Wednesday, May 03, 2006

Tradesport and Taxes

This evening, I noticed that shares of "Republican Party Candidate to Win the 2006 Maryland Governor [sic] Race" are now trading at 39 on Tradesport. I immediately began thinking.
I know a few Republicans whom I can goad into putting down bets on Gov. Ehrlich to win at even money.

If, for every $100 I bet with Republicans on Gov. Ehrlich to lose, I buy $80 in Tradesport contracts for "Republican Party Candidate to Win," I am guaranteed in all events to win $20. That's because if Ehrlich loses, I win $100 from a Republican, but lose my $80 in Tradesport contracts. Conversely, if Ehrlich wins, I lose $100 to a Republican, but I get back roughly $200, or a net of $120, from my Tradesport contracts.
So why haven't I quit my day job?

Well, first there's the obvious difficulty of locating, then investing in, and then enforcing a lot of barroom bets. As a practical matter, this is fairly hard work.

But there's a tax problem.

If Ehrlich loses, I'm ok. While I've lost $80 in Tradesport contracts, I will get back $100 of cash which I will likely not report as income. After all, friendly bettors don't generally turn out 1099's or W-2G's and I'm not that honest.

However, if Ehrlich wins, I get a net of $120 which is going to be reported to the IRS by Tradesport. Assuming that my marginal tax rate, both federal and state, is about 40%, I only net out $52 on the Tradesport side of the transaction. Since I've lost $100 in the barroom, I'm down a net $48. Theoretically, of course, I could attempt to deduct the $100 I lost in the barroom against my Tradesport "winnings," claiming that both were a form of wagering. There are obvious record keeping and proof problems involved in this, however, which are likely to be insurmountable.

Moreover, it's not clear that "investing" in a Tradesport contract is technically gambling. In that case, my $120 in Tradesport "winnings" is simply a short term capital gain that cannot be offset by my $100 gambling loss.

I think that I'll keep my day job.

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