I’m about to tell you a hard truth. It’s something those in the poker community have known for years, but those looking in from the outside might not realise. You know those players you see winning five, six, and even seven figures in poker tournaments?

Well, most of them are not really winning that much money.

Why not?

Table of Contents

Poker Stacking and Backing

Sure, they’re getting paid the advertised amounts, but what you might not realise is the prize money is often divvied up among investors. In poker, especially for big buy-in tournaments, players tend to reduce variance by selling action or getting staked. To give you an idea of what this means, if a player wants to play the $10,000 World Series of Poker (WSOP) Main Event but doesn’t want to put up the full amount, they may sell action. Perhaps an investor will pay $5,000 for 50% of potential winnings. This is a very elementary example, but is indicative of what happens in the poker world on a daily basis.

In big buy-in tournaments, players tend to reduce variance by selling action

In addition to buying/selling action, some players are backed. What this means is someone puts up the money for buy-ins, and the player plays for a smaller percentage of him or herself. Sticking to the above example, perhaps a benevolent backer will front the entire $10,000 buy-in for 80% of the winnings, meaning the player plays for free with the incentive of pocketing 20% of the winnings. In long-term poker backing arrangements, players are often required to pay makeup, meaning all their buy-ins are tallied as debt that must be paid by future winnings.

Poker staking seems like a simple concept, but it can be confusing to the uninitiated, especially when you consider “markup” and “tax obligations.” To help simplify things, we spoke to both John “KasinoKrime” Beauprez, a WSOP bracelet winner and proprietor of PLO QuickPro, and Zak Zimbile of noted poker tax specialists Kondler & Associates.

Backed player- the player plays for free with the incentive of pocketing 20% of the winnings

Beauprez on Poker Staking, Choosing Horses, and Markup

“Poker Staking is the primary method players use for scaling their poker-playing business,” says Beauprez, an accomplished online poker pro. “Under the right circumstances, it can be lucrative, such as when you have good players in soft games, and particularly in situations where said players have access to games I cannot play.”

Like Beauprez, many investors choose to either back players or buy action for games they cannot attend. For instance, many investors can’t always make it to a big poker series like the WSOP but still want to be in action. By investing in another player, they have skin in the game, so to speak. So, how do investors go about choosing their horses?

“I am more likely to stake players who I have played with,” admits Beauprez. “I'm an experienced player and can recognise the players who have true talent much easier if I have the opportunity to sit at the table and observe them in real time rather than just look at their short-term results. Also, it gives you a better idea of the markup you pay is worth it.”

For those who may not know, markup refers to a percentage a player may charge an investor, a sort of premium related to their skill. For example, if selling 50% of a WSOP Main Event buy-in, a player might charge a rate of 1.2:1. That means it would cost an investor $6,000 instead of $5,000 to buy the action. This setup is usually done when a player feels they have a significant edge in a tournament. Unfortunately, excessive and undue markup has become a bit of a problem in the industry.

“Very few players are worth more than 1.2,” says Beauprez. “The ones that are, typically don't sell. If you are the buyer, negotiate markup down in exchange for a larger piece. As an example, someone approaches you and offers to sell action at 1.2 - tell them you will pay 1.1 in exchange for taking all their action. This increases convenience for them, and you get a good piece at a discounted price. These little margins add up big time over the long run especially if you are buying a lot of pieces.”

As a poker player, you no doubt feel you have an edge (all players tend to think highly of their own skillset), and the idea of markup is appealing. However, do you have the results, résumé and reputation to warrant charging markup?

“If you are considering playing a tourney you otherwise wouldn't play without selling, I wouldn't charge markup,” Beauprez states. “I don't think it's ethically wrong, it's just a personal thing. I am a free-market guy - I have faith the market will respond negatively towards you by not getting buyers if you are charging too much markup or shouldn't be charging in the first place. On the flipside, if you are playing a tourney you don't need to sell for - I would sell at markup if someone wants a piece.”

Markup - a percentage a player may charge an investor, a sort of premium related to their skill.

Swapping Poker Action

While a lot of players buy and sell action, many prefer a simple swap. What does that mean?

“It is a very simple idea,” says 888poker Ambassador Dominik Nitsche. “People offer a small piece of their tournament in exchange for the same piece of a friend. There are a lot of reasons players do this. For starters, it helps to swap with a few players when the buy-in is a bit bigger than one can afford. It's also nice to have a rooting interest in the tournament when you bust.”

An example of swapping is what Nitsche and his roommates did over the summer during the WSOP. All of them swapped 5% in every event that played.

“It's a fun sweat, especially when someone goes deep in the Main,” adds Nitsche. “I do swap but only small pieces with my friends to give each other an incentive to root for the other guys to do well.”

Swapping is usually done on the fly, and many players even do it late in a tournament based on chip stacks. For instance, if two players make Day 2 of a tournament near even in chips, they might do an even chop. If one player holds a bigger stack, they might get a bit more in the swap.

The Risks and Rewards of Poker Stacking and Backing

“I bought a piece of a student in a WSOP event who was playing PLO200 and small stakes tourneys online earlier this year,” Beauprez responds when asked about his most successful poker staking story. “He ended up cashing for $200,000. It was an awesome experience because we had spent probably 50 hours on Skype discussing hand histories, and since he works extremely hard on his game I was happy to win money but also thrilled to see him succeed in a big way.”

Beauprez’s success story shows the upside of poker stacking, and it’s just one example of poker investments that have paid off. Details surrounding who bought/sold action and how much are usually kept mum. But a couple of examples include Daniel Negreanu selling 13% of his action before finishing runner-up in the 2014 Big One for One Drop for $8.29 million (that meant a $5,000 minimum investment returned $41,440). And, when Greg Raymer won the 2004 WSOP Main Event for $5 million, he paid out more than $2 million to investors.

As a fun example, imagine you had 10% of the hottest player in poker right now -- Fedor Holz. From 2015-16, Holz has amassed $19,676,642 in tournament earnings. Sure, a lot of the tournaments he plays cost $25K, $50K, and $100K to enter – meaning buying 10% of his action would cost a small fortune – but if you had the opportunity to invest and did, you would be a millionaire getting back $1,967,644.20!

Of course, poker investments don’t always pan out. In fact, most of the time you’ll lose money, and in those rare instances when you don’t, there are still potential hurdles.

“People will inevitably lie about winnings or be difficult to collect from in some instances,” admits Beauprez. “But as you gain experience you will be able to spot these types of people. In long-term poker staking deals, it’s good to get things in writing for obvious reasons. For individual piece buying, a gentleman’s agreements are the norm.”

One of the biggest slights in poker investment history took place after the 2008 WSOP Main Event. Russian player Ivan Demidov was backed in the tournament, finished runner-up to Peter Eastgate for $5.8 million, and admitted years later that his backer did not pay him his share of the prize money.

There’s also the story of Constant Rijkenberg, who in 2009 sold action in order to play the EPT San Remo. The problem was, he oversold himself, meaning he took in more money than the amount of the buy-in. It should go without saying, but overselling is extremely unethical.

Overselling is extremely unethical.

Also note, when players oversell they should absolutely avoid cashing. If they do, they’ll end up owing investors more than their win. For example, if a player sells 110% for a $1,000 tournament, meaning they charged $1,100 and pocketed $100, and cash for say $10,000, all the various investors will be expecting payouts totalling $11,000. As you can see, the scam doesn’t add up.

Funny thing, Rijkenberg must have been ignorant on that point as he went on to win the EPT San Remo for nearly $2 million! Obviously, his overselling came to light, his reputation was ruined, and he ended up owing a lot of people money.

Tax Implications of Poker Stacking

Depending on where you live, winning big most likely means tax obligations. It’s a very complicated issue, and each country handles it differently. Please research the applicable tax laws for your country, but for the sake of this article, we will look at the United States as an example.

If you sell action and are fortunate enough to win a large amount of money, you’ll need to take the proper steps to ensure you’re not on the hook for paying taxes on the whole amount. When you pay out U.S.-based investors, provided them with a 1099 form, which will make them responsible for the taxes on their fair share.

“If you are going to be giving someone more than $600 of net winnings, you should be issuing them a 1099,” said Zak Zimbile of poker tax specialist Kondler & Associates. “In order to issue a 1099, you need the player’s name, address and social security number, which can be officially documented on IRS Form W-9.”

Zimbile also recommends both players and investors keep careful records to not only protect against one another, but also against the IRS.

“Track everything. You do not necessarily need a written contract, but those always help. It can be something as simple as ‘Player A gave Player B $XXX for a XX.X% share in WSOP Event #15.’ Then have both players sign it, and you are good to go. This process prevents discrepancies from arriving after a cash when people may claim they had different percentages than previously agreed upon. It is also smart to have a paper trail for payment (bank wire, check, etc.). Many players pay backers in cash, so an issue could arise where one person claims they were never paid, so it is smart to cover your tracks at all times.”

Seems simple enough, but things can get complicated when investments occur between non-U.S. players.

“This is where it gets tricky,” Zimbile admits. “Before getting into a backer arrangement, make sure you know which country the backer/backee is from and the corresponding tax treaty treatment of winnings. If your backer is not a U.S. citizen/resident, you will not be able to issue Form 1099. It also becomes more challenging if they do not have an Individual Taxpayer Identification Number (ITIN). You can still give them their money and deduct it as losses, but you must file Form 1042-S instead of Form 1099, which is more complicated.”

Before investing, it’s also important to note one important number that could potentially apply to a non-U.S. player.

“If you buy a piece of a Non-U.S. citizen/resident, you must first know if they will have 30% withheld from their winnings or not (depending on their country’s tax treaty with the U.S.). If there is withholding, you should determine your payout before the tournament, so it is clear if you are owed based on the gross/net payout.”

Paying taxes is important, so make sure it’s addressed in your poker investment transactions.

More Information for Those Looking to Buy/Sell Action

For those looking to participate in poker investing, be it buying or selling action, a good place to start would be poker staking sites such as YouStake, which has emerged as the market leader. YouStake and its counterparts have made it easy to both buy and sell action by facilitating the transaction and ensuring consumer protection.

Poker staking sites are a great place to start when researching poker stacking, but you can also browse sites like 2+2, which is a reputable place to both post and search for poker stackingopportunities.

Understand the risks, do your due diligence, and invest wisely. Good luck!

Chad Holloway is a 2013 WSOP Bracelet winner who has previously worked for PokerNews as a managing editor and live reporter