Casualty Losses, Constructive Receipt and Full Tilt Poker

I’ve been asked numerous times over the past few weeks one question by poker players: “Can I take a casualty loss on the money I have tied up on Full Tilt Poker?” The answer is a definite maybe, but even if there is a casualty loss it will likely not be a 2011 event.

For those unaware, Full Tilt Poker was one of three business offering online poker to Americans before April 15, 2011. On that date, the US Department of Justice indicted Full Tilt, PokerStars, and Absolute Poker/UltimateBet. The companies were accused of bank fraud and violations of the Unlawful Internet Gambling Enforcement Act (UIGEA) and other statutes. Yesterday, Brent Beckley (one of the founders of Absolute Poker) pleaded guilty to conspiracy to commit bank fraud and wire fraud and conspiracy to violate the UIGEA. His sentencing is scheduled for April 19th.

Of the three businesses, PokerStars has fully repaid its customers. Absolute Poker/UltimateBet announced that the business is closing, with assets being sold in an attempt to repay customers. Full Tilt Poker, after being accused of being a Ponzi scheme, was sold to Group Benard Tapie (GBT). According to reports, GBT will repay non-US customers while the Department of Justice will repay Americans.

So let’s get back to the original question: Can an individual take a casualty loss on his funds at Full Tilt Poker? First, we need to determine whether there has been a casualty loss. A casualty loss is a sudden, unexpected or unusual event where an individual loses something of financial value. There is no doubt that the loss of funds from Full Tilt Poker’s collapse was “sudden and unexpected.” However, there’s a problem with this being a casualty loss. Given that the DOJ and GBT do expect to repay Americans, there’s no loss today. There may be a loss at some future date if funds aren’t fully repaid, but today the most likely possibility for Americans is full repayment sometime in late 2012. That means there is no casualty loss.

This is even true for Absolute Poker/UltimateBet. Given that AP/UB is attempting to sell their assets and repay players, we do not have certainty of what will be lost (or won’t be lost). And certainty of loss is another thing needed to claim a casualty loss. While I doubt that AP/UB will fully repay players, it’s probable players will get something. Until we know what that something is, it’s not yet time to take a casualty loss.

The other question that goes hand-in-hand with this is whether individuals need to claim money “won” on Full Tilt Poker (and Absolute Poker/UltimateBet) that they did not cash out before April 15th. Here we must look at whether individuals constructively received the funds.

The doctrine of constructive receipt governs when income is reported in the United States. If you receive a check on December 29th you can’t hold it until next year to defer the income. You had the funds in your possession (albeit as a check), and there’s no reason you couldn’t have deposited them in December. You constructively received the money and its income in this year.

The same principle holds in reverse. When there is substantial doubt as to the paying of the funds, you do not have constructive receipt. With Full Tilt Poker and Absolute Poker/UltimateBet, such doubt definitely exists. (Given that the Department of Justice has charged Full Tilt Poker as being a Ponzi scheme, even the US government sees this doubt.) I can’t see constructive receipt existing here. (Note: For anyone who received funds from Full Tilt Poker or Absolute Poker/Ultimate Bet in 2011, there is definitely constructive receipt.) Until the funds are repaid, there likely is no constructive receipt.

Finally, I’ve been asked, “Can’t I just deduct the money I had on Full Tilt Poker (or Absolute Poker/Ultimate Bet) as a gambling loss?” No. You clearly did not lose the funds in a wagering event. This isn’t a gambling loss. This may be a theft or loss of funds on deposit, but today all we know is that the funds are in limbo.

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9 Responses to “Casualty Losses, Constructive Receipt and Full Tilt Poker”

  1. 1logic says:

    What source do have for the timeline of DoJ repaying US players?

  2. Michael says:

    I had some funds on (demand-)deposit with UltimateBet, which, on the balance of evidence, I think are unrecoverable.

    I am not sure whether this is a casualty loss or a nonbusiness bad debt. I obviously would prefer to represent this is as a bad debt, rather than a theft or casualty, but I am not sure whether the IRS would agree.

  3. DJ says:

    So, for those of us who played at Full Tilt from January to April, with monies that we couldn’t have withdrawn (since FT apparently didn’t actually have most of the money being played with), do we report *any* gambling gains or losses during this period? Many of us kept daily session records that turn out to be meaningless, essentially based on play money although we didn’t know it at the time. Or is all of this poker playing (at Full Tilt or AP/UB) relegated to a nullity either way, at least for the purpose of 2011 taxes?

    Put another way, is the money left on the site a to-be-determined gain or loss, not material to 2011 taxes?

    If we get anything back, ever, is that simply a flat gain? Is it even a gambling gain or simply a return of monies being kept in trust(!) for use in playing poker? Or is it counterbalanced against deposits, and, if so, during what period?

    Or, if we get nothing back, is that a flat loss? A casualty loss due to theft/fraud/whatever? We did deposit monies based on the trust that these monies would be kept in secure separate accounts. On the other hand, there’s the issue that deposits to Full Tilt, after a certain point, were never taken from our bank accounts (due to processer busts) yet we were able to play real money games with the money — which was part of the reason that FT got into trouble.

    I am planning to treat play at PokerStars as usual (session play to either gambling gains or losses), so the balance returned (ty Stars!) is not directly in either column. I played there rarely, though, in 2011.

    • Russ says:

      Without knowing your exact situation, I can only speak generally. Right now, I believe money left on the site is likely in limbo. You may have income in a future year if the money is returned. You may have a casualty loss in a future year if money you paid tax on in the past vanishes. You may also have money that just disappears into the ether and won’t be a casualty loss.

      Any money lost is almost certainly not a gambling loss, though. You didn’t lose the money gambling.

  4. Eric says:

    Russ,
    Hi. I’m still confused. As my taxes are done now (and due in a couple days), my Ultimate Bet balance of $12,000 is being shown as a casualty loss. I am paying SE tax on the amount, and I’m only able to deduct $6,000 of that as itemized deduction. This all assumes no return of funds from UB.
    You are saying my money was not constructively received, and therefore I should not pay taxes on it?
    Thanks,
    Eric

    • Russ says:

      I don’t believe you can take a casualty loss on the money. As of December 31, 2011 there was no certainty that the funds were lost. UB/AP’s public stance was that they were working with the DOJ, and that they were trying to arrange sales of assets. (That’s still their stance, though the DOJ has seized assets in 2012.) Thus, you can’t take a casualty loss.

      There is also no constructive receipt (except to the extent you received funds from AP/UB and FTP). There was, as of December 31, 2011, many strings attached to individuals’ funds at AP/UB & FTP.

  5. Steve says:

    Russ,

    You seem to be defining “constructive receipt” as actually receiving money.

    In a normal job we wait for a paycheck but online poker lets us withdraw after each session, right?

    If your definition holds I could win WCOOP for millions , leverage that up for cash games and only report the $3,000 I get back each month to pay my expenses.

    Seems to me the IRS has a strong case you are in constructive receipt as soon as cash hits your online account. Otherwise you could “defer” for years ?

    Thanks for doing all the advice tho, very nice of you

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