Hidden neatly inside President Trump’s new budget plan is a not-so-beautiful change in how taxpayers will handle deductions for taxes on gambling losses. Previously, gambling losses were deductible 100% up to the amount of gambling winnings if a taxpayer itemized his or her deductions. Now, deductions will be capped at 90% of a taxpayer’s gambling winnings according to the new language of Internal Revenue Code Section 165(d). Thus, if a taxpayer reported $100,000 in winnings but $100,000 in losses in the next calendar year, the taxpayer would pay income tax on $10,000.
Consequently, the changes will quietly impact player behavior, and by extension, a casino operator’s bottom line. The Senate Finance Committee estimates that this will provide over a billion dollars in new tax revenue over eight years. However, this change may reduce the volume of play for high-level players, affect professional gambling engagement, and increase pressure on casino operators to adapt.
The gaming industry is already burdened by significant taxation, including an automatic 24% federal withholding on certain jackpot winnings and a 0.25% excise tax on sports betting handle (the total amount of wagers). The heat is on at the state level as well; for example, Illinois increased the tax obligation for its sports betting operators so that the operators must pay 0.25% on every wager for the first $20 million in wagers and 0.50% for each bet thereafter. The operators have responded by either increasing the minimum wager amount or adding a fee to each wager to offset the tax.
So who put it in there? We may never know. While I am struggling to write a 750-word blog, it appears some elected officials may have failed to catch this new provision in the 900-page bill:
“If you’re asking me how it got in there, no I don’t know” – Sen. Chuck Grassley (R-Iowa)
“I don’t know anything about it. I’m not sure what it does” – Sen. John Coryn (R-Texas)
Commentators indicate that members of the Joint Committee on Taxation staff flagged gambling loss deductions as excessive and closing this loophole would only affect a small group of individuals. Thus, it flew through utilizing the infamous Byrd rule, named after former Senator Robert Byrd which prevents extraneous provisions from being included in budget reconciliation legislation.
And who benefits? Not the industry, and certainly not the taxpayer. Some are not as concerned, such as Brandt Iden, currently Vice President of Government Affairs for Fanatics Betting & Gaming and former Michigan legislator who stated the following at the recent National Council of Legislators from Gaming States (“NCLGS”) Summer Meeting:
“I saw a stat that said only 10 percent of Americans that federally file a line-item deduction under the new rules in place…so really, what you’re talking about is the 10 percent of those filers that then have gambling deductions, which I’m sure is another lower percentage that actually use that line item. So I don’t know that it will have the effect that I saw it have over the weekend when the media was reporting on it. That said, I’m not a tax expert.”
That statistic is comparable in the gaming industry where studies have shown that 90 percent of individuals who gamble are considered “recreational”, and the remaining ten percent are considered “educational”. Recreational gamblers who generally report losses will not be as hard hit, but they will need to report more losses than winnings. Casinos may see their larger players hesitate to engage on a scale they were accustomed to before the change. Could we see a player request cash in hand to offset a year-end tax bill rather than the usual casino comps?
The largest impact will affect the remaining ten percent, the “professional gamblers” (i.e. those who generally do not have gambling losses equivalent to winnings) – such as professional poker players – who utilize ordinary and necessary business expenses to offset gambling winnings. The permanent change to Internal Revenue Code Section 165(d) states:
For professional gamblers, the total of losses and business expenses could not exceed are reduced to 90% of gambling winnings losses and business expenses incurred.
Professionals, who are accustomed to winning given it is their livelihood, may adapt their own business practices to balance the change. Some professionals may opt for fewer trips to land-based establishments if the professional cannot take full advantage of expensing his travel and lodging costs. Poker players, for example, may opt to play strictly online. Poker is already one of the lower-held games largely kept as an amenity.
The repeal of the Professional and Amateur Sports Protection Act (“PASPA”) paved the way for over thirty states to pass some element of sports wagering, bringing a largely black market dominated player base to the regulated market. This included small element of “sharp” sports bettors who used to have the first crack at shaping old Las Vegas point spread releases. Now, this contingent may resort back to black market wagering or shift alternatives where the income could be taxed differently.
Kalshi, for example, has recently gained notoriety for offering sports event contracts via its Designated Contract Market (“DCM”). Kalshi’s DCM is registered with and subject to the regulatory oversight of the Commodity Futures Trading Commission. A professional sports bettor may elect to use this option in lieu of traditional sports betting and some may attempt to report income via filing as a professional trader with “tax trader status,” deducting all expenses and enjoying the fruits of market-to-market accounting. Instead of reporting income as traditional gambling income, some may attempt use Form 6781 to report gains and losses. It is important to note that such professional sports betting transactions do not fall under the “Section 1256 contract” definition set forth in Internal Revenue Code Section 1256(b). However, as of this date, case law has not distinguished such fact pattern; the Internal Revenue Service has not provided any commentary on the matter, nor may it ever take a position on the issue.
The overwhelming response to the Internal Revenue Code Section 165(d) alteration, from both professional and recreational gamblers and those in the industry, has been widely negative. Is the addition to Internal Revenue Code Section 165(d) lawful? Deductions have been slowly getting crushed in every derivative, but imposing tax on funds that are not deemed income may violate the Sixteenth Amendment of the United States Constitution. The United States Supreme Court in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) held that income must be an “undeniable accession to wealth, clearly realized, over which the taxpayer has complete dominion.” If a gambler’s winnings and losses net to zero, what is there to tax?
But there is hope: Rep. Dina Titus (D-Nevada), representing Nevada’s 1st Congressional District which harmoniously covers a portion of the Las Vegas strip, introduced the FAIR BET Act which would effectively roll back Internal Revenue Code Section 165(d). The FAIR BET Act now has bi-partisan support with the joinder of Rep. Jeff Van Drew (R-New Jersey) whose District includes Atlantic City. Sen. Cortez Masto (D-Nevada) has a Senate bill titled the FULL HOUSE Act with comparable bi-partisan support from Sen. Ted Cruz (R-Texas) – a notable and avid poker fan despite the large anti-gambling sentiment from the state which elected him. However, the introduction of the FULL HOUSE Act was blocked by Sen. Ted Young (R-Indiana).
The change to Internal Revenue Code Section 165(d) represents a significant impact to a regulated market already tightly scrutinized both from a regulatory and tax perspective. With bipartisan support emerging for legislation like the FAIR BET Act and the FULL HOUSE Act, it is clear that discussion as to the modification to Internal Revenue Code Section 165(d) will continue and likely generate industry-wide support. Navigating the new law will be a challenge: for the player, maintaining thorough records and addressing whether expenses qualify as ordinary and necessary business deductions will be essential. It is important to contact an experienced gaming and tax attorney to best address your unique tax situation. For the companies: Industry-wide casino associations and advocates should fully support the repeals brought upon by Rep. Titus and Sen. Cortez Masto or move quickly to adapt to behavioral changes their players may undergo as a result of the change.
Lucas R. Levenson is a seasoned gaming attorney, based in the firm’s Atlantic City office. He focuses on multistate gaming licensing, regulatory and technical analysis, and compliance-related drafting, while maintaining strong relationships with state gaming agency and tribal commission personnel across the country. Lucas’s knowledge covers all gaming derivatives, including casino gaming, sports wagering, iGaming, lotteries, sweepstakes, social casinos, and esports. He can be contacted at 609-572-7346 or via e-mail at lrlevenson@cooperlevenson.com.
The content of this post should not be construed as legal advice. You should consult a lawyer concerning your particular situation and any specific legal question you may have.