Poker Primer: Five Questions

The runaway growth of Internet gaming has left a murky trail of legal and public health issues
May 29, 2005

Is online poker legal?

The U.S. Department of Justice considers all online gambling illegal under the Interstate Wire Act, and numerous states have antibetting laws that may apply to online poker. Nevertheless, individual players aren't normally targets for prosecution. "Those laws are never enforced," says I. Nelson Rose, professor at Whittier Law School in Costa Mesa, Calif., and co-author of Internet Gaming Law. "Your chances of being charged with a crime if all you're doing is playing online poker--well, you have better odds of winning the World Series of Poker."

To sidestep U.S. law, every for-profit gambling site is chartered overseas, many in tax havens such as Gibraltar (PartyPoker.com) and Costa Rica (PokerStars.com). American law enforcement agencies have tried to discourage online gaming by pressuring U.S. media outlets that accept advertising from such sites. The Justice Department, for example, issued Esquire magazine a cease and desist order after it ran an ad for the Costa Rica--based gaming site Bodog.com. But such methods would not likely survive court challenges. Says Rose, "Online poker is a low-priority crime, and with limited resources, it's down there with enforcement of traffic laws."

Who runs poker sites?

Typically, large online gaming firms operate the sites; PartyPoker belongs to PartyGaming, which is owned by two American and two Indian entrepreneurs, including Ruth Parasol, a 38-year-old Californian who made her fortune in Internet pornography. Last year Sportingbet, the British online bookmaker, acquired ParadisePoker.com for about $300 million. PartyPoker is reportedly considering an initial public offering on the London Stock Exchange valued at $4 billion to $6 billion.

Do players have to pay taxes on winnings?

Yes. "Tax law is very clear that Americans have to report income earned anywhere in the world," says Rose. Because overseas sites, unlike American casinos, don't have to file with the Internal Revenue Service, players have some concealment, and tax inspectors lack the manpower to track small-scale players. Significant money-movers, especially those who leave red-flag evidence such as large bank deposits or transfers, risk detection.

How do the sites make money?

They typically offer two game structures: ring games (which players can join and leave at any time) and tournaments. Ring games are raked, meaning a fixed percentage is deducted from each pot. In April, according to the tracking service PokerPulse.com, players put an estimated $197.7 million each day into online ring-game pots, from which $5.2 million was raked. Tournaments charge an up-front entry fee, around 10% of the buy-in. In both cases the deductions are small relative to the amount changing hands. Sites trade in volume--at a peak period on PartyPoker.com, it's not uncommon to find 25,000 tournament players--and benefit from the absence of overhead like building expenses, dealers and cocktail waitresses, which sap profits from bricks-and-mortar card rooms.

What are colleges doing in response to the boom in online poker among students?

Very little, so far. Says Dan Romer of Penn's Annenberg Public Policy Center, "Schools are scratching their heads trying to figure out what to do about it." Most colleges have neither counselors nor programs specifically to address gambling addiction, though they typically have mechanisms for dealing with alcohol and drug abuse. "I'm on a national network of counseling services directors, and I haven't heard that much about the issue," says Jim Clack, director of counseling and psychological services at Duke. "I've heard concerns, but more about whether online games are honest." In some cases, schools have explicitly encouraged play: Last year Penn permitted Pokerroom.com to bankroll a $2,500 campuswide tournament.

COLOR PHOTOPETER GREGOIREFederal agencies rarely pursue the individual online player.

HOLE YARDS PAR R1 R2 R3 R4
OUT
HOLE YARDS PAR R1 R2 R3 R4
IN
Eagle (-2)
Birdie (-1)
Bogey (+1)
Double Bogey (+2)