You can’t take it with you: Horse gambler’s system stymied by tax law

December 5th, 2012 by Philip Brasor & Masako Tsubuku

People in Japan who win prizes through the lottery (takarakuji) do not have to pay taxes on their gains, even if they win hundreds of millions of yen. However, people who win money betting on horses or other racing sports are required to report those earnings on their income tax returns. Why the distinction? Is it a difference in approach? Though both are forms of gambling, which is strictly circumscribed, lotteries are purely matters of chance, while betting on the ponies can involve calculation and experience. Only the tiniest fraction of the population could make a “living” from the former, by essentially winning a jackpot once, while there is a small but dogged subculture whose members at least like to think they can profit continually at the track.

Poster commemorating Japan Racing Association’s 150th anniversary

One person recently found out just how limited such a livelihood can be. A 39-year-old salaryman, whom the media hasn’t named, was recently indicted in Osaka for tax evasion. The man’s lawyer has told the press that he makes ¥8 million a year at an unspecified job. He is married and has one child with another on the way.

In 2006 he started spending enormous amounts of money on horse racing based on the belief that he could make a profit over time. Using software that “predicts winners,” he would analyze the statistics for individual horses and then bet on multiple contestants in individual races through the internet. He would not bet on races with horses making their debut since there wasn’t enough data available, but almost anything else was acceptable.

The point was to bet as much as possible on as many “favorable” horses as he could, including combination tickets. He lost most races, but he made enough on winning bets to pool that money and then use it for the next series of races. This sort of continuous overkill methodology meant that in the long run his winnings grew exponentially. During the three-year period from 2007 to 2009, he bought ¥2.87 billion worth of tickets and received winnings of ¥3 billion, thus making a net profit of ¥140 million.

However, he didn’t report these earnings on his tax return and eventually was audited by the Osaka branch of the National Tax Bureau. The amount they cited him for was not the ¥140 million he netted, but rather ¥2.9 billion — the ¥3 billion he grossed minus an expenditure of ¥100 million. Thus his tax bill for the three years is a whopping ¥570 million, and with the added penalty it comes to a total of ¥690 million.

According to tax law, earnings from horsetrack betting are considered “one-time income,” which means the only expenditures they count in the minus column are those that were used specifically to produce income. In other words, they don’t count all the money he spent on losing tickets as expenditures. Let’s say a gambler spent ¥3 million on bets in a single day, but only won one race with a bet of ¥100,000 that paid out 20-to-1 odds for a take of ¥2 million. For the day’s work, the gambler is in the hole ¥1 million, but according to the law he has to pay taxes on ¥1.9 million, which is the ¥2 million he won minus the ¥100,000 he paid for the bet. In the Osaka defendant’s case, only the ¥100 million he spent on winning tickets was counted as expenditure.

At a Nov. 19 court hearing, the man said he had intended to report the earnings but once he figured out the real meaning of the law it was too late and he realized that there was no way he could ever pay the tax even if he worked his whole life. His defense strategy is basically to argue that he should be taxed for the ¥140 million he netted, not the ¥2.9 billion he won.

Though his lawyer insists he is not a “professional gambler,” his betting habit should be considered a “second job,” like that of someone who regularly plays the stock market. If it is considered in that way, then all money spent on transactions should be deductible as expenses.

There is a difference, of course: stock speculation involves gradations of loss and gain, while betting on the horses is strictly a win-lose proposition for each transaction. Still, many people think that playing the stock market is gambling by another name, and, for the time being at least, the tax rate on stock earnings and dividends is a flat and measly 10 percent, since the government wants people to bet on the stock market. As for why the tax rate for lotteries is zero, you’ll have to draw your own conclusions.

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4 Responses

  1. Excellent post, as usual. Thank you for the great work!

  2. The takarakuji tax is already payed when you buy the ticket. its 50%.

  3. The tax we were referring to in the post was a tax on winnings, not a tax on the ticket itself. There is no tax on lottery winnings in Japan the way there is in the U.S., for instance.

  4. for the takarakuji, you pay the tax on the bets not the gains.
    it’s a much easier and cheaper way to collect tax. they should do the same for horse racing.


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