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Archive April 2012
Sunday 29 April 2012
Today I came up with the silliest idea for an income tax loophole. For it to make sense, you first have to know that gambling winnings are taxable as income, and gambling losses are only deductable as an offset against gambling winnings (except the stock market, where you can deduct all losses for years, because that's gambling for politicians and lobbyists, and those guys don't like to pay taxes, everyone else loves it.)

Here's how you can exploit this as a tax loophole.

Step 1: Have your employer pay you minimum wage plus a limited number of gambling opportunities at odds which average out to winning the rest of your wage. (eg. if you're paid $20 an hour and minimum wage is $10 an hour, your new wage is $10 an hour plus an option of 20 opportunities to gamble $1 against $2 with 50:50 odds.) So now half of your income is legitimately "gambling winnings" and can be declared as such.

Step 2: Open shops at which you can 'gamble' for all the things you would normally buy. 10 cents for a one in twenty chance of winning a loaf of bread, a loaf which normally costs $2. Now your "gambling losses" are more than half your income, though your "gambling winnings" are also increased by the same amount when you win the bread since you also have to declare non-cash prizes, leading to...

Step 3: The gambleshops also sell all prize items for ten percent of their normal-shop price, limit one item per customer (lifetime). Thus we establish that the tax-declared 'value' of your 'prize' loaf of bread is just 20 cents, since that's what you can buy it for.

Bringing it all together, now you work for an hour and earn $10 regular income, gamble 20 times and now have $20 (on average, made up of your initial $10 plus $20 gambling winnings and $10 gambling expenses/losses). Now you gamble for bread 100 times, winning 5 loaves, costing you $10 ($10 gambling losses, and $1 in gambling winnings of 'prizes'). Your running totals for the taxes are now $10 regular income, $21 gambling winnings, and a deductible $20 of gambling losses, totaling $11 of taxable income, versus the normal-world $20 you'd be taxed on for that same practical result.

Essentially, the idea is that through making everything "gambling" you can make everything you "win" instead of buying tax-deductible. Note that this only works if you're also paid in "gambling winnings", because the "losses" wouldn't be deductible otherwise, and also only works if you establish the "value" of what you "win" as lower than its normal cost, because otherwise your additional prize-winnings will be equal to your losses and cancel them out.

I would love to see the court case that would result when the IRS cries "fraud" if someone actually set up a town that worked on this basis. Presumably the argument would be about the "value" of the prizes, but what is the true value of a loaf of bread prize? If that was the argument then, worst case, you could still end up tax-deducting the difference between what you pay for a loaf of bread and what a loaf of bread costs the store wholesale. I'd be really interested to find out what the true and proper value of intangible goods is in the eyes of a court too - if you were to win rental of a house that has never been rented for money, what was that prize's cash value according to the IRS? [23:50] [2 comments]