Poker: skill or luck?
Posted: Sat Jul 18, 2009 6:49 pm
Was watching some of the WPT on ESPN last night and the commentary on one of the players at the final table was very interesting.
Billy Baxter is a pro who's been around for some time. He's in the Hall of Fame and has 7 WSOP bracelets to his name. Whilst impressive, that isn't what was interesting.
This will be old news to some of us on here, but it turns out that Billy went to court (in the US) about taxation on his poker winnings.
Further information from Wikipedia tells us that the view at the time was that it was 'unearned income' (similar to lottery winnings or from pokies etc) and therefore taxable at a rate of 70% instead of being treated as 'earned income' which had a lower maximum tax rate of 50%. Quite harsh when you consider that at the time, to Billy this meant an additional US$178,000.
Initially Billy refused to pay but on legal advice he did pay and then sued for a tax refund. The case is "William E. Baxter Jr. vs. the United States".
Billy had to demonstrate that his poker career was essentially a trade or business and he was able to do this via the "facts and circumstances test" and the Government then had to concede that the tax rate should be a maximum of 50% and not 70%.
The judge who heard the case ruled in favor of Baxter, declaring "I find the government's argument to be ludicrous. I just wish you had some money and could sit down with Mr. Baxter and play some poker."
The court stated:
[ . . . ] the Court finds that capital was not a meterial [sic]-income-producing factor in Baxter's gaming income. In fact, the Court finds that Baxter's income was derived entirely from his personal services and that the capital he used to finance his poker playing was merely a "tool of the trade." The money, once bet, would have produced no income without the application of Baxter's skills. [ . . . ] it was Baxter's extraordinary poker skills which generated his substantial gaming income, not the intrinsic value of the money he bet.
Because of this case, gambling winnings in the United States can be treated as earned income for federal income tax purposes, depending on the facts and circumstances of the case. This means that in some cases expenses and losses can be deducted from gambling winnings in arriving at the net earnings from self-employment, and that winnings can be placed into retirement funds.
The case of Baxter v. United States is currently being cited by opponents of the Unlawful Internet Gambling Enforcement Act (UIGEA). Opponents of the UIGEA believe that since poker is a game of skill that the act does not apply to online poker sites.
Russia and Denmark have similarly declared poker to be a game of skill. In the Gutshot Poker Club case in England, the court ruled poker to be a game of luck and so subject to the Gaming Act (though this is currently under appeal).
Some of this confuses me as to how it's even up for debate to begin with. There is no one fixed and constant amount or portion of either luck or skill. The amount of either will depend entirely upon the person(s) taking part and is therefore partly fluid. Which of those two factors has the greatest impact is clear - the skill level of the player. A highly skilled player versus a lowly skilled player has little relevance to luck, sometimes almost to the point where it's basically zero luck. If even an American can see this common sense then surely there's hope for the rest of the world!
Billy Baxter is a pro who's been around for some time. He's in the Hall of Fame and has 7 WSOP bracelets to his name. Whilst impressive, that isn't what was interesting.
This will be old news to some of us on here, but it turns out that Billy went to court (in the US) about taxation on his poker winnings.
Further information from Wikipedia tells us that the view at the time was that it was 'unearned income' (similar to lottery winnings or from pokies etc) and therefore taxable at a rate of 70% instead of being treated as 'earned income' which had a lower maximum tax rate of 50%. Quite harsh when you consider that at the time, to Billy this meant an additional US$178,000.
Initially Billy refused to pay but on legal advice he did pay and then sued for a tax refund. The case is "William E. Baxter Jr. vs. the United States".
Billy had to demonstrate that his poker career was essentially a trade or business and he was able to do this via the "facts and circumstances test" and the Government then had to concede that the tax rate should be a maximum of 50% and not 70%.
The judge who heard the case ruled in favor of Baxter, declaring "I find the government's argument to be ludicrous. I just wish you had some money and could sit down with Mr. Baxter and play some poker."
The court stated:
[ . . . ] the Court finds that capital was not a meterial [sic]-income-producing factor in Baxter's gaming income. In fact, the Court finds that Baxter's income was derived entirely from his personal services and that the capital he used to finance his poker playing was merely a "tool of the trade." The money, once bet, would have produced no income without the application of Baxter's skills. [ . . . ] it was Baxter's extraordinary poker skills which generated his substantial gaming income, not the intrinsic value of the money he bet.
Because of this case, gambling winnings in the United States can be treated as earned income for federal income tax purposes, depending on the facts and circumstances of the case. This means that in some cases expenses and losses can be deducted from gambling winnings in arriving at the net earnings from self-employment, and that winnings can be placed into retirement funds.
The case of Baxter v. United States is currently being cited by opponents of the Unlawful Internet Gambling Enforcement Act (UIGEA). Opponents of the UIGEA believe that since poker is a game of skill that the act does not apply to online poker sites.
Russia and Denmark have similarly declared poker to be a game of skill. In the Gutshot Poker Club case in England, the court ruled poker to be a game of luck and so subject to the Gaming Act (though this is currently under appeal).
Some of this confuses me as to how it's even up for debate to begin with. There is no one fixed and constant amount or portion of either luck or skill. The amount of either will depend entirely upon the person(s) taking part and is therefore partly fluid. Which of those two factors has the greatest impact is clear - the skill level of the player. A highly skilled player versus a lowly skilled player has little relevance to luck, sometimes almost to the point where it's basically zero luck. If even an American can see this common sense then surely there's hope for the rest of the world!
