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My purpose in writing this paper is to illustrate the hardships horseplayers face due to the IRS reporting and withholding rules on gambling winnings. As a thoroughbred owner and breeder, and a professional horseplayer, I believe thoughtful changes to these IRS rules will help our industry greatly.
I operated an antique shop for years while I sharpened my betting skills part time at the track. I’ve been playing the horses full time for ten years. I work roughly 90 hours per week. Obviously, I love what I do and, although, I get stressed and frustrated, I never grow tired of the challenge of picking winners. I am also proud that a significant percentage of the money I bet goes to our industry and to state government. In 2004 over two million dollars of the take-out from my bets went to some part of the racing industry or to the state of Kentucky. With an average takeout of around 20%, breaking even is a very difficult task that few people can complete. Imagine a poker game where 20% of the bets on each hand are taken off the table before the winner receives the remainder. Most often, all the players at this poker table would end the night as losers. It would require a lot of skill and/or luck for someone to overcome this 20% take-out and actually leave the game with more money than they started with. Now imagine that every time the poker player won a big pot, with the winnings already reduced by 20%, the player was then forced to have another 31% of his winnings withheld immediately. The player has the opportunity to recover some of the money withheld by claiming his losses against his winnings on his tax return. This process can take as long as 18 months until the player actually receives part of the money back as a tax refund. ( The 31% figure represents 25% IRS withholding and 6% KY withholding.)
Is this a poker game you or I would want to play? I think most reasonable people would be busy that night. But these are exactly the rules that I and other horse players operate under.
While I realize that the takeout is here to stay, I believe the IRS withholding rules are in need of change. It seems much more reasonable for the player to be required to sign a tax form when he cashes a bet at very high odds, but to eliminate the rule to hold 31% of his money. After all, this is simply normal cash flow for a gambler. He should be able to pay quarterly taxes on estimated profits as other businesses are allowed to do.
Yes, professional gambling is a business endeavor. We are required by the IRS to keep daily programs, maintain betting logs, retain losing mutuel tickets, and file tax forms. But even though the IRS imposes these business requirements, they treat our normal business cash flow as a rare cash windfall.
I am sure there are some casual players who are more comfortable having money withheld when they cash a truly significant high-odds bet. They don’t want to risk having to come up with money later in order to fulfill their tax obligations. This is perfectly understandable. There is a simple solution to satisfy this type of casual bettor and the professional player. Simply eliminate required withholding, but leave the option of having tax withheld open to the few bettors who choose it.
These proposed rules are similar to rules currently in place at major casinos. It makes much more sense to allow the player to have the option of whether to have taxes withheld. And it creates a more level playing field between the racetrack and the casino industry, who are competitors for the same wagering dollars. How is it fair for the IRS to require a horseplayer to give up $3100 of a $10,000 ticket at the cashier’s window and allow a slot machine player in Vegas to hit a million dollar slot machine payoff and walk away from the cashier’s window with zero dollars withheld? In effect, the IRS unfairly handcuffs the racing industry by forcing the industry to operate under more restrictive withholding rules than the casino industry.
Possibly the most damaging result of these withholding rules is the harm they do to the players’ cash flow. As these 31% chunks of high odds wagers are continually withheld throughout the year, the players’ bankroll may eventually be wiped out.
This ‘tap-out’ factor forces the players to curtail or even stop his betting until he receives his tax refund. The ‘tap-out’ factor not only hurts the horseplayer, but negatively impacts the racetracks in the loss of handle. As a result, the horsemen lose their share of this lost handle. The state also loses its share of each dollar not bet because of this very real ‘tap-out’ factor.
By implementing our suggestions for improving the tax withholding situation, most of the negative impact of the ‘tap-out’ factor can be eliminated, thereby helping the horseplayers, the racetracks, the horsemen, and the state treasury.
Since first going to the track at the age of eight with my dad, I’ve seen many changes in the game. When Dad, an avid horseplayer for fifty years, made his first visit to the track most patrons bet only win, place, or show. The only other bet available then was the daily double on the first two races of the day (The daily double is a simple bet requiring the bettor pick the winner in each of two races).Our current tax withholding laws were a good fit at that time. It was very rare that long shots would win both halves of the daily double, which is what had to happen for a $2 daily double ticket to pay $600 or more. A $600 or more payoff was required to meet the IRS tax threshold of 300-1 odds or more. Since this size payoff was very rare and since it was nearly impossible for a horse to pay 300-1 to win, place, or show, the IRS rules very seldom came into play.
Now let us fast forward to 2005 when basically the same IRS withholding rules are still in effect. Today’s horseplayer can be found at his local track or betting outlet watching and betting races from as many as two dozen tracks running each day. The wagering choices offered on a single race may include win, place, show, daily double, exacta, quinella, trifecta, superfecta, twin trifecta, place all, pic 3, pic 4, pic 5, and pic 6. Serious horseplayers will bet many of these wagers in many different races. Many of the payoffs in these races will exceed the IRS 300-1 odds threshold. Players will be required to sign tax forms each time this occurs.
Another significant problem is the IRS’ failure to deduct the actual amount bet and not just the base wager amount when determining if the tax threshold has been met. This problem can be better understood by examining the superfecta wager. The superfecta is a very difficult bet requiring a bettor to pick the first four finishers in a given race in the exact order of finish. Given the degree of difficulty in correctly picking a superfecta, it comes as no surprise that the payoffs are very high. It is not unusual for more than one half of the superfectas on a race card to require the player to fill out IRS forms. The
300-1 payoff in today’s racing is not a rare windfall but a normal part of a player’s cash flow.
As an example, there are 11,880 possible combinations when betting a superfecta in a field of 12 horses. Let’s say a player narrows his choices to six horses and boxes those six horses in superfecta ticket which costs $360. The result is fairly formful and his winning superfecta ticket pays $720. The player has doubled his investment, not exactly a windfall profit. However, the IRS requires the player to sign an IRS form because the IRS calculates all bets as if the player only bet the one winning superfecta combination instead of the 360 different combinations he actually bet. Even though all 360 bets are on the same $360 paper tote ticket, the player must sign the IRS form to receive his money.
This is just one example of how the current IRS rules are in need of change. These rules simply have become outdated due to the vast changes in exotic wagering since the days when the daily double was the only exotic wager.
Why not just bet to win, place, and show and avoid all the tax hassles? I would love to do this as my wife and I spend over 300 hours each year maintaining our tax records. Unfortunately, it is not possible for me to avoid the exotic wagers. With 20% being taken from each wager, and other horseplayers having access to more and better information each year; the win, place, and show pools hold very little value. The win, place, and show pools have become more efficient than the exotic pools.
The more difficult a particular wager is to hit, the greater chance that inefficiencies are present in the wagering pool. It is a similar situation to investing in General Motors stock versus a small Nasdaq stock. With dozens of professional stock analysts following General Motors, the stocks near term prospects are constantly under the scrutiny of many stock experts. While the stock price may fluctuate, the chances are that the consensus of these analysts will be accurate. In comparison, a small Nasdaq stock might not be scrutinized so intently. A sharp analyst might find this stock to be dramatically over or under valued and he may be able to take advantage of the relative inefficiency of the market’s view of the smaller, less understood stock.
A horseplayer must also search for value for his wagering dollar. The win odds are updated on the tote board and the TV monitors. Most players can determine if the #4 horse is a good bet at 3-1.
However, there are times when a pic 4 (pick the winner of four consecutive races) will pay twice the combined odds (parlay price) of the four winners in the pic 4 sequence. This higher than expected payoff is an example of inefficiency in the wagering pool. This level of value for your wagering dollar most often occurs in the exotic pools. For this reason, I must bet in the exotic pools in order to survive in the game. The IRS rules make it difficult for all players, but even more difficult for the high-stakes players like me. In 2004, I paid withholding taxes of over $500,000. I will have to borrow against the total equity in my personal residence in order to maintain cash flow until I receive my tax refund, hopefully in May or June of 2005. In order to combat the ‘tap-out’ factor, I will probably also have to access a $200,000 line of credit my banker has allowed me. I’ll make it to my tax return, but it is a very stressful time each year for me and my very understanding wife.
Hopefully, this paper will provide some insight into the impact that the IRS reporting and withholding laws have on horseplayers, the racing industry and the Commonwealth of Kentucky.
Thank you for your attention and if I can provide documentation, more information, or answer any questions please feel free to contact me.
Mike Maloney
859-333-8838
mikedanam@aol.com
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