How Should Multiple Buy-Ins for a Poker Tournament be Handled on a W-2G?

Poker tournaments today have various forms. Some are “freeze-outs,” where you can only buy into the tournament once. Some have rebuys and add-ons, where if you lose all your chips you can rebuy into the tournament and if you’re in the tournament at a certain point you can purchase an “add-on” of additional tournament chips. A format that has grown in popularity is the multiple reentry tournament. Here, if you lose all your chips you can reenter the tournament. The difference between this and a rebuy tournament is that in a reentry tournament you pay the house fee for running the tournament; in a rebuy tournament, your rebuy goes exclusively into the prize pool.

The IRS Office of Chief Counsel issued an opinion
back in July (but released last week) on how to treat multiple buy-ins for a poker tournament vis-a-vis issuing W-2Gs. Do note that this is solely the opinion of the Chief Counsel’s office; a court could make a completely different ruling. That said, the analysis looks correct to me.

The issue the IRS counsel needed to answer was, “Whether multiple buy-ins should be deducted as individual wagers or in the aggregate from winnings in a poker tournament for the purposes of reporting the winnings on a Form W-2G?” The conclusion the IRS came to is that multiple buy-ins are not identical wagers and should not be aggregated. Although this is a bad ruling for recreational gamblers, I think the IRS got it right.

So when a person rebuys is it an identical wager? “Of course it is, Russ; the person is paying the same amount for the entry into the tournament.” Yes, that’s correct but is his situation identical?

The IRS noted that the preamble to Treasury Decision 7919 explains the rule on identical bets.

…winning on identical bets must be aggregated to determine if the $1,000 floor has been exceeded. This ensures that bettors are treated the same, whether or not a wager is divided into several small components. Identical bets are those in which winning depends on the occurrence (or non-occurrence) of the same event or events. For example, two wagers on a horse to win a particular race general[ly] are identical. … [But] … wagers containing different elements, e.g., an “exacta” and a “trifecta” are not identical.

The issue is that the conditions when you reenter a poker tournament are not identical. Consider if you buy-in before the tournament begins, and there are 100 entrants. When you reenter, there are now 120 entrants. The prize pool is different, your chances of winning are different, and, most likely, the opponents at your table will be different. While the amount wagered is identical, the wager itself has a different chance of success.

The conclusion the IRS draws is correct:

Multiple buy-ins into a single poker tournament event are not identical wagers and therefore should not be aggregated for purposes of withholding and reporting requirements under section 3402(q) and the regulations thereunder. If a player wins a prize at the close of a tournament, only the buy-in that resulted in the win should be deducted from the winnings to determine the “proceeds from a wager.”

While I agree with the conclusion, this is not good for players (or for poker). First, for professional gamblers this is a non-issue. A professional gambler nets his wins and losses, so while a W-2G may have a larger win, the professional gambler can offset that by his higher losses. Nothing has changed for him or her.

However, the situation is different for amateur gamblers. An amateur gambler cannot not his wins and losses. Wins are Other Income (line 21, Form 1040) while losses are an itemized deduction on Schedule A. This ruling will cause an amateur gambler’s Adjusted Gross Income (AGI) to increase. An increased AGI has numerous deleterious effects, including (but not limited to):

  • You lose the value of exemptions;
  • You can lose certain itemized deductions both directly (2% AGI, 7.5%/10% AGI restrictions) and through the phase-out of itemized deductions (note that gambling losses are not impacted by this);
  • You can lose the ability to deduct student loan interest;
  • You may lose tax credits for health insurance; and,
  • Some states do not allow deductions for gambling losses, so if you’re a resident of one of those states you must pay tax on artificial “wins”.

Personally, I think that the reentry format is bad for poker. (A discussion of that has far more to do with the health of the poker economy than taxes.) This ruling from the IRS appears to be legally correct but is another blow to amateur players.


2 Responses to “How Should Multiple Buy-Ins for a Poker Tournament be Handled on a W-2G?”

  1. […] NOT be aggregated, and not to be treated as individual wagers. The blog from Fox can be found at…led-on-a-w-2g/   Add Kevmath to […]

  2. […] Fox, How Should Multiple Buy-Ins for a Poker Tournament be Handled on a W-2G? I have no idea what he’s talking about, but I’m sure many of you […]