Having a backer and paying taxes
 

I know this topic has been discussed many times over but I really couldn't find exactly what I was looking for in the search. If someone has a link to help me out please feel free to post it.

For the last two years I have been playing online poker as my primary source of income, though it has only been since my graduation in May that I have used it as a full time job. While in school I was able to build a bankroll from 300 dollars to 10,000, but I used most of this to have fun/pay off debts from studying abroad/pay rent etc and after graduation was left with a bankroll of 3,000.

Since then I have been taking graduate classes and playing 2/4, and I am making enough money to survive and live on my own but nowhere near enough to also build a bankroll.

Today my father, who has watched me win over 500,000 hands and a long period of time, started to ask me about what I could make through a backing deal where he gave me 10,000 to work with.

The only real concerns he has are with the legality of online poker and paying taxes. I believe he can give me a once a year gift of 10,000 tax free. Now say I take this gift before Jan 1 and make it into 100,000 by the end of next year. Then I give him his 50,000 share. Do I have to pay taxes on this 50,000, give it to him, and then he would have to pay taxes on what he actually receives? Or do I not declare the 50,000 and let him take care of declaring/paying taxes? Also, he has an upper managment job and is concerned about the best way to declare any winnings. Would it be wise to treat it like a small business on next years return, or should he treat it as if he had won 50,000 at the lottery?

Lastly, to the best of my knowledge it is not clear whether or not online poker is legal or illegal in the US. I guess his biggest worry is that he takes his cut of winnings, pays taxes, and then gets in trouble for participatingin /aiding an illegal activity. Has there been any clarification on the law as of late?

Sorry for the length of the post, but any information would be great.

To cut off some comments and questions...
Right now I work as a high school coach and am in the midst of getting a bartending job, so please don't tell me how I could just get a job and build a bankroll myself. Poker and coaching and grad school take up most of my time.

Also, I have hardly any knowledge on this subject, so if any of these questions are elementary I apologize.

Thanks again,

Jon

Re: Having a backer and paying taxes
 

I don't have a reply on the tax issue, but I thought I'd give my opinion anyway. If I were in your shoes, I wouldn't take your dad's money. It certainly is tempting to instantly build a bankroll and play higher stakes, but not on the backs of your relatives. Do not put him in the position of losing money and/or getting snarled up in tax problems. Yes, he can give a $10k tax-free gift to you every year, but do you really want to be in the position of gambling with and possibly loosing your father's money?

Re: Having a backer and paying taxes
 

[ QUOTE ]
I don't have a reply on the tax issue, but I thought I'd give my opinion anyway. If I were in your shoes, I wouldn't take your dad's money. It certainly is tempting to instantly build a bankroll and play higher stakes, but not on the backs of your relatives. Do not put him in the position of losing money and/or getting snarled up in tax problems. Yes, he can give a $10k tax-free gift to you every year, but do you really want to be in the position of gambling with and possibly loosing your father's money?

[/ QUOTE ]

Good point. To clarify, he knows that this is a risky investment and he knows that it is certainly possible that I'm going to lose the money.

I should also clarify that I've been backed before and played up to 30/60, but mostly 10/20 and 15/30. I also have a significant number of hands at these levels and I am pretty confident I am a winning player there. I stopped my original backing deal because I was getting shafted with how much I was getting back, and the backer was extremely results oriented session by session. My father, as a backer, has already said he wouldn't want more than an update every two months. He understands the variance involved.

I would also be following a 300 BB or drop down rule, and as I have won close to 2bb/100 over 500,000 hands, mostly 8 tabling. For this deal I wouldn't more than 3-4 table. So I'm going to say it would be very very very difficult for me to lose most of it, and I'm going to say impossible for me to lose it all. Especially with rakeback/bonuses added.

Re: Having a backer and paying taxes
 

Lots of people have staking agreements. I think Fossilman had one when he won the WSOP, and this year's second place winner had his backer there with him. Surely these people didn't win millions without giving some thought to the tax consequences.

I'm no tax expert, but the method you describe, where your dad gives you a tax-free gift, you win a lot of money, and then "give" him back his share, sounds like a tax minefield. You and your dad could well end up paying double taxes on the profits if you don't take the proper steps up front to avoid it.

I had a lawyer assure me once that a contract for illegal activity is quite enforceable, and the IRS doesn't care if the income is illegal or not, they just want their taxes.

If you're dead set on doing it, get proper legal and tax advice up front and save yourself a lot of misery down the line.

Re: Having a backer and paying taxes
 

THis sounds like a horrible deal for you, unless of course you are a losing player at these limits, then its a horrible deal for both of you.

Re: Having a backer and paying taxes
 

How is this a terrible deal?