05/20/2015 5:15PM

Beyer: Horseplayers have chance to make tax relief a sure thing


Horseplayers are accustomed to dealing with tough losses and cruel tricks of fate, knowing that they’re an inescapable part of the game. But most bettors cannot abide a rule that was issued by the Treasury Department in 1978 and has tormented them ever since.

Treasury mandated that bettors fill out a tax form before collecting “certain gambling winnings,” and that the Internal Revenue Service withhold tax from large winnings. Some results of the policy were unfair: The IRS confiscated money from many bettors who, at year’s end, didn’t owe any taxes. The rules that govern reporting and withholding have become absurdly outdated but have undergone little change in 37 years. 

What hurts the customers hurts a business, and for many years, racing’s leaders have bemoaned the effects of tax withholding on their industry. Finally, the National Thoroughbred Racing Association has found a smart way to confront the issue. It is urging Treasury to change the calculation that determines what money is subject to withholding. The modification would be an infinitesimal item in the gigantic mass of U.S. tax regulations, but it would be a significant benefit to the sport. 

In 1978, Treasury was trying to make sure that windfall gambling profits didn’t escape detection by the IRS. It chose to define a big win as one that returned more than $300 for each $1 wagered. Under today’s rules, a winner must complete IRS Form W-2G if he hits a 300-1 payoff and collects $600 or more. If the payoff is $5,000 or greater, the IRS withholds 25 percent. Thus, a player hitting a pick six worth $10,000 will collect only $7,500.

Treasury was principally targeting games like keno and bingo, not horse racing. Payoffs at huge odds were rare in an era when most wagers were placed on horses to win, place, or show. But by the 1990s, of course, racetrack betting was being transformed by the proliferation of popular exotic bets – trifectas, superfectas, pick threes, pick fours, etc. – that regularly yielded big returns. Instead of conservatively betting horses to win, most players adjusted their approach and tried to hit occasional large payoffs in the exotics. In the process, they got caught in the maw of the IRS.

The typical horseplayer doesn’t make a net profit over the course of a year; if he had money withheld during the course of a losing year, he would be entitled to get the money back. But to satisfy the IRS, he would need records documenting all of his gambling transactions to establish his loss. He would have to file a return itemizing deductions to show losses that offset his reported winnings. Many players either surrendered their money to the IRS or else turned over a winning ticket at the track to a so-called “10 percenter” who would cash it for a fee.

The whole system produced many negative effects. Maury Wolff, gambler and economist, said, “It used to be a standard belief that a dollar at the track would be bet three or four times a day.” A player cashes a bet, feels a little more confident, bets a little more on the next race, and the process continues – what racetracks call the “churn.”  But every dollar taken out of circulation by withholding may never get churned again. 

The cumulative cost to the racing industry is significant.

One aspect of Treasury’s rules governing withholding was blatantly unfair: the way it chose to define what constitutes a 300-1 return. Bettors almost always play a multiplicity of combinations in pursuit of a big payoff in the exotics. If a player boxes six horses in a superfecta with a $1 base unit, the cost is $360. If he catches a $7,200 payoff, he’s getting a return of 20-1 on his money, well below the 300-1 threshold that triggers withholding. Yet the IRS ignores $359 of the investment and maintains the fiction that this was a $1 bet returning $7,200.

Individual racetracks have tried to reduce the frequency of withholding by offering wagers with lower base units – 10-cent superfectas, 50-cent pick fours, for example – so that they pay less than $5,000 and are exempt from withholding. The industry has for years sought legislative remedies for the policies that govern withholding. But Alex Waldrop, the NTRA’s president, acknowledged, “With the gridlock in Washington, it was a waste of time.”

So, the NTRA altered its strategy and asked Treasury to change its “definition of the amount wagered” and recognize the entire size of the investment that produced a payoff. Congressmen wrote to Treasury seeking to modernize the treatment of racetrack winnings, as did Kentucky Gov. Steve Beshear. The NTRA wants racing fans to do the same.

In a perfect world, Treasury would instantly recognize that a $360 bet on a superfecta is a $360 bet, not a $1 bet. But in case the regulators do not understand this fact, racing fans ought to remind them. From now until June 2, they can submit comments that will reach Treasury at www.ntra.com/legislative/tax-reg-modernization/.

Chuck Schafer More than 1 year ago
Steve Wilson More than 1 year ago
So the IRS, who would not give tax-exempt status to groups who think everyone is being taxed into oblivion, will now suddenly and magically pass legislation that will benefit horseplayers? Yeah, good luck with that. Little if anything will change.
Anonymous More than 1 year ago
If anybody actually reads the proposed Reg-1322531 that Racing is trying to attach its reforms to they would see what it calls for is for Slots, Keno, and Bingo players who bet electronically to subtract the cost of their bets from the $1200 (Bingo, Slots) or $1500 (Keno) winnings level that triggers notification. Now if you cash a $1550 Keno ticket you must notify, but the new regulations will allow a person who bets electronically to deduct the entire cost of his bet from the net return which means that $1550 payout would gross out at $1450 and therefore escape notification. Note: there is no 300-1 exclusion afforded to slot, keno, and bingo players. So, If the IRS was going to bring consistency to the table what they would do is eliminate the 300-1 logic from Racing, establish a monetary level that triggers notification, maybe $5,000 if we're lucky, and allow bettors to deduct the total cost of their bets from the pay outs. But while this would eliminate the most egregious examples of unfairness, nobody would be subjected to withholding on a losing ticket, for instance, it really wouldn't do much to invigorate the game. Under a Reg 1322531 system the $1000 win bettor would be subjected to tax notification if he hits a 5-1 shot. This is not good. On the other hand, what Racing is proposing to the IRS is if a person bets $1000 into a pick six pool and wins $300,000, being that it is only 299-1 return, the IRS should just ignore that income. A little guy cashes the same ticket for $100 he bears the tax burden, but not the whale. So much for fairness From my perspective it seems that the entire campaign for tax reform has really been an exercise in specious, solipsistic, sophistry. Not that there isn't an urgent need for meaningful tax reform for the Industry--a more equitable taxing system could benefit tracks, bettors, and the IRS who, after all, let's not forget, have a congressionally mandated responsibility to collect Income Taxes--but it just seems to me that proposing a system to the IRS which makes their job almost impossible to perform, withholding being their only tool for insuring compliance, is kind of fatuous. But there are actually creative alternatives which if pursued might have worked to the benefit of all parties. I like the idea of a progressive flat tax, paid, never to be refunded, when you cash your ticket. The numbers would have to be worked out, but let's say the first $5000 is untaxed, between $5001 and $15,000 10%, $15,001 and $25.000 15%, etc. So in my example if you cashed a ticket for $24.000 you would pay 10% on the money between $5001 and $15,000, or $1000, and 15% on the winnings between $15,001 and $24,000 or another $1350 for a total of $2350. That's all the tax obligation you'll ever owe. Maybe, to guard against money laundering, you would have to list your scores on your IRS forms, much like you have to list income from tax free bonds, but you wouldn't have to declare winnings at the track as income. What a boon, what an inducement to bet, to the guys and gals in the top tax brackets. Indeed, such a system would set the following dynamics in play. Instead of having the IRS taking out $6,000 from your winnings they would only take $2,350. Immediately you have an extra $3,650 in your pocket, to bet. So churn increases. And, I know the whales with their rebates and their accountants don't want to hear this, but the average player really doesn't want to worry about jiggling his books at the end of the year; doesn't need a big surprise when he finds out he owes tax than was taken out by the IRS. Fork Out and Forget being the sportive philosophy for many, if not most. But, of course, some people really do care about minimizing their taxes on income incurred through horseracing gambling at the end of the year. For these people the IRS could establish betting accounts similar to IRAs. As long as it stays in the Account winning are not subjected to with holding, but are taxed as regular income when withdrawn. Maybe you have to put a $1,000,000 ceiling on how much money can sit in the account, but still under such a system the bettor would not be prevented from using his own money. Fairness issue addressed. And the other dynamic that comes into play is that you've just made the IRS's job so much easier, that they might be persuaded to ask Congress for the necessary tax reforms needed to implement them. My guess is they waste so much time, and time is money, trying to enforce tax compliance from winnings at the track, that either of these reforms would result in a gain of net income to the Agency and therefore to the Government. That is, such reforms my be doable. Listen, maybe silent money speaks louder than common sense; maybe the NTRA will carry the day. Maybe, only the fools who don't bet lots of money into every pool, will ever feel the sting of taxes, but if they fail know this: It was a poorly conceived approach; a good opportunity wasted.
Anonymous More than 1 year ago
Randy Baker More than 1 year ago
And I thought my wife could blabber on.
Slew32A More than 1 year ago
Next time I'll wait for the movie to come out.
Chuck Schafer More than 1 year ago
Chuck Schafer More than 1 year ago
Jeffrey Morer More than 1 year ago
I invested @$1,000 in the Kentucky Derby superfecta and cashed a $1.00 super for $634. Instant W-2 generated. So I'm getting taxed on a $366 loss....duhhhhh IRS...the time is now for some horseplayer justice
Joel Firsching More than 1 year ago
The government has always known that it is close to impossible to beat a 20% takeout. But they still unfairly take huge sums of money from the horse player who is trying to enjoy one of the best moments of their life.
akakug . More than 1 year ago
Thankfully, Canadians are exempt from paying these taxes. I haven't had to declare anything on my tax returns.
Chuck Schafer More than 1 year ago
lets go back to the one ticket at a timemachines where you had one winning ticketand 359 pieces of cardboard sign the form and deduct the losersfrom what you wonYOU STILL HAVE TO DECLARE IT ON YOUR TAXES ANYWAY in 2002 I won a 1155dollar trifectaand signed the ticket myself all I got was a lot of GRIEF NEXT TIME I WILL GIVE MY FRIEND 20%TO CASH IT FOR ME
Pat Lyons More than 1 year ago
Finally my family said this 20 years +++ ago ... #patsRightDontFightIt #trendsetter
Ian GW More than 1 year ago
At the same time I wish tracks would put their best cards on Sat and Sunday. Especially Sundays. As a younger player who works Mon-Fri there is no week to play. The best day would be Sunday. But often there is little to play and fields are weak. Most young players fall in this category. I understand the week play but best cards should focus on Sat-Sunday before regular week. Sunday is an area that could really benefit any younger players who would come into the game,
TEDK215 More than 1 year ago
how would you EVER expect a "younger player" to have money to wager when all there is now is a bunch of part time jobs? Im pretty sure most if not all are scraping to get by let alone play the ponies.
Anonymous More than 1 year ago
Part time jobs are you serious obviously you don't bother to check the monthly jobs report this president has put the American Worker back to work makes Regan look like the *Grinch That Stole Christmas* Joe six pack
TEDK215 More than 1 year ago
theres no such thing as a 40 hr work week anymore with full benefits. where is this drempt up "jobs report"? all I ever see is 2000 people standing in line for a place hiring 20 people.
Anonymous More than 1 year ago
the last Friday of each month the Dept.Of Labor comes out with the * Unemployment Report* Unemployment fell to 5.4% in April Agree not that easy to find work but job market improving Six Pack Joe
TEDK215 More than 1 year ago
so it went from "jobs report" to "unemployment report". I rest my case.
Ronald Krzeminski More than 1 year ago
what planet are you on Ted? Everyone in my family is doing well education ,training,common sense,intelligence and gumption are the answer. dummy frat boy is long gone and so is 11% unemployment and dow jones@7000!!!
Keith Valentine More than 1 year ago
They DO now and have always put their best graded races on Saturdays...Pacific Classis used to be on Sunday but that moved to Sat...wait for Saratoga/Del Mar meets and you'll see what I mean
jtim11 More than 1 year ago
For people who foolishly don't take a few minutes and reply,due to outdated and uninformed tax rules on winnings,the government will continue to get your tangible dollars that would have remained in your pocket ,and at the betting window and come every tax season in april. You can fill out the form in the time it takes to run a 6 furlong in the slop at Saratoga...