As politicians from both sides of the aisle continue to try (and fail) to pass legislation — or shoehorn in an amendment — to restore the 100% gambling loss deduction, a pair of academics have decided to take a different tack.
In short: They believe the reduction to 90%, courtesy of President Donald Trump’s One Big Beautiful Bill, doesn’t go far enough. In fact, they believe the deduction should be killed completely.
Mirit Eyal-Cohen, the Joseph D. Peeler Professor of Law at the University of Alabama School of Law, and Jay A. Soled, a distinguished professor of taxation at Rutgers Business School, titled their paper Eliminate the Gambling Loss Tax Deduction, which leaves little room for doubt as to their opinion.
And before you wipe this away as academic nonsense, it’s worth noting the pair penned an op-ed piece that appeared on TheHill.com, which is read by 43 million people a month, with a print version delivered to the offices of each and every member of Congress.
The pair’s arguments come down to a few basic principles, with the chief one being their claim that gambling is a form of entertainment, and the tax code is pretty clear on the fact you can’t deduct non-business entertainment expenses.
But the entertainment argument isn’t even the headline finding. The authors show how the current system treats rich gamblers versus everyone else (assuming, of course, people are being fully honest with their tax bills).
Gambling losses are an itemized deduction, but about 91% of taxpayers don’t itemize, per the paper. So the vast majority of low- and middle-income gamblers can’t use their losses to offset their winnings at all. They get taxed on every dollar they win (again, assuming honesty). Meanwhile, high-income taxpayers who do itemize can knock up to 90% of their winnings off the books.
The paper spells it out with a simple example: A high-income CEO and a middle-income professor both gamble, and both break even over the course of a year. The CEO, because he itemizes, reports just 10% of his winnings. The professor, who takes the standard deduction, reports 100%.
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The paper also points out that for those who take the standard deduction, losses don’t count against winnings. As a result — and for the third time, assuming honesty — this could be potentially devastating.
The authors walk through a case of a hypothetical McDonald’s cashier earning $30,000 who breaks even on FanDuel with $20,000 in winnings and $20,000 in losses. Without the gambling, their earned income tax credit would be $6,029. With the winnings bumping income to $50,000, it drops to $1,817. They didn’t make a dime gambling but lost over $4,000 in tax credits.
And for those who think prediction markets would serve as a loophole, the authors have some bad news. The paper explicitly calls for Congress to expand the definition of wagering to include prediction markets and event contracts. It doesn’t matter that platforms like Kalshi are registered with the Commodity Futures Trading Commission. Eyal-Cohen and Soled say these are gambling, plain and simple: binary outcomes, speculative profit, fixed payments, and a long track record of retail losses.
On the revenue side, the numbers are a little eye-popping. Taxpayers reported $61.1 billion in gambling winnings in 2022, and so the authors estimate that eliminating the deduction entirely could bring in close to a quarter trillion dollars over 10 years, all without raising tax rates.
The full paper, titled Smart Bets, Unequal Odds: A Case Study of Tax Bias in AI Gambling, is scheduled to be expanded in a forthcoming article in the Stanford Technology Law Review.
