While Congress has been debating tax reform in recent weeks, not a word has been uttered about the greatest inequity in the whole system: the treatment of gamblers by the U.S. Tax Code.
Most of the statutes that apply to wins and losses were enacted decades ago and reflect a bias against an activity thought to be "immoral." In fact, gamblers are treated harder by the tax laws than many criminals. A manufacturer of illegal drugs has an easier time deducting his business expenses than a professional gambler.
At long last, however, our gambling-related tax laws have attracted some serious scrutiny. The Tax Lawyer, a publication of the American Bar Association, has published a study entitled "The Business of Betting," and it begins: "It is time to reconsider the tax treatment of gamblers."
Written by Linda Haller of Georgetown University, the article dissects the laws that apply to gambling and concludes (in scholarly language, of course) that they're nuts.
The most common problem that professional gamblers face is patently absurd: Courts have trouble recognizing that somebody in the business of gambling is actually in a business. All the confusion stems from a 1941 case, having nothing to do with wagering, in which the Supreme Court defined a trade or business as "holding one's self out to others as engaged in the selling of goods or services."
When gamblers try to deduct the cost of racing forms, bus fare to the track and other expenses, courts have said: "You're not offering goods or services to anybody. Therefore, you're not in a business. Therefore, you can't have business expenses." This same definition of a trade or business has embroiled gamblers in other arcane and costly problems with the Internal Revenue Service.
The Tax Lawyer sensibly proposes that another standard -- the so-called "facts-and-circumstances test" -- be applied to professional gamblers. "Courts do not deny (stock-market) traders trade or business status," the article said. "They apply a facts-and-circumstances test. Courts should do the same for gamblers . . . They should consider a gambler's profit motive, including the reasonable expectation of making a profit, and the scope and regularity of the gambling activity."
The most costly form of discrimination against professional gamblers is the Tax Code's rules governing losses. If a gambler wins $100,000 one year, and loses $20,000 the next, he pays taxes in his good year and he is out of luck the next. Gambling losses may be deducted only to the extent of gambling winnings, and they may not be carried over from one year to another.
Surprisingly, this has not always been so. Before 1934, losses from legal gambling could be taken in full, but the laws were changed because the potential for abuse was so great.
However, the Tax Lawyer argues: "It is unfair to single out business gamblers for loss limitations when other business taxpayers have equal opportunity to under-report income and exaggerate losses. Congress currently allows deductions for a variety of losses that are difficult to document . . . The business taxpayer who uses an automobile for business and personal purposes . . . has no better means of documenting business expenses . . . than the business gambler whose horse finishes fourth."
Furthermore, the article points out, "Courts currently allow unlimited expense and loss deductions to taxpayers engaged in certain illegal businesses. To deny them for gambling, especially legal gambling, is a discrepancy in the tax law that Congress shold reconsider."
Alas, it is Congress that would have to pass laws that would permit professional bettors to deduct losses in full and carry over excess losses to other years, and very few legislators have the backbone to vote for what would be perceived as tax breaks for gamblers. Still, it is a good sign for gamblers that objective observers have begun to recognize how unfair our present laws are.