My Personal Finance Journey

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Tax Deduction on Gambling Losses

Contributed by mm | March 7, 2004 12:52 PM PST

During my brief trip to Las Vegas early this week, I'm thinking about the tax treatment of gambling income and losses in the current tax system. Currently IRS will tax you on gambling gains, but only offer deduction on gambling losses up to the extent of the gambling gains. It is apparently an asymmetric arrangement: government always wins.

I formed some opinions on this after losing a few hundred bucks in the Strip. My conclusion is this arrangement is, first, a morality issue, and second, a practicality issue.

If IRS were to offer deduction on all gambling losses, it is like to say that the government, or more fundamentally, other taxpayers, will subsidize gambler's losses in the casinos. The gaming industry will surely win with this arrangement because people have one more reason to gamble. However, our culture always think gambling as morally wrong, and this tax law change will certainly backfire the politicians who voted for this choice.

Moreover, such a shift to full tax deduction on gambling losses is technically impractical. In short, it is very hard for a gambler to track his/her losses and produce hard proof without casino's assistance. (Yes, one can claim losing Keno tickets, but think of all the slot machines and table games, in which you don't have a receipt or anything to prove your loss.) The gaming industry can help by using the frequent player card (a credit-card size card that can track all your gambling transactions and offer rewards based on your activity), but requiring all gamblers to use frequent player cards will certainly slow down all the gambling activities and thus is a no-go in the gaming industry in the first place. Also, there is no universally accepted frequent player card in Las Vegas, only to make this further impractical. (In order to deduct gambling loss, one needs to apply for one more card even he/she just wants to try the luck in the airport waiting room.)

Of course, for this law to pass, the politicians needs to find a replacement income or approve higher deficit.

In conclusion, no one seems to have an incentive to promote this change in tax law. And it appears to me that the current law seems the most reasonable, albeit it is still difficult for the few casino winners to prove previous losses to claim the deduction.

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