Mirit Eyal (Alabama) & Jay A. Soled (Rutgers), Smart Bets, Unequal Odds: A Case Study of Tax Bias in AI Gambling:
In the age of mobile wagering apps and algorithmic predictions, gambling has become ubiquitous, frictionless, and increasingly driven by artificial intelligence. This shift has been further accelerated by the emergence of AI-governed event-contract platforms that blur the line between gambling, prediction markets, and financial derivatives. Yet, while most participants lose money or break even, the federal tax system frequently taxes them as if they have realized economic gain.
How so? High-income and sophisticated taxpayers are more likely to itemize deductions and offset gambling winnings with losses, while low- and middle-income taxpayers typically claim the standard deduction and receive no such offset. As a result, two taxpayers engaging in identical wagering or event contract activity can face radically different tax liabilities, including taxation on phantom income and the loss of other tax benefits. These disparities are exacerbated in AI-driven markets, where rapid, high-frequency transactions generate taxable “wins” divorced from economic reality.
This Article exposes how the rise of AI-powered gambling and event-contract platforms has amplified a structural inequity embedded in the Internal Revenue Code.
It argues that a statutory framework designed for an earlier era now disproportionately burdens taxpayers least equipped to anticipate or absorb these consequences. To address this inequity, the Article proposes three reform options reflecting distinct policy approaches: eliminating the deductibility of gambling losses altogether; permitting all recreational gamblers to deduct losses up to winnings; or imposing an excise tax on gambling winnings to fund the social costs of gambling. Any of these approaches would restore horizontal equity and eliminate the Code’s largely accidental preference for high-income, sophisticated gamblers.
Editor’s Note: If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.
