Odds Are Good

Life is full of mysteries that we may never solve. Nature, or nurture? Growth, or value? “Tastes great,” or “less filling”? But last month, one fortunate gambler proved it’s better to be lucky than smart. He started with a $20 credit on the FanDuel betting site – house money! He bet that the underdog Cincinnati Bengals would beat the hometown Kansas City Chiefs by 27-24, and the favored Los Angeles Rams would beat the visiting San Francisco 49ers by 20-17. Amazingly, he called both games, and turned that $20 credit into $579,020. Who needs smart when you’ve got that kind of luck?

The Rams are 4.5-point favorites to win this weekend’s Super Bowl. But savvy gamblers know the point spread isn’t supposed to predict the winner. It’s there to balance the action, so that bettors wager equal amounts on each team. That way, the bookies get to line up in the neutral zone and walk away with their 10% vig on everything. As any stat geek can tell you, the best way to win is to be the house.

The fans at the IRS are delighted our lucky bettor’s win, too. They’ll take a big chunk of that payoff even though they took none of the risk. But if you look a little closer, you’ll see that the folks who write our tax laws have given the IRS an unfair advantage in a lot of situations where taxpayers take the risk.

Start with the rules for gambling. Winnings are taxable as ordinary income. But losses are deductible only up to the amount you win. If you lose more than you win, which happens enough that Las Vegas is a thing, those excess losses are nondeductible. You can’t even carry them forward like you can with business net operating losses, capital losses, or charitable gifts. Watch your kicker split the uprights as the clock winds down and the IRS cheers with you. Watch your quarterback throw an interception in overtime and you lose alone. (Your bookie might buy you a beer to cry in – but he’s still going to break your knees if you don’t pay.)

That’s not the only situation where Uncle Sam has an unfair edge. If you invest in rental real estate, which is comically treated as a “passive” activity no matter how many hours you spend on your back under the kitchen sink, your income is fully taxable. But if you lose money on your property, your losses are deductible only up to the amount of passive income you earn from other activities. Any remaining losses get “suspended” until your property starts making money, you sell it in a fully taxable transaction, or (*checks notes*) you die.

The same principle applies with capital gains. If you make a fortune in crypto and get out before the market collapses, as it seems to do fairly regularly, your gains are fully taxable. But if you buy before the collapse, your net losses are deductible only up to $3,000/year. Anything more than that gets carried forward to future years and future gains. And if you die with a boatload of carryover losses waiting to eat up gains that never come, well, you know what they say: “You can’t take it with you.”

Sports gambling is legal in 30 states now, with online betting available in 18. And sites like FanDuel do something Bernie the Bookie down at the corner tavern never did – they send out W-2Gs to report winnings. So we know the IRS will be celebrating Sunday’s Super Bowl results, no matter who wins. Here’s hoping you get to celebrate a win, too! Contact us at (562) 281-1040 or email to [email protected]