Prediction markets and Taxes
13RamblinDash
2Max Ghenis
7Dagon
1Edmund Nelson
2jbash
3Edmund Nelson
2jbash
3Edmund Nelson
New Comment
It's not true that you can't pay negative taxes on your betting market losses, at least if you are someone who uses prediction markets routinely. You are allowed to deduct your gross gambling losses from your gambling gains, and you only pay tax on the net gain. See https://www.irs.gov/pub/irs-news/at-02-53.pdf.
1Only if you itemize rather than taking the standard deduction!
For example, suppose you purchase a binary contract that pays $1 if an event occurs (and $0 if it doesn't) and you believe there's a 50% chance of the event. If you win, you receive $1 in gross winnings. With a 30% marginal tax rate and without itemizing, you'd pay tax on the full $1—leaving you with a net of $0.70. Given that you paid some amount for the contract, your net gain on a win is , while a loss means you lose the entire .
To break even, the expected value of the bet must be zero:
This simplifies to:
Thus, if you believe the event is 50% likely (and considering only taxation, not other factors like transaction fees or opportunity costs), you would only gain if you paid under $0.35 for the contract.
Tax (and other frictions) is pretty well-known as a market distortion. There is some symmetry to the taxation - both sides of the market have the same friction (tax if win, no tax if loss), so this will make it less noticeable. And in robust markets, there will be enough professional involvement (who get taxed on net winnings, not on wins ignoring losses), that the effect is probably small.
Still, thanks for pointing it out - the effects are real, and important.
I'll be using American odds.
Where do all these bizarre notations come from?
That one seems particularly off the wall.
American odds can be basically interpreted as "The Net amount you win after making a $100 bet" So if the odds are +150 you win $150 PLUS your initial $100 bet if you win the bet.
Negative american odds means "the amount you have to be to win $100" so odds o -230 would mean you have to bet $230 to win $100
Yeah, I got that, but it's a very counterintuitive way to describe probability, especially the negative thing.
Yeah that's fair, I'm just so used to American odds for gambling that I mentally use them all the time for these sorts of things.
Probably should have used good old fashioned odds instead.
The reason casino's show something like "Yankee's +110 Red sox -120" is so you can easily see the casino's rake or something.
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