Let’s paint a picture. You’re in Vegas for the week. There’s sunshine, drinks, and yes, the casinos. You’re feeling lucky tonight and you plan to take the house for all they’re worth. You go to the casino because you’re excited to try their new game, the coin flip (just go with me on this one). It’s exactly what you’re imagining. You place your bet, the dealer flips a coin, and the bet pays out 1:1, so if you bet $1 you either win $1 or lose $1.
While that seems reasonable and those are the best odds you’ll ever see in a casino, you’re forgetting the other party who gets a piece of the action – Uncle Sam. Because of our tax code, if you happen to get lucky in the casino, Uncle Sam will want his piece of the pie and you’ll be subject to gambling tax. Unfortunately, if you happen to get taken for all you’re worth Uncle Sam won’t be there to chip in since normally you can only deduct gambling losses up to the amount of your gambling winnings and note that the deduction is itemized, not netted against your winnings.
Let’s look at an example. Assume you have a 25% gambling tax rate and ignore state taxes and lots of other intricacies.
Example 1: You bet $1,000 on heads and win! Congratulations, you get $750 and Uncle Sam gets $250.
Example 2: You bet $1,000 on tails and lose (that’s what you get for betting on tails). Sorry, you lose $1,000 and your Uncle Sam is nowhere to be found.
This outcome changes the odds for you from 1:1 to 4:3. In other words, in our example, if you lose, you owe $1,000 but if you win, you only make $750.
Another interesting tidbit is Uncle Sam prefers if you lose. Why? Because while most people can only deduct gambling losses up to their amount of winnings, the casino can deduct the entire amount. So, if you win, Uncle Sam taxes you on $1,000 but taxes the casino on $1,000 less. If the casino wins, Uncle Sam taxes the casino the additional $1,000, but you don’t get any benefit.
I hope everyone knows this contains no gambling advice; I am not a gambling expert. This also doesn’t contain any tax advice, but since I am a tax professional, you can feel free to contact me with any tax questions you have, whether they concern gambling or not.