.59 million after tax 30-year annuity. You would have to invest the lump sum at 6.06% per year after tax to match the annuity. You couldn't do that with safe bonds, either taxable or tax-free, but you would probably do much better in the stock market (but could do worse).

[Justin A]

This thread makes me chuckle.

If I play poker and I play enough that my chances of losing for the year are practically zero, then how can taxes change whether it's +EV or not?

[Doc7]

You say $500 mill jackpot, but what about all the smaller prizes? Couldn't that be enough to push it down to $450 mill or something?
just in discussing the EV of powerball

[SheetWise]

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This thread makes me chuckle.

If I play poker and I play enough that my chances of losing for the year are practically zero, then how can taxes change whether it's +EV or not?

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You have to look at the sampling period. For taxes, it's currently an annual sampling period. If it were daily, the problem would be more self evident.

[Vincent Lepore]

Since you only pay taxes on your winnings and taxes are less than %100 you have money (winnings) left over after paying taxes. Since you still have winnings after paying your taxes you have earned and if continue to do so at the same or greater rate then you realized a +EV and can expect to have a +EV in the future.

Vince

[Justin A]

[ QUOTE ]
[ QUOTE ]
This thread makes me chuckle.

If I play poker and I play enough that my chances of losing for the year are practically zero, then how can taxes change whether it's +EV or not?

[/ QUOTE ]
You have to look at the sampling period. For taxes, it's currently an annual sampling period. If it were daily, the problem would be more self evident.

[/ QUOTE ]

yes. this is it.

[AaronBrown]

[ QUOTE ]
This thread makes me chuckle.

If I play poker and I play enough that my chances of losing for the year are practically zero, then how can taxes change whether it's +EV or not?

[/ QUOTE ]
Because you have to account for each session, you are not allowed to net. Suppose you have 70 winning sessions of $100 and 50 losing sessions of $100. With seven chances in twelve of winning and 120 sessions, your chance of a losing year is about 1 in 10,000. You make $2,000 over the year.

You're a single guy with $50,000 of adjusted gross income income before Poker. You have no special tax situation or itemized deductions. Your federal marginal rate is 25% and state is 10%, the state uses the federal income rules.

If you didn't play Poker, you would subtract your $5,000 standard deduction from your $50,000 adjusted gross income to get $45,000. Your income tax bill would be about $10,000 for federal and state.

Now you add $7,000 of Poker income to your adjusted gross income of $50,000 to get $57,000. You can deduct the $5,000 losses as itemized deduction, but to do so you lose your $5,000 standard deduction. Either way, you deduct $5,000 to get $52,000 taxable income. The extra $7,000 is taxed at your full marginal 35% rate, that means $2,450 extra taxes. You're down $450 after paying taxes on your $2,000 Poker profits. Also, you cannot deduct expenses associated with the game.

If you qualify as a professional gambler, then you don't have this problem. You can deduct all losses and expenses. But the IRS has been hostile to people who claim to be professional gamblers but have other income.

[SheetWise]

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If you qualify as a professional gambler, then you don't have this problem. You can deduct all losses and expenses. But the IRS has been hostile to people who claim to be professional gamblers but have other income.

[/ QUOTE ]

Makes the current court decision on Irwin Shiff seem significant.

[Justin A]

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[ QUOTE ]
This thread makes me chuckle.

If I play poker and I play enough that my chances of losing for the year are practically zero, then how can taxes change whether it's +EV or not?

[/ QUOTE ]
Because you have to account for each session, you are not allowed to net. Suppose you have 70 winning sessions of $100 and 50 losing sessions of $100. With seven chances in twelve of winning and 120 sessions, your chance of a losing year is about 1 in 10,000. You make $2,000 over the year.

You're a single guy with $50,000 of adjusted gross income income before Poker. You have no special tax situation or itemized deductions. Your federal marginal rate is 25% and state is 10%, the state uses the federal income rules.

If you didn't play Poker, you would subtract your $5,000 standard deduction from your $50,000 adjusted gross income to get $45,000. Your income tax bill would be about $10,000 for federal and state.

Now you add $7,000 of Poker income to your adjusted gross income of $50,000 to get $57,000. You can deduct the $5,000 losses as itemized deduction, but to do so you lose your $5,000 standard deduction. Either way, you deduct $5,000 to get $52,000 taxable income. The extra $7,000 is taxed at your full marginal 35% rate, that means $2,450 extra taxes. You're down $450 after paying taxes on your $2,000 Poker profits. Also, you cannot deduct expenses associated with the game.

If you qualify as a professional gambler, then you don't have this problem. You can deduct all losses and expenses. But the IRS has been hostile to people who claim to be professional gamblers but have other income.

[/ QUOTE ]

Wow this is an interesting post. I am a professional gambler so I don't think it affect me much. However, my wife also earns income and we will be filing jointly, how is this going to affect me?

[Justin A]

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If you qualify as a professional gambler, then you don't have this problem. You can deduct all losses and expenses. But the IRS has been hostile to people who claim to be professional gamblers but have other income.

[/ QUOTE ]

Makes the current court decision on Irwin Shiff seem significant.

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Can you elaborate on this?

[SheetWise]

[ QUOTE ]
Makes the current court decision on Irwin Shiff seem significant.

Can you elaborate on this?

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Who is Irwin Schiff? (http://www.paynoincometax.com/irwinschiff.htm) The trial now on in Las Vegas is interesting. He usually ends up in prison for a while, then back in court -- but his arguments are interesting and his research is excellent. I love reading transcripts of his trials.

It's interesting to gamblers because one of the concessions the IRS has made is that it is legal to simply fill in the adjusted gross income on your tax form and not provide any information on the source of the income or how you arrived at that number -- but this only works in the absence of any public records (W2s, 1099s, etc). If there are any public records, you will have to provide personal records detailing any discrepencies. Of course, the IRS still has the right to calculate imputed income, for which you would have to provide records if you want to dispute. I've done this a couple of years where I had no tracable income, and it does work -- the IRS has a help sheet on how to protect your Fourth and Fifth Amendment rights while filing income taxes.

[AaronBrown]

You can be a professional gambler while your wife has salaried income, that's not a problem.

Roy Cohn, the sleazy counsel for Joe McCarthy, never paid income taxes. He claimed his profession was being Roy Cohn, so everything he spent was a deductible business expense. His case was pending before the Supreme Court when he died. I've always had a sneaking, not quite admiration, but grudging respect, for someone so gloriously an evil jerk who played by his own rules.