Shock and Awe: Gamblers Hit by Surprise Tax in Senate Budget Bill

^{Constituents of Rep. Dina Titus (D-Nev.) were up in arms over a provision of the Senate budget bill this week that they say would devastated professional gamblers. (Photo: Mark Schiefelbein / AP)}

As President Trump’s Big, Beautiful Bill chugs towards the finish line, there’s a provision included that could potentially devastate gamblers and in turn severely damage the casino industry. Or perhaps not. Let me explain.

Internal Revenue Code Section 165(d) currently mandates bettors “must report all gambling winnings on Form 1040 or Form 1040-SR.” On the other side of the ledger, you can deduct your gambling losses “only if you itemize your deductions on Schedule A (Form 1040) and kept a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return. Claim your gambling losses up to the amount of winnings, as "Other Itemized Deductions."

In plain English, you get taxed on your net winnings (less deductible expenses such as travel, subscriptions, etc.) and it's treated the same as ordinary income. Say a professional gambler, we’ll call him Hypothetical Harry, has $600K in winnings on the year, and $500K in losses and incurs $20,000 in deductible expenses. He thus earns $80,000 and is taxed on that $80,000. If he pays at a 25% tax rate, he owes $20,000.

But this provision in the Senate version of the bill will change that. “For purposes of losses from wagering transactions, the amount allowed as a deduction for any taxable year -- ‘‘(A) shall be equal to 90 percent of the amount of such losses during such taxable year, and (B) shall be allowed only to the extent of the gains from such transactions during such taxable year … “the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.’’

Back to English, that means instead of (logically) deducting losses (and expenses) from wins and having net income determine your tax obligation, you will now, under terms of the bill sent to the House of Representatives on Tuesday, only be able to deduct 90% of losses and expenses. 

So in the example above, Hypothetical Harry can only deduct 90% of $500K+$20K, or $468K. He gets taxed as if he earned $132,000 ($600K - $468K). His tax bill will rise from $20K to $32K.

What if Harry “loses” $580K and simply breaks even on the year after expenses? 

Under the current system he owes no money. But under the new law, Harry’s loss plus expenses only equals 90% of $600K, or $540K. Thus he owes taxes on his $600K in winnings minus $540K in losses/expenses, or $60K. Thus he owes $15K in taxes despite earning no money. 

That’s not good. I could keep going with these, but long story short, Hypothetical Harry could net lose up to $66K in this example and still owe taxes.

Bad Beat for Gamblers

The social-media sphere is not-so-hypothetically up in arms. Sports betting tipster and YouTuber “Captain Jack Andrews” laid out the devastation of a bill that could turn gambling wins into gambling losses.

Nate Silver, best known for his election prediction models and a prominent poker pro and podcaster, also sounded the alarm, posting on X, “Tax code is already punitive for poker players (you get taxed on winning years but can’t write off losing years unless you file as a pro; it’s easy to have a down year even as a good player) and Senate-passed version of OBBBA would make it considerably worse.”

This coincided with some social media rallying to contact your congressperson. 

Unabated.com, the sports betting info subscription site Andrews represents, was promoting a drive among their community members to contact their Congressional Rep before it’s too late. 

Poker pro Phil Galfond echoed the sentiment in an extended video explaining the numbers behind this unexpected provision for the government to essentially skim off gamblers’ winnings, which they already pay taxes on.

Of course, not everyone saw this wonky change to tax law as a dire emergency. 

So the good news? I’m not sure Kelly in Vegas is correct, but most bettors do not make money and you can only deduct losses up to your winnings as it stands now. There were a few pro gamblers in her thread that agreed, however, that the civic-duty complainers were overreacting. 

Regardless, for professional and typically large gamblers and sports betting syndicates, this looks devastating. The idea behind professional sports wagering is to identify small edges and press them with volume. A typical sports bet with even odds at winning and losing gets priced by the casinos at -110, which means you need to win roughly 52.5% of the time just to break even. Let’s say you are  good at this and can pick the right side 55% of the time. That’s a 2.5% edge. For every $100 you wager, you pocket $2.50. Do the math. You need to bet a lot to earn enough money at this to do it for a living. Or even a side gig that’s worth the time spent. 

Unfortunately for said gambler, he’d barely earn any money after taxes. He’d pay $1.84 in taxes on his $2.50 of earnings per $100, as opposed to his current rate of $0.625 on it.

You can translate this to all forms of gambling. A professional poker can now only deduct 90% of his entry fees, et. al. How it would treat just sitting at a table at a casino is beyond me. Keep an accurate ledger I suppose.

Penny Wise, Pound Foolish for Casinos?

In theory this helps casinos. The new tax would impact only the sharpest players. Curtail their play or send them back offshore or into gray markets and its gravy time, right?

Well, maybe not. That’s a bit of a penny wise and pound foolish way of looking at it, from my view. In poker especially, the casinos make money off volume, period. They profit on the rake, not on the success of individual players. 

As for sports betting, I’m not so sure turning away your best customers makes any business sense. Even with so-called sharps playing, casinos turn a tidy profit. They recognize smarter money very quickly and move their odds accordingly. 

It begs the question though, did casino interests somehow insert this into the bill? No way anyone in the industry would actually say it out loud. I asked Gambling tax expert Russ Fox of the Taxable Talk blog if he thought that was the case and ….well, not really. “A Reconciliation bill is supposed to be revenue neutral.  Given that there are tax cuts (e.g. some tip income being exempt from tax), “pay-fors” are required within the legislation.  My best guess is that the gambling proposal was added by staffers on the Senate Finance Committee (but this is only a guess).”

I do not fancy myself a tax law expert and my knowledge of how a bill becomes a law is basically from Schoolhouse Rock. But I do know that one of two things will happen here. Either the House approves the Senate bill as it stands now, and President Trump signs it into law, or they pass a modified version that would then head back to the Senate (perhaps it goes to conference and they hash out the differences there). It's possible the latter version takes out this new provision. 

Rep. Dina Titus, who represents Nevada’s 1st District, while disavowing the budget bill for many reasons, was sure to point out her commitment to at least getting this problematic provision revised or eliminated.

We shall see I suppose, but I do not have much optimism here. Hopefully I am wrong.