Gambler argues his losses are tax deductible

The entire basis to tax the gambling gains in the first place is based on as shaky ground as so much other taxation. Many of you have gotten so used to being fleeced, you don't analyze how ridiculous so many of the taxes you pay are in the first place.

There was no permanent personal income tax in America until the early 1900s. On what basis do we have it now? Sure, the government needs money to work with, but is your share of benefits provided you by the government magically based on your income? No. Is it based on what you won gambling? No.

Of course there is no way to make taxation completely sensible. So the least they can do is make it consistent. If they are going to tax your gambling gains, they need to allow you to deduct your gambling losses. Its not rocket science. There is no sense taxing you on money you had for ten minutes before you lost it again. The only way it seems sensible is that people have gotten used to that crazy status quo.

They may as well tax you on the value of a standing house, even though in reality, the house burned down years ago. If you have nothing to show for your winnings, not even a purchase, there is no basis to tax you even in their own bizzaro world concept of taxing you just for having money, because you don't have it any longer. Beggaring people in this way is of no use to anyone, not even the tax man. Its like a parasite killing its host, and itself in the process.

@ scrote the 10% betting tax was one levied by the bookies to cover the 9% tax that they were charged by customs and excise on everything that went through the tills . It was removed once a new deal was struck with the levy based on them paying tax on the profits only .

But neither or those elements are necessarily preconditions for taxation - rather, only if you've chosen to structure the code in that manner

@Triumvere - I Agree. Every country decides what is taxable and what is not. (I think the US tax code is so complex that even the coins you pull out of your sofa are taxable at some special rate!)

In the US it doesn't matter whether it is a trade or business because the tax code explicitly segregates gambling and provides a special tax treatment (losses can only be written off against gambling gains whether for a business or individual). The door is closed on any possibility to write off gambling losses against say, employment income or other profitable business activities.

In Japan and the UK there is no explicit segregation of gambling wins/loses. Therefore the only available tax structure for being able to write off any type of loss in Japan or the UK is being classified as a trade/business and people want to try to use this for obvious reasons. This is why the trade/business question is so important in the UK in the 1925 case and now in Japan. Also why the tax authorites in Japan are arguing that the occaisional income provision is Japan's 'special treatment' although it is far from explicit in Japan.

There is no doubt that even if this guy wins his court case, the diet could simply pass a law which keeps the current situation but does so explicitly this time. The only hope is that this guy's case brings about a change. I say its better just to make it non-taxable in the first place since losses will always outnumber gains. The US system is actually no less unfair than the Japanese system in aggregate. The mechanics of the US system is also that the casinos etc deduct the money at source and give you a tax receipt, it massively complicated for all involved. Especially for winners that are not US tax resident and need to file addition tax returns to get back their winnings.

M3,

Not capital gains, but ordinary income. The US definition of income is quite broad ("all income from whatever source derived"). So, basically, if you have value coming in the government can tax it. Can, not necessarily will - there are a lot of special exceptions, but the default expectation is everything is taxable. Really, it all comes down to how you decided to structure your tax code. I'll agree that gambling gains are not capital gains under any definition thereof; I'll also agree that gambling is not, in most cases, a trade or profession (though there are times where the case can be made otherwise). But neither or those elements are necessarily preconditions for taxation - rather, only if you've chosen to structure the code in that manner. I have no idea how Japan's tax code is structured.

If you reported the gains as income, then you are allowed to claim the losses as an expense. If you're only reporting the difference between gains and losses then you're going to get a visit from the tax man.

In the UK (some years ago at least) gamblers had the option of paying a 10% tax on their stake, or 10% on their winnings. There was no need to declare winnings as income since the tax would already have been paid one way or another.

Thanks for the link to the story.

I agree, it seems like he is not blameless but that doesn't take away from the fact that the current "law" is irrational. I put law in quotation marks since its more like a policy since the law is so grey. I hope he wins his case.

I also wonder how much tax is being collected on people's losses which are after all being taxed as other people's winnings and profits of the bookmakers on the other end.

I read the original Asahi article.

It sounds like the guy was late filing his tax return for the income, which wouldn't have helped him any.

But it also seems the tax office regards good horse race bets as "occasional income" based on chance, which can't be summed together with losses on bad bets. The Income Tax law also apparently puts gambling into that category, and a 40 year old notice confirms horse race gambling was included.

http://ajw.asahi.com/article/behind_news/social_affairs/AJ201405070001

Given the nature of what this guy was doing, I think he has a point, but if you are getting rich not declaring the income until AFTER the tax man comes asking, you are obviously asking for trouble.

Hi Triumvere,

Gambling winnings may be deemed to be capital gains in the US but not in the UK/Canada/and it seems Australia. But I'm not sure whether they are taxed as gains or income in Japan?

I'm not a tax lawyer but the reason that we do not class lottery winnings in the UK as gains is most likely this:

As you know Capital Gains is a tax on the increase in value of certain types of property when it is disposed of. When you buy a lottery ticket for example, you don't really dispose of the ticket do you? You don't sell the ticket back to the ticket seller. There is no disposition of property and it isn't property per se. The ticket is just a representation of a promise by the seller to pay you if something happens (like the number of the ticket is drawn out of a machine). It is more likely a 'chose in action' which does not attract capital gains tax in the UK. Nor does the ticket go up in value in many cases. When you buy the ticket, especially a scratch off ticket, the value of what you bought doesn't change does it? The only issue is that when you buy the ticket neither you nor the seller know how much it is really worth. By purchasing the ticket for $1, you are entitled to excercise all the rights that come with ownership of the ticket, perhaps the right to collect $1000. So there is no disposal, just excercising of rights.

An example would be if you bought a house and later discovered that there was cash stashed in the attic. Just because you made a purchase which turned out to be a great bargain doesn't mean tax would be payable on the extra cash you found.

So in the UK, it is neither a capital gain nor income. It is therefore not taxable. Of course the US and Japan are free to set their own rules as to what is a gain. Capital gains are also a fairly new type of tax. 1965 was the first year in the UK and before that everything was just income.

The article says he "declared the balance of 570 million yen", but now that I read it again it doesn't say whether he filed a single tax return to cover all 6 years, or filed a return each year (which I had assumed).

the local tax bureau said he had failed to declare hundreds of millions of yen in income over the six year period, in a case that is being heard at Tokyo District Court.

If he's filed his returns each year, and the tax office has audited him 6 years later and said that he owes money only on the basis of his good bets, I think most of us are with the gambler.

If he only filed a single return circa 2010 covering net income across all 6 years, then the tax office has it right, IMO.

But I suspect that the tax office has noticed this guy (with all his money), audited him and decided to try to fleece him for more than he is worth. Looking forward to more details of this case.

The way I read it the guy has only declared his gross winnings as income. If he's to keep the books straight he needs to declare all his income (winnings) and his outgoings. Surely then he has evidence of his losses and a good case to offset them.

M3,

The real question is whether gambling gains are income, not whether gambling is a trade or business. (Though there are unquestionably professional gamblers out there that make their living of cards and such.) There are plenty of ways to receive income that have nothing to do with your profession; investment, for example. I don't see any reason why taxing gambling gains is somehow not in line with "common sense."

26 U.S. Code § 61 - Gross income defined

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust.

But if the guy had been profitable for 5 years but then tried to cut a break from the tax office because year 6 turned out in isolation to be a loser, I would side with the tax office.

Great point fxgai.

If I were this guy, I would already be packing my bags for friendlier shores. Maybe Thailand, Lichtenstein? Time to break out a copy of butterworth's tax treaties.

goodchoice,

99% agree with you, just this bit:

But now that he has suffered losses, the tax man does not want to hear about it?

As it says in the article, he suffered losses in the process. We don't have the details, but I presume the losses were spread across the 6 years of gambling, and the guy probably filed taxes on a year to year basis. If so I'm 100% in his camp.

But if the guy had been profitable for 5 years but then tried to cut a break from the tax office because year 6 turned out in isolation to be a loser, I would side with the tax office. Futures trading etc in Japan does have tax rules that allow profits to be offset against losses from different years, but I believe there is no such system for "miscellaneous income".

But now that he has suffered losses, the tax man does not want to hear about it?

I think the reasons the tax man does not want to hear it are two-fold. (Not that I agree with any of them)

First-Under Japanese tax law, business, as well as other losses can be applied unconditionally against employment income. Unlike in other countries where certain types of losses can only be applied against profits of the same type (ie gambling losses against gambling income only)

Second- Retrospective legislation is prohibited in Japan. So if the court rules that gambling is a business and losses are fully deductible, it means that it has always been legal to do so, not just from the date of the court ruling. Professional gamblers will come out of the wood work and start amending their previous year tax returns. The government could pass a specific law to stop people from deducting gambling losses going forward but could do nothing about allowing people to claim refunds from previous years.

Now I get it! I will deduct money for a movie or food or book or date I didn't like because it was a loss.

There is a difference between these activities which are straight consumption (which as M3M3M3 says may be deductible as expenses if your tax office agrees), versus gambling which is not only spending money making bets but also collecting money on bets made good.

It's only natural that the tax agency take a holistic view to overall gambling income over a specific time window, which is what is done with respect to securities investments/trading for example.

If I have any criticism of this guy it's that he might have checked things carefully with the tax office before spending billions of yen making bets and then finding himself in a sticky situation. Hopefully this story results in clarity for all the gambling addicts out there!

They would take tax him on the winnings so why shouldn't he be able to deduct the loss, he is right the loss was an expense incurred in him doing business.

I am happily surprised so many of you see this so clearly.

For those of you who can't, you need to learn to be biased against the tax man, because 90 percent of the time, he is completely full of it.

Next, you need to read the article. It says clearly the man, in previous years, filed his winnings as income, which means he paid taxes on it.

But now that he has suffered losses, the tax man does not want to hear about it? This is quite simply a case of the tax man wanting to have his cake and eat it too, ie run things by a complete double standard. And its hardly a new strategy for tax men in just about any country.

If this were taking place in my court of law, I would warn the tax man at the hearing that if he pursues this and losses, the plaintiff is then going to be suing for this trouble, and it will amount to more than the tax man is trying to steal.

Now I get it! I will deduct money for a movie or food or book or date I didn't like because it was a loss.

If you earn you income by being a movie, book, food critic or a host then tax laws say you can deduct these things even if you enjoyed them as long as they were required for the earning of your income.

The question is whether gambling can ever be a business or whether it is simply 'an irrational agreement where one person agrees to pay another on the occurrence of some specified event'

Now I get it! I will deduct money for a movie or food or book or date I didn't like because it was a loss.

If winnings are taxable then loses should be tax reductions it's very obvious.

The Japanese courts would be well advised to take note of what the British say on this issue. The UK tax office cites this case to explain why gambling cannot be considered a business and why winning are not taxable. It really is worth quoting here since the common sense of it is quite funny.

The case of Graham v Green [1925] concerned a man whose sole means of livelihood came from betting on horses at starting prices. Justice Rowlatt said:

Now we come to betting, pure and simple... the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money, at whatever may be the starting price. I do not think he could be said to organise his effort in the same way as a bookmaker organises his. I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays today and he plays tomorrow and he plays the next day and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But I do not think that you can find, in his case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man ... is that he is addicted to betting. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting. The subject is involved in great difficulty of language, which I think represents great difficulty of thought. There is no tax on a habit. I do not think habitual or even systematic fully describes what is essential in the phrase trade, adventure, profession or vocation.

He did not pay taxes on his earnings

This does not appear to be the case. From the article:

He declared the balance of 570 million yen as “miscellaneous income,”

Declaring 570 million yen as miscellaneous income implies that he reported the income to his tax office, and therefore would presumably have paid tax on it as well. (If you haven't done so yourself, believe me that is how it works.)

The dispute appears to be that the tax office wants him to pay tax on the profitable bets he made, without taking into account the losing bets he made. Doing so would result in a tax bill far in excess of his net winnings, and completely bankrupt him.

Imagine having 400 million yen in the bank, but owing the tax man 2 billion yen. And that's before the tax office applies penalties for late payments. It will absolutely destroy the guy's life if the court doesn't rule in his favour.

He did not pay taxes on his earnings and wants his losses to be tax deductible (as far as I understand, horse racing wins of more than 2 million yen/year are considered as taxable income and are subject to a 10% income tax. Lottery wins are exempted regardless of the amount). I gather this is just a simple case of getting caught while 'trying-to-cheat-the-system', and he got caught. He definitely will get what he deserves. The Guy did actually reveal how he earned all that money he spent, if he hadn't then he would have been in totally different, much more severe jam.

But the local tax bureau said he had failed to declare hundreds of millions of yen in income over the six year period, in a case that is being heard at Tokyo District Court

What a bummer if this civil servant in Hokkaido has his case heard at Tokyo District Court. Wonder if he can have his travel expenses deducted?

There's not many civil servants I feel sorry for, but this guy is one of them.

Look, the article says he's filed his 570 million yen as miscellaneous income, so he's presumably paid tax on that. Yet

the tax agency is trying to bankrupt the poor guy by saying he should have paid tax on 7.84 billion yen in profits, ignoring the 7.2 billion in losses. Should that stand, the tax bill would be far in excess of the 570 million yen he actually ended up with before tax.

Let's say the tax agency calls it 3 billion yen (I don't know the exact calculation). Does the tax agency seriously believe this guy would be able to pay 3 billion yen in taxes?

They should absolutely accept his tax filing, and on the contrary, they should be THANKING him for his massive contribution to government coffers by paying tax on 570 million yen in profits (maybe 200 million yen?).

This guy should be designated a national treasure for his contribution. I wish this good soul the best of luck, and given the Osaka precedent I think he will succeed.

Not sure about this, because I'm not a gambler. I'm reminded of the remark once made by American comedian W.C. Fields: "Horse sense is what keeps horses from betting on people."

I assume that the tax office would argue that when you are gambling, you are buying a form of entertainment (the excitment and chance to win). So it might not be correct to say that these are total losses for someone who is self employed rather than an incorporated company.

For example, if you buy a luxury car for your business, the tax office will only allow you to deduct the cost of what an average car would have cost. They will claim that the additional cost is purely luxury and entertainment for the driver and not deductable. Same goes for hotel rooms, meals etc. This is why entertainment expenses spent on customers are not deductable in Japan at all.

I personally think it‘s just crazy to treat gambling winnings as income. Just opens a can of worms. Do any other countries besides the US and Japan treat it as income? Canada and the UK are both a no.

Gambling losses should be tax deductible only to the extent of your winnings. In other words you should report all the money you win as taxable income on your return. However the deduction for your losses is only available if you are eligible to itemize deductions. Therefore if you claim a standard deduction, then you should not be able to reduce your tax by your gambling losses and are still obliged to report and pay on all winnings you earn during the year. But you will not be able to deduct any of your losses. Also the amount of gambling losses you can deduct should never exceed the winnings you report as income. The bottom line is that losing money at a casino or the race track does not itself reduce your tax bill. You need to first owe tax on winnings before a loss deduction is available. Therefore, at best, deducting your losses allows you to avoid paying taxes on your winnings, but nothing more.

I'm definitely doing something wrong. One can make 13 Million US$ annually by betting on horses? @Frungy Good point.

Winnings in Australia are not taxable, even a lotto win is not taxed.

If I understand this correctly they want him to pay taxes on the income he earned from gambling, but don't want him to deduct his losses? Since loses are a normal expense in legal gambling it seems only reasonable to me.

Stock brokers (another sort of legal gambler) do exactly the same thing, only paying tax on the profit they make overall, deducting the loses from bad investments and balancing them against the good investments.Since the sort of gambling he was engaging in was entirely legal I don't see why he shouldn't follow the same rules as tax brokers.

The only problem I have is that ticket stubs are anonymous (or at least they are where I come from), and we have no way of knowing if they're his. It would be like me submitting a whole lot of combini receipts to the tax office as "business expenses". He could have just had his friends hand him all their losing stubs and be using them to offset his wins.

If he paid taxes on his windfall, then he should be able to deduct his losses, just as people who gamble on the stock market can. But he didn't pay taxes, so he is just trying to scam the system.

Eh. You can deduct gambling losses up to the extent of your gambling gains in the US tax code. If you think about it, its remarkably harsh to do otherwise: lets say I play the ponies and win 1M yen, only to turn around and lose 1.5M. Is it really fair to tax me on the 1M if I'm .5M in the hole? Illegal income is still income, and still taxable, after all.

By similar logic, as a business expense, I'm going to deduct the huge amount of money I think I could have made but didn't. That is more logical than his idea.

He took a "gamble" and "paid" the price for it.