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Staking Agreements Involving U.S. Nonresidents at the WSOP

The 2011 World Series of Poker, to be held at the Rio All-Suite Hotel & Casino in Las Vegas, Nevada, and run by Caesar’s, commences later this month.  I suspect the aura to be different from previous years, with #BlackFriday to blame.  Considering only one of the three major poker companies recently shut down in the U.S. is currently returning player funds, the fields for larger entry fee tournaments are likely to take a hit.  To that end, since many players will be strapped for funds, my hunch is there will be an uptick in staking agreements (sponsorships).

Back in February, I wrote about the tax implications of staking arrangements for U.S. residents at the WSOP.  Simply put, Caesar’s does not recognize staking arrangements, despite being required to.  If you are a U.S. resident and win $100,000 at the World Series with a backer, for example, and submit to the casino a completed Form 5754, Statement by Person(s) Receiving Gambling Winnings so the Casino issues W-2Gs to both you and your backer, Caesar’s won’t acknowledge the form; instead, the casino will issue to you a W-2G for the full amount of the winnings.  Read that February post for suggestions on how to properly allocate the winnings in a staking agreement at the WSOP between two (or more) U.S. residents for tax purposes.

What are the tax implications when we introduce a U.S. nonresdient to a staking agreement?  Let me be clear: It’s a mess, and I present my longest blog post to date.  Note that if a U.S. resident is involved with a staking arrangement with a nonresident, these issues are still most certainly of significance.

Basic Facts and the Three Scenarios:

The Facts:  Suppose the staking agreement is between one “staker” (the person putting up the funds) and the “stakee” (the person playing in the tournament).  The staker agrees to contribute 100% of the tournament entry fee, and the staker and stakee are each entitled to 50% of total winnings, if any (beyond the entry fee, which the staker is fully entitled to, if the stakee places).  Further suppose the entry fee is $10,000 (which is the entry fee to enter the WSOP main event), the stakee ends up placing and wins $100,000, less the $10,000, for a total gambling winnings of $90,000.

See my prior post for the tax implications if both the staker and stakee are U.S. residents.  The implications are quite different, however, when a nonresident is involved.  Further, it depends on the hat the nonresident wears, hence the three possible scenarios:

A)  U.S. stakee, nonresident staker

B)  Nonresident stakee, U.S. staker

C)  Nonresident stakee, nonresident staker

Before delving into the particular tax consequences of each scenario, I must first discuss how the Internal Revenue Code treats U.S. gambling winnings earned by U.S. nonresidents in general.

Taxation of U.S. Gambling Winnings Earned by U.S. Nonresidents and Possible Treaty Relief

In general, gambling winnings paid to foreign individuals are subject to 30% withholding.  For example, if a Canadian resident wins $90,000 (net the entry fee) at the WSOP, Caesar’s will withhold $27,000 for U.S. taxes, and the winner walks away with only $63,000.  The winner also walks away with a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, reflecting the $27,000 withheld.  This document must be kept in a safe place for tax time at year-end.

Note that the 30% withholding rule applies only if the income is not effectively connected with a U.S. trade or business and is not exempted by treaty.  (For purposes of this post, I assume no income is effectively connected.  I’ll address those consequences in a future post.)  Indeed, an applicable tax treaty between the United States and a treaty partner may reduce the amount withheld by Caesar’s.  U.S. gambling winnings earned by residents of the following countries are not taxable in the U.S.:

Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.

Some other tax treaties reduce the percentage of gambling winnings withheld by the U.S.  If you are a nonresident, be sure to find out whether the U.S. has a tax treaty with your resident country, and whether it addresses gambling winnings.

Withholding Agents

If withholding for tax on U.S. gambling winnings is required, how does Uncle Sam actually receive his cut?  Through withholding agents.  A “withholding agent” is a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.  Thus, payments of gambling winnings from the WSOP made by Caesar’s to U.S. nonresidents are subject to withholding, with Caesar’s acting as the withholding agent.

Because withholding agents are required to withhold tax from income paid to a foreign person, they are liable for such tax.  If at the end of any quarter-monthly period the total amount of undeposited taxes exceeds $2,000, the withholding agent must deposit the taxes within three business days after the end of the quarter-monthly period.  (A quarter-monthly period ends on the 7th, 15th, 22nd, and last day of the month).  Beginning January 1, 2011, all withheld taxes must be deposited by electronic funds transfer.  Penalties may be imposed for failure to timely deposit, up to 15% of the required amount.

Withholding agents are also required to report payments on Form 1042-S and file a tax return on Form 1042, Annual Withholding Tax Return for U.S. Source Income for Foreign Persons (note: 2011 Form 1042 not yet available).  For income paid in 2011 subject to 1042-S withholding, the withholding agent is required to file the Form 1042 and Form 1042-S with the IRS no later than March 15, 2012, and is required to furnish the 1042-S to the recipient of the income by the same date.  Penalties may be imposed if either requirement is not satisfied.

WSOP Gambling Winnings Earned by U.S. Nonresidents

With the taxation framework in place, we’re now prepared to address each of the scenarios, applying the basic facts above.  Assume that no tax treaty applies to the gambling winnings.

A)  U.S. stakee, nonresident staker

Caesar’s will issue to the stakee a check for $100,000, along with a Form W-2G reflecting $90,000 of gambling winnings.  Yet, the stakee only has $45,000 of taxable gambling winnings.  To account for this difference, the stakee may allocate the nontaxable portion to a Schedule C as gross receipts, and list on the Schedule C the amount of winnings paid to the staker, here $45,000, as a business expense.  The result: net income from the transaction between staker and stakee (i.e. the mere shifting of funds) as zero.

The staker receives the initial $10,000 entry fee, which of course is not taxable income, as well as $45,000 of the winnings.  Because the stakee is paying gambling winnings to the nonresident staker, the stakee is a withholding agent required to withhold $13,500 of the winnings from the staker (30% of $45,000).  The stakee must complete a Form 1042-S and issue a copy to the staker, file a Form 1042 by March 15, 2012, and deposit the $13,500 with the U.S. Treasury within three business days after the end of the applicable quarterly-monthly period.

B)  Nonresident stakee, U.S. staker

In this case, the roles are reversed, yet the outcome is far different.  Casear’s will withhold 30% of the nonresident stakee’s gambling winnings, and issue a check to the stakee for $73,000 ($90,000 winnings less $27,000 for withholding, plus $10,000 entry fee), along with a Form 1042-S reflecting amounts won and withheld.

The U.S. staker is entitled to $55,000 ($10,000 entry fee, plus $45,000 winnings), and will report and pay tax on his share of the winnings.  Note that after paying this amount, the stakee is left with only $18,000 cash in hand.

But wait, if the staker pays tax on his gambling winnings, isn’t Uncle Sam getting two bites at the apple?  Yes, and the party who paid too much in tax will be due a refund.  In this case, it’s the nonresident stakee.  After the close of the tax year, the stakee should file a Form 1040-NR (income tax return for nonresidents), and attach a Schedule C, reflecting the transaction between the staker and stakee (as described in greater detail in the first paragraph under Scenario A).  The stakee should also be sure to list the $27,000 withheld by Caesar’s on line 60d of the 1040-NR.

C)  Nonresident stakee, nonresident staker

For the stakee, the consequences are same as those under Scenario B, except the stakee is also a withholding agent, and pays the staker $10,000 entry fee, plus $31,500 in winnings (net 30% withholding).  The filing and depositing requirements of the stakee are the same as described in the second paragraph under Scenario A.

Final Thoughts

Staking arrangements at the WSOP create headaches when accounting for taxes.  If Caesar’s ever changes its policy of disregarding the Form 5754, most of this discussion becomes moot.  But for now, it stands.  Of course, the assistance of a tax professional who is knowledgeable with these issues could make the headaches turn painless.

  1. a
    May 10th, 2011 at 04:26 | #1

    so is it ok for a US player to report taxes for this year if their income exceeds the minimum needed to file a return (I think it’s like 15k for singles?)

  2. September 13th, 2011 at 17:05 | #2

    Hi Brad, I’m a professional poker player and your staking agreements for the WSOP article was very helpful (http://taxdood.com/2011/05/08/staking-agreements-involving-u-s-nonresidents-at-the-wsop/). I was wondering if you knew about California tax law in regards to poker.

    Here is the situation: I won some money at a poker tournament in California, and I know there’s a California state tax of 7%. Since I am a California resident, I get all the money upfront, but non-California residents get only 93% of their prizes. If someone bought a stake in this tournament, do I give them back 93% of their share or the full 7%?

  3. September 14th, 2011 at 10:37 | #3

    Let’s address your question by an example. I’ll use essentially the same basic facts here as I did in the post you linked to.

    Facts: Suppose the staking agreement is between one “staker” (the person putting up the funds) and the “stakee” (the person playing in the tournament). The staker agrees to contribute 100% of the tournament entry fee, and the staker and stakee are each entitled to 50% of total winnings, if any (beyond the entry fee, which the staker is fully entitled to, if the stakee places). Further suppose the entry fee is $10,000, the stakee ends up placing and wins $100,000, less the $10,000, for a total gambling winnings of $90,000.

    Let’s assume the staker and stakee are both U.S. residents. Also assume the tournament takes place in California, the staker is a nonresident of California, and the stakee is a resident of California. Further, let’s assume the stakee did NOT provide to the payer (i.e. the casino) a Form 5754.

    Because the stakee is a resident of California, the casino pays to the stakee $100,000. No withholding is required. The staker is entitled to $55,000 ($45,000 winnings plus the $10,000 entry fee). Must the stakee withhold any of the $45,000 winnings for tax purposes?

    The answer is yes. In general, in California a payment of winnings to a nonresident requires 7% withholding (note: there are some exceptions). In our example, the stakee withholds $3,150 for California income tax. This page on the California Franchise Tax Board web site provides a nice overview regarding when and how to handle payments subject to withholding for California income tax.

    I should add: In the eyes of the IRS, the stakee has $90,000 of income, because, under our facts, a W-2G will be issued reflecting that amount to the stakee. Of course, some accounting tactics can be taken to reflect the proper allocation of income between the staker and stakee. Whether or not the IRS accepts this allocation as reported is anybody’s guess. That’s why the prudent move is to provide to the casino the Form 5754 upon receipt of the winnings, so that W-2Gs are issued to both the staker and the stakee. Of course, we assume the casino will accept the Form 5754. But, as we know, not all do.

    Clearly, these issues are not straightforward. I must state that this information cannot be relied on as advice for any taxpayer’s personal situation. Be sure to consult a tax professional to discuss your particular facts and circumstances.

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