At the end of October 2012, the Cologne Tax Court ruled that poker players must pay income tax on the winnings they make in poker tournaments. This was a dark day for poker players because until that date, poker was a game of chance, like the lottery, and was therefore considered tax-free. However, this only works if luck decides whether a game ends in victory or defeat.
A few years later, the Münster Tax Court ruled that poker winnings are subject not only to income tax but also to sales tax. These two rulings were then reviewed by the Federal Tax Court, Germany’s highest court for tax matters. The Federal Tax Court ruled that the Cologne judges had judged correctly and that poker winnings are subject to tax. They therefore confirmed that “winnings from participation in poker tournaments may be subject to income tax as income from commercial operations.” The Federal Tax Court thus follows the 2012 Cologne decision.
Amateur players play tax-free
The reasoning is that in poker, the prize money is won through the player’s skill, not by chance. Therefore, victory depends on the player’s skill. Thus, poker doesn’t count as a game of chance, but rather as a game of skill. In poker, the game is generally decided in favor of the player with the best psychological and analytical skills.
According to the tax court, poker players are only required to pay taxes if they have successfully participated “for years in renowned tournaments with large prize pools.” Only then are their winnings subject to tax, the judges ruled. However, in the case of an amateur player who won more by chance, poker winnings remain tax-free.
Poker winnings are exempt from sales tax
In the case in which the Münster judges ruled that poker winnings are subject to sales tax, the following occurred: a poker player had participated in online poker events and cash games for a period of at least nine years. He earned his living in part from these prize money, which he won in poker tournaments. In order to participate in these tournaments, he had to take unpaid leave from his employer. He did not report his winnings from poker tournaments on his income tax return.
The poker player attracted attention because of a video interview about him. A tax audit was immediately ordered. Since there were no written records, the arbitrators estimated the player’s turnover. The player filed a lawsuit against this procedure, but the lawsuit was rejected by the Münster judges. They ruled that by participating in the tournament, the poker player provided an achievement. Furthermore, there was an intention to make a profit, because he wanted to make money. For this reason, the poker player was a normal businessman and had to pay sales tax.
The Federal Court of Justice ruled in August 2017 that poker players do not have to pay sales tax on their gambling winnings. The decision was justified by the fact that winnings are not paid for the poker player’s participation in tournaments, but rather for achieving a result in a competition. Consequently, no sales tax is payable because the poker player is not an entrepreneur.
The situation would be different if the tournament organizer paid the player for participating in the tournament. Even if poker winnings are not subject to VAT, they are still subject to tax and therefore income tax must be paid. What remains unclear is whether, now that poker players are treated as a commercial enterprise, they can also deduct the costs incurred from their income. This decision is still pending.
The effects for the poker player
The judges’ ruling has significant significance for all professional poker players. Because all those who regularly sit at poker tables or participate in tournaments and thereby earn profits through their skills must pay taxes on these profits. And not just when the IRS finds out, but also when playing goes beyond the amateur level and becomes professional.
Therefore, it is important to continually check at what point the tax office might assume a business is active. In our experience, this is the case, for example, if the individual does not have any other profession and earns his or her livelihood entirely or at least predominantly from poker. However, if the poker player is active professionally and earns only a fraction of his or her income from poker, he or she cannot be assumed to be a professional poker player.
Since the statute of limitations only kicks in after four years, and even three years later if the player hasn’t filed a tax return, caution is advised. No one should wait until the tax office comes across them, as this can be costly, as poker winnings can be taxed retrospectively several years in advance. In addition, there is an annual interest charge that the IRS will add.
Conclusion: Make money with online poker
If you want to play poker professionally, you must meet certain requirements. For example, you have a certain financial cushion. Finally, you must consider that regular income isn’t always available. If you want to find out what tips exist and who wants to make money with online poker, you can find appropriate advice on a forum.
Poker income must be taxed if it is a commercial activity. This is the case when the poker game is played with the sole intention of earning a living and, therefore, making a profit. Each individual case is considered differently. If there is an intention to make a profit, but the player continues to suffer losses, it is still a taxable activity.
The problem is that the tax office can still tax winnings from a poker tournament many years after the event. Furthermore, interest is generally charged at a rate of 6% per year.