It's true that taxes are not compounded after every tournament but due to the variation in outcomes even over large tournament sample sizes the impact of taxes are still far greater than the marginal tax rate and the lower volume you play the more true this is.
Let's pretend it was compounded annually, and you play 200 tournaments with an average field size of 1,000 players. Using tournament sims we can see that still the probability of being down money by the year end is somewhere around 40% for someone with a 25% ROI.
So lets use 5 hypothetical annual outcomes for someone playing 200 $1,000 buy in tournaments a year with a 25% roi who was down 2/5 (40%) of those years :
year 1: +175,000
year 2: -75,000
year 3: +250,000
year 4: -175,000
year 5: +75,000
So you played 1,000 total tournaments with a total buyin of $1,000,000. You showed a $250,000 net profit which is a 25% roi.
Suppose a flat tax rate of 25% compounded annually. Your total tax liability would have been $125,000. That's not 25% of your net winnings, that's 50% of your net winnings.
Consider then a more realistic tax rate of 40%, which given that your winning years will have the large majority of your income in the highest tax bracket is probably closer to reality. Now your tax liability is $200,000, which is 80% of your winnings instead of 40%. Brutal.
This is mitigated by the fact that you can carry losses over 2 years forward or back but it will always be the case that the effective tax rate will have more than a proportional impact on your ROI. Maybe a 40% tax rate, instead of shaving off 80% of your expected annual gains, will in actuality shave off 50 to 60% of your annual expected gains.
Dec. 13, 2019 | 12:06 a.m.
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Old post, but thought I'd chime in...
It's true that taxes are not compounded after every tournament but due to the variation in outcomes even over large tournament sample sizes the impact of taxes are still far greater than the marginal tax rate and the lower volume you play the more true this is.
Let's pretend it was compounded annually, and you play 200 tournaments with an average field size of 1,000 players. Using tournament sims we can see that still the probability of being down money by the year end is somewhere around 40% for someone with a 25% ROI.
So lets use 5 hypothetical annual outcomes for someone playing 200 $1,000 buy in tournaments a year with a 25% roi who was down 2/5 (40%) of those years :
year 1: +175,000
year 2: -75,000
year 3: +250,000
year 4: -175,000
year 5: +75,000
So you played 1,000 total tournaments with a total buyin of $1,000,000. You showed a $250,000 net profit which is a 25% roi.
Suppose a flat tax rate of 25% compounded annually. Your total tax liability would have been $125,000. That's not 25% of your net winnings, that's 50% of your net winnings.
Consider then a more realistic tax rate of 40%, which given that your winning years will have the large majority of your income in the highest tax bracket is probably closer to reality. Now your tax liability is $200,000, which is 80% of your winnings instead of 40%. Brutal.
This is mitigated by the fact that you can carry losses over 2 years forward or back but it will always be the case that the effective tax rate will have more than a proportional impact on your ROI. Maybe a 40% tax rate, instead of shaving off 80% of your expected annual gains, will in actuality shave off 50 to 60% of your annual expected gains.
Dec. 13, 2019 | 12:06 a.m.