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

AA suited · #1 10-19-2005, 02:26 PM

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? [img]/images/graemlins/confused.gif[/img]

SheetWise · #2 10-19-2005, 02:38 PM

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 · #3 10-19-2005, 04:18 PM

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 · #4 10-19-2005, 04:36 PM

[ QUOTE ]
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.

[/ QUOTE ]

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 · #5 10-19-2005, 05:03 PM

[ QUOTE ]
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 · #6 10-20-2005, 09:12 AM

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 · #7 10-20-2005, 09:22 AM

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 · #8 10-20-2005, 09:22 AM

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 · #9 10-20-2005, 10:55 AM

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 · #10 10-20-2005, 11:13 AM

[ 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.