Treasury/IRS Finally Recognize Reality

A mere 22 years ago, I wrote a law review article arguing, among other things, that the tax reporting and withholding rules for horse-race betting were punitive and irrational. (For those so inclined, you can find it at 49 Tax Lawyer 1 (1995).)

At the time, the only horse racing insiders with an audience much larger than the seven people who read law review articles and who were making the same case were Andy Beyer and Steve Crist. But, whatever our logical merit, the US Treasury, which writes the regulations that the IRS then enforces, continued on its boneheaded merry way.

Here's what was wrong: the Treasury regulations provided for mandatory IRS reporting any time a bet returned at least $600 at odds of 300-1 or higher. And for mandatory withholding whenever those 300-1 bets produced winnings of $5,000 or more. Where the regulations erred was in treating the winning bet (say, a $2 Pick Six ticket) as a separate entity, and not as part of a larger bet that included all the losing tickets on the same event. So, for example, if someone bet $500 on the Pick Six, with 250 separate $2 tickets, and had one winner, and had the sole winning ticket, returning, say, $75,000, then that winner was subject to withholding, because the IRS treated it as getting $75,000 for $2, odds of 37,499-1, rather than what it really was, $75,000 for $500, or actual odds of 149-1.

Withholding was imposed at 28% -- roughly $21,000 in the case of our $75,000 winner. And in some states, state income tax withholding was added in on top of that. Even without any state tax, though, our happy $75,000 winner would be taking home only $54,000. A nice payday, but a lot less than what she thought she won.

As the popularity of complex exotic wagers -- Pick 4/5/6 bets, superfectas and such -- has grown in this century, the amount of money locked up in withholding has also grown, to perhaps $1 billion a year, as estimated by the National Thoroughbred Racing Association (NTRA). As the late Sen. Everett Dirksen used to say, a billion here, a billion there, pretty soon you're talking about real money. And in the little corner of the economy that's horse racing, $1 billion is pretty close to 10% of total annual handle. To be sure, horseplayers can get some of that withheld money back the next year, when they file their tax returns, either by deducting losses as an itemized deduction on Schedule A of their 1040 or by treating their gambling as a trade or business on Schedule C, The documentation of those losses is easier now, since most serious horseplayers use online accounts that generate a precise record of all their betting -- no more shoeboxes full of losing tickets, many with heel prints on them -- but it still (1) leaves out those bettors who don't itemize deductions and (2) decreases "churn," the ability to recycle wins into more wagering.

Now, finally, thanks in large part to the untiring efforts of Alex Waldrop and others at the NTRA, and to the more than 1,700 comments sent to the Treasury by us ordinary horseplayers, sanity has prevailed. New regulations, published in the Federal Register today and scheduled to become effective in 45 days, on November 11th, take the sensible step of treating all a bettor's wagers on the same opportunity -- say, a Pick Six pool on a given day -- as a single bet. In our example above, the $75,000 winning ticket on a total bet of $500, that would mean the odds would indeed be calculated at 149-1 and the bettor would not face any withholding. So our hypothetical bettor would go home with $75,000, not $54,000, and would most likely put a good chunk of that extra money right back into the parimutuel pools.

So, from November 11th on, the tax environment for horserace (and greyhound and jai alai, if you care) bettors will move one step closer to fairness. It's still not all the way there, for reasons explained in my 1995 article, but every little bit helps. Thanks to all the folks at the NTRA who made this happen, and to David Bergman of the Treasury's legal staff, who wrote the new regulation. Now, all we have to do is wait for those Pick Six carryover days with a positive expectation (when the amount of the carryover exceeds the takeout on new money) -- and actually pick winners.