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Lottery withholding taxes are quite substantial, and from my understanding of the federal tax regulations, gambling winnings can be offset by gambling losses up to the amount won.

So if someone won 5 million dollars from a lottery ticket, and had a lot of it automatically withheld, that same withheld amount could be used (for fun, bankroll, consumption) by further gambling at high roller tables and slot machines and other lotteries, and losing.

This would then incur a tax deduction and if more was withheld than you won from the lottery ticket, then you would likely get it back from the government. In practice this would have to require spending the post tax cash, and getting a large refund, which is still a lot better than not having access to that portion of the original lottery proceedings at all.

Am I understanding this correctly?

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    are you proposing that you take all of your lottery winnings and essentially give them to the casino owners in Vegas just to save on your taxes?
    – mhoran_psprep
    Commented May 17, 2016 at 18:23
  • @mhoran_psprep obviously, you say that like it is a bad thing. We are talking millions of dollars here, and are also presuming that circulating money is a better outcome than the government treasury.
    – CQM
    Commented May 17, 2016 at 19:21
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    You also don't get a one-to-one between dollars lost and dollars withheld. So, say that you won $5 mil and they withheld $1 mil, then you go blow $1 mil in Vegas to stick it to the man. They won't give you $1 mil back, they will only return $200k. Unless you are talking about trying to launder the winnings through small transactions, this is a losing gambit.
    – Ukko
    Commented May 17, 2016 at 19:52
  • @Ukko thanks thats the kind of math I was looking for. You still got to spend $1,000,000 and got back $200,000 you wouldn't have ever seen if it was spent on consumer goods or put in an investment asset.
    – CQM
    Commented May 17, 2016 at 20:01
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    @Ukko "lets say you just break even by losing $1mil and wining $1mil at the roulette table over a long weekend." For this tax year you will have won $6 million now (lotto + roulette) and still deduct $1 million, there is nothing complicated about that, why do you guys think it is so complicated to keep track of your gambling losses and winnings, this isn't hidden tax code or require any designation as a professional gambler.
    – CQM
    Commented May 18, 2016 at 15:47

3 Answers 3

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I think it's obvious that it would never make financial sense to throw money away just to get a percentage of it back in the form of a tax refund. However, in this particular situation there may an interesting wrinkle worth exploring.

Suppose you went to a casino and considered playing a game where the house has a slight edge of about 1% (blackjack, etc). Mathematically you should never place a bet. But now suppose the casino modified the game such that every time you lost you were given 25% of your original bet back.

  1. Does getting a rebate on your losses now make the game in your favor?
  2. If yes, wouldn't it then make sense to always go gambling with your lottery winnings since you are getting a guaranteed rebate if you lose?

It may seem strange but the answers are 1 = yes, 2 = no. Here's why:

  1. Without the rebate, the expected value (EV) on a $1 bet is $-0.01. So for every $1 bet you make, you can expect a return of about 99 cents. With the 25% rebate on losses, your EV becomes +$0.12 meaning you can expect a return of $1.12 on each $1 bet. This would be a good bet to continue making all day long.
  2. The flaw in the logic in question 2 is that you also have to pay tax on your winnings, meaning any tax rebate you receive is offset by the same amount when you win. This brings you back to the original 1% disadvantage that you started with.

So what can we conclude? Under normal circumstances when you don't have any gambling winnings to offset against, gambling at a casino is a much worse bet than it seems. Since you have to pay taxes on your winnings, but cannot deduct your losses, even if the house edge is only 1%, your true EV (with a 25% tax rate) ends up being around 13 cents on the dollar, so for every $1 you bet your return is only $0.87. If you already have winnings in the same tax year, then your expected return on a $1 bet jumps back up to the $0.99 that the casino advertises, but in either scenario, it's always a bad bet.

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    It is an interesting thought experiment. My observation also was that the government is effectively hedging your bet. The Delaware government did that once to entice gambling revenues. So there is an effective similarity, despite that the Federal government is collectively adverse to supporting gambling directly. I think there is an equilibrium here. In the UK gambling winnings aren't taxed at all, so this whole thought experiment could be avoided and investing would make the most sense.
    – CQM
    Commented May 18, 2016 at 15:49
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You are falling for the common misconception that 'high' taxes means 100% taxes. Which is of course wrong.

Take a simple example (all numbers are millions!): You win 10 in the lottery, and they keep 50% of it - which is 5 - for taxes. You whine, and blow 2 of the remaining 5 in Vegas.

Now you have 3 left (instead of 5), and at the end of the year - assuming you have proof that you blew 2 - you get 50% of the 2 back, which is 1.

Now you have 4 instead of 5, and you had to wait a year for getting the fourth.

why would 4 be better than 5? you basically blew 1 to have the fun of blowing 2. In other words, blow 1, blow 1 free...

And in reality, taxes are not 50%, but lower, so your math looks worse.

Generally, remember, taxed money is still money. That counts for blown money as well as for made money.

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Kindof.

A couple of things:

  1. The assumption here is that you cash out at the end, which is obviously not going to work when you're casino-hopping. But when the winnings are substantial enough the risk of people "forgetting" to put them on their tax return is substantial enough to warrant withholding at source.

  2. You need to substantiate the losses, which is not always easy. You need to show receipts and/or other proof of the money spent and how exactly it was spent. From my personal experience dealers don't give receipts when you buy tokens at the table, but I guess when you're dealing with thousands of dollars at a time things change.

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  • Any "craps mechanic" or "eke out a living at Texas Holdem" book at your local Barnes and noble will have an example gamblers diary for logging buy ins and cash out transactions. Such a book should be an expense to your lottery -spending business
    – user662852
    Commented May 17, 2016 at 22:18
  • @user662852 if it's a business. The OP didn't say that it is a business. Imagine one lucky night in Vegas.
    – littleadv
    Commented May 18, 2016 at 2:14

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