Let me share a difficult truth. This is something many in the poker world are already aware of, yet those observing the scene from the outside may not see. You’ve likely seen players raking in substantial cash prizes, sometimes reaching five, six, or even seven figures. poker tournaments ?
However, the reality is that many of these players aren’t actually pocketing that much money ultimately.
Why not?
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Poker Stacking and Backing
While it appears that players are winning large sums, it’s crucial to understand that this profit is frequently split with various investors. In poker, particularly with costly tournament entries, many players opt to mitigate their financial risk by selling parts of their action or being staked. For instance, if a contestant wishes to enter the $10,000 World Series of Poker (WSOP) Main Event but prefers not to gamble the entire amount, they might sell a portion of their action. An investor could provide $5,000 for a 50% share of any potential winnings. This straightforward example reflects a common practice in the poker industry.
Beyond merely buying or selling action, some players are financially backed as well. This arrangement means that an individual covers their buy-in costs in exchange for a greater share of the winnings. Referring to the previous example, a generous backer might cover the complete $10,000 entry fee, claiming 80% of any winnings while allowing the player to keep 20%. In these long-term agreements, players often have to account for makeup, where all their buy-in amounts accrue as a form of debt that must be reimbursed from future earnings.
Poker staking might seem like a straightforward concept, but it can be perplexing for newcomers, especially when considering aspects like 'markup' and 'tax implications.' To clarify these topics, we spoke with John 'KasinoKrime' Beauprez, a respected WSOP champion, and Zak Zimbile from the esteemed poker tax advisory firm Kondler & Associates.
Beauprez Discussing Poker Staking, Player Selection, and Markup Concepts
"Poker Staking is the fundamental approach players take to grow their poker endeavors,\" notes Beauprez, a seasoned professional in online poker. \"When the conditions are favorable, it can lead to significant profits, especially when you support skilled players in advantageous games that I don’t have access to.\"
Similar to Beauprez, numerous investors opt to back players or buy action in events they are unable to attend in person. For example, while many investors might not make it to major tournaments such as the WSOP, they still want to have a stake in the action. By financing another player, they find a way to participate from a distance. So, what are the strategies investors use to select their chosen horses?
"I tend to back players with whom I've competed before,\" admits Beauprez. \"Being an experienced player allows me to identify true talent and skill more effectively when I can observe them during live play rather than just look at their past performance records. This insight also gives me a clearer view of whether the markup is justified.\"
For those unfamiliar, markup refers to an additional percentage that a player may request from an investor as a premium linked to their demonstrated skill. For example, if a player decides to sell 50% of their buy-in for the WSOP Main Event, they might apply a markup rate of 1.2:1. Consequently, an investor would pay $6,000 instead of the $5,000 base amount for the action. This tactic is generally employed by players who feel they possess a considerable advantage in competitive scenarios. Unfortunately, inflated markups have become a noticeable issue in this field.
"Very few players justly command markups over 1.2,\" remarks Beauprez. \"Usually, those that do don't sell their shares. If you are the investor, aim to negotiate for a reduced markup in exchange for acquiring a larger share. For instance, if someone offers an action piece at 1.2, propose covering 1.1 if you agree to take all of their available action. This arrangement not only benefits the seller by providing convenience but also secures a good deal for you. Over time, these minor savings accumulate significantly, especially if you are purchasing several pieces.\"
As a poker player, you likely believe you have an edge, which is common among many. The concept of markup can seem enticing. But do you possess the performance records, accomplishments, and reputation necessary to justify demanding markup?
"If you’re contemplating participating in a tournament you typically wouldn’t enter without selling off action, I wouldn’t charge markup,\" Beauprez advises. \"It’s not that I view it as ethically incorrect; it’s merely my personal stance. I believe in a free market, trusting that excessive markup will deter potential buyers. Conversely, if you're entering a tournament without a pressing need to sell, don't hesitate to apply markup when someone shows interest in your action.\"
Swapping Poker Action
Although many players engage in buying and selling action, a portion prefer a straightforward swap. What does this entail?
"The concept is rather uncomplicated,\" states 888poker Ambassador Dominik Nitsche. \"Players offer a minor percentage of their tournament shares in return for an equivalent percentage from a friend. There are numerous reasons why participants engage in this practice; among them is the utility of pairing up with multiple players when the buy-in exceeds individual affordability. It can also enhance the excitement of the tournament experience when someone is rooting for you post-elimination.\"
An example of this swapping dynamic occurred during the summer WSOP where Nitsche and his housemates exchanged 5% stakes in every event they entered.
"It's quite the enjoyable experience, particularly when someone progresses deep into the Main Event,\" adds Nitsche. \"I prefer to swap in modest amounts within my friend group to motivate us all to cheer for one another's successes.\"
Swapping typically happens spontaneously, with players frequently engaging in it late in a tournament based on their chip counts. For instance, if two competitors advance together into Day 2 of a tournament with nearly identical chip totals, they may opt for an even exchange. If one contestant holds a more substantial chip stack, they might negotiate for a bit more in their share swap.
Weighing the Risks and Rewards of Poker Stacking and Backing
"Earlier this year, I invested in a student who played in a WSOP event – he was primarily participating in PLO200 and smaller online tournaments,\" Beauprez shares when discussing his most notable experience with poker staking. \"He managed to cash out with $200,000. It was an incredible journey, having spent around 50 hours on Skype analyzing played hands with him, and witnessing his dedicated efforts in the game. While I was thrilled to profit, seeing him achieve such a significant milestone was equally rewarding.\"
Beauprez's success story underscores the potential benefits of poker staking, and it's just one instance of a poker investment yielding high returns. Typically, specific details surrounding action buyers and sellers are kept confidential. Nevertheless, there are notable examples such as Daniel Negreanu, who sold 13% of his action prior to finishing as the runner-up in the 2014 Big One for One Drop, winning a whopping $8.29 million, translating to a return of $41,440 on a minimum $5,000 investment. Similarly, Greg Raymer took home $5 million after winning the 2004 WSOP Main Event, paying over $2 million back to his investors.
For a fun hypothetical, picture having a 10% stake in the current hottest player in the poker scene, Fedor Holz. From 2015 to 2016, Holz collected an astonishing $19,676,642 in tournament earnings. Admittedly, many of the games he enters have entry fees ranging from $25K to $100K, making a 10% investment costly. However, if you managed to invest earlier, you'd find yourself enjoying a substantial payout of $1,967,644.20!
Nonetheless, not all poker investments yield positive outcomes. In fact, you’re likely to incur losses the majority of the time. And even in those instances where profits are made, challenges can still arise.
"It's almost inevitable that some will misrepresent their winnings or become difficult to collect from,\" Beauprez acknowledges. \"With experience, you'll cultivate the ability to recognize these types of individuals. It’s advisable to formalize long-term staking arrangements through written agreements for clear reasons. In individual action purchases, gentlemen's agreements tend to be the standard practice.\"
One of the most notorious incidents in poker investment history occurred after the 2008 WSOP Main Event. Russian player Ivan Demidov was funded for his participation in the tournament, finishing as a runner-up to Peter Eastgate for $5.8 million. Years later, he confessed that his backer had failed to pay him his entitled share.
There’s also the account of Constant Rijkenberg, who in 2009 sold his action to participate in the EPT San Remo. Unfortunately, he oversold himself, acquiring more funds than his buy-in required. This practice is, without question, extremely unethical.
It’s crucial to acknowledge that in situations of overselling, players should entirely refrain from cashing out. If they do cash in, they can find themselves owing investors more than their actual winnings. For example, if a competitor sells 110% of a $1,000 buy-in, receiving $1,100 in total while pocketing $100, and then finishes with a payout of $10,000, their investors will each expect to receive a total of $11,000. Thus, the numbers simply won't align.
Ironically, Rijkenberg appeared to be unaware of this consequence; he won the EPT San Remo for nearly $2 million! Naturally, his actions of overselling came to light, tarnishing his reputation, leaving him significantly in debt to numerous investors.
Tax Implications of Poker Stacking
Depending on your jurisdiction, receiving a substantial win often carries tax liabilities. This can be a convoluted area, as every country has distinct regulations. It's essential to familiarize yourself with applicable tax guidelines specific to your country, but for illustration purposes in this discussion, we will focus on the United States.
When you engage in selling action and happen to strike it rich, it's crucial to take the right measures to avoid being liable for taxes on your entire earnings. By providing a 1099 form to investors in the U.S., you shift the tax responsibilities to them, ensuring they only pay on their respective shares.
According to Zak Zimbile from Kondler & Associates, a specialist in poker taxation, 'If you're planning to give a player over $600 in net winnings, you must issue them a 1099 form.' To successfully issue a 1099, it's essential to collect the player's full name, address, and social security number, which can be obtained through the IRS Form W-9.
Zimbile also advises both players and investors to maintain meticulous records. This not only safeguards each party's interests but also provides protection against potential audits from the IRS.
'Make sure to keep track of everything. Though a written contract isn't always necessary, having one can be highly beneficial. It could be as straightforward as stating, 'Player A provided Player B with $XXX for a XX.X% stake in WSOP Event #15.' Getting all parties to sign off on it can help eliminate any future disputes over the agreed percentages. It's also wise to establish a clear paper trail for any payments, whether through bank transfers, checks, or other methods. Given that many players pay their backers in cash, there’s a risk of someone claiming they were never reimbursed, so it’s prudent to always protect yourself with proper documentation.'
While it may seem straightforward, the dynamics change significantly when it comes to investments involving players from outside the U.S.
'This is where the situation becomes complex,' Zimbile concedes. 'Before entering into any backing arrangement, it's vital to ascertain the nationality of both the backer and the backed player, as well as to understand the applicable tax treaty concerning winnings. If your backer isn’t a U.S. citizen or resident, issuing a Form 1099 isn’t an option. The process is made even trickier if they lack an Individual Taxpayer Identification Number (ITIN). Although you can still provide the funds and deduct it as a loss, you will need to submit Form 1042-S instead of Form 1099, which makes things more complicated.'
Before making an investment, it's crucial to keep in mind a critical aspect that could affect a non-U.S. player.
'If you're purchasing a stake from a Non-U.S. citizen or resident, you must first determine whether 30% will be withheld from their earnings, which depends on their home country's tax treaty with the U.S. If withholding is applicable, you should clarify your payout calculation prior to the tournament to establish whether you are entitled to a gross or net payout.'
Addressing tax obligations is essential, so be sure to incorporate this aspect into your poker investment dealings.
If You're Interested in Trading Action
For individuals eager to join the world of poker investing, whether buying or selling action, starting with poker staking platforms like YouStake can be beneficial as it leads the market. YouStake and similar platforms simplify the process of buying and selling action while also ensuring that consumer protections are in place.
While poker staking sites represent a solid starting point for exploring opportunities in poker investment, you can also check forums like 2+2, a well-regarded platform for posting and discovering poker staking opportunities.
Be aware of the associated risks, conduct thorough research, and invest thoughtfully. Wishing you the best of luck!