Gamblers should pay more taxes than investors

As he saw it, this was unfair. People can write off all of their business or stock market losses, so why shouldn’t he be able to write off all of his poker losses? Until this tax provision became law as part of the US One Big Beautiful Bill, he was allowed to.

As I told him, online poker is different. Speculating on stocks is still investing. Gambling is more like amusement—consumption, to use the economic term. And just as people can’t write off the cost of a movie ticket if they don’t like the film, so gamblers shouldn’t be able to write off their losses. In fact, they’re lucky to be able to write off 90%.

That is not to say there is anything wrong with gambling. But should it be encouraged by the tax code the same way investing is? The tax code encourages investment activity for a reason: It creates wealth and jobs, and helps expand the economy.

Taxes are a necessary evil. The government needs revenue and must tax all sorts of productive activities, such as work or saving. It is good policy to charge a higher tax on activities that provide less benefit to the economy. Thus the US taxes earnings on investment (at a lower rate than income) but also lets people write off their losses. The idea is that if they invest and lose money, they don’t have a tax liability. This encourages some healthy risk-taking, both to start businesses and to invest in them.

It is less clear why betting on a basketball game should get the same treatment. Not only does it fail to provide the same society-wide benefits, it may actually impose costs on society, especially considering the rise in problem gambling.

Nonetheless, until the bill passed, losses for gambling could be written off entirely. If you won $5,000 on one bet but lost $5,000 on another, you would have no tax liability. Now, you get to write off only $4,500, and have to pay income tax on $500 in winnings—even though, on net, you didn’t make any money.

The change is an acknowledgement of two realities: Gambling is becoming a bigger part of the economy and governments need more revenue. After the US Supreme Court struck down a federal law that prohibited sports gambling in 2018, many cash-strapped states opened up the market. Aiding this expansion was technology that enabled gambling on pretty much anything, in real time, on your phone.

Even in these profligate times, politicians of both parties sort of acknowledge that the US needs to tax something—and a good place to start is with less productive activities. It is better to reduce the amount of gambling losses people can write off than to increase the capital gains tax rate.

There is, however, a complication: As gambling becomes a bigger part of the economy, the distinction between gambling and investing is becoming less clear.

Some people earn a living this way. Professional gamblers, like that poker player, argue that the law will squeeze their already small margins. Some may leave the field altogether, which would reduce the tax revenue the government could collect. But if the pros are indeed smarter, maybe it would be better for the economy if they applied their talents elsewhere.

True, a lot of people have jobs that provide dubious economic value and get to write off all their losses. But an exception for professional gamblers would create all sorts of dubious incentives for more casual gamblers to find a way to claim professional status. Considering the rise in problem gambling, this would be unwise.

Then there is the other side of this argument: More investors are behaving like gamblers and can write off 100% of their losses. The prevalence of trading apps has popularized day trading ; Robinhood is so large now, it is in the S&P 500 index. More people are betting on stocks or crypto the way you might bet on a football game.

But the difference between investing and gambling is not just about intention. Even day trading, while often not in the best interest of the trader, adds economic value by providing liquidity to markets as well as information on prices.

No doubt, the vice economy, aided by the legalization of gambling and abetted by the advance of technology, has real drawbacks. Nor is there any doubt that the US government needs more revenue. Taxes on pure gambling is a good place to get it. And if I were the gambling type—which I am not, although I like a good card game—I’d bet on higher taxes on a lot of other economic activity too. ©Bloomberg

The author is a Bloomberg Opinion columnist covering economics.