Taxing the House Edge

Some gamblers are buying losing lottery tickets on eBay to offset their winnings, a dubious tactic that has caught the attention of tax experts. This practice is not surprising, given the complexity of the US tax code. A narrow provision in the tax code (IRS Topic 419) allows gamblers to deduct losses from their winnings if they itemize and keep accurate records, but the deduction is capped at the amount of winnings reported.

The eBay listings for losing tickets are often disguised as “collectibles” or “arts and crafts” items, with some sellers claiming they’re worth thousands of dollars. However, the fine print reveals that many of these listings are actually tax write-offs designed to help gamblers avoid paying their fair share. Jeffrey Hoopes, a professor of accounting at UNC’s Kenan-Flagler Business School, is skeptical of this practice. “This is clearly tax fraud,” he says.

The IRS has been aware of the issue for some time and has taken steps to crack down on it. However, the sheer volume of transactions makes it difficult to keep up with demand. eBay’s policy allows expired lottery tickets to be sold as long as they’re clearly labeled as such, but the company has removed listings that promote improper uses.

The problem goes beyond just eBay. The growing popularity of prediction markets and online betting platforms is creating a new landscape for tax evasion. With the rise of sports betting, the IRS faces an increasingly complex task in tracking winnings and losses. A recent analysis by the Pew Research Center found that monthly trading volume on prediction markets has swelled to $24 billion, exceeding the average monthly volume of legal sportsbooks.

The IRS’s own compliance record suggests a significant problem with unreported winnings. In 2024, a Treasury Inspector General for Tax Administration audit found that nearly 149,000 people who won more than $15,000 in gambling never filed a return reflecting it, accounting for $13.2 billion in unreported winnings.

The practice of buying losing tickets on eBay may seem like a peculiar quirk, but it’s actually a symptom of a larger issue: the tension between individual freedoms and government oversight in taxation. As Hoopes notes, “eBay just facilitates transactions between two people. They never take hold of the inventory.” The responsibility for policing this activity falls squarely on the shoulders of tax authorities.

The case highlights the need for more transparency and better tracking mechanisms to combat tax evasion. With the rise of online platforms and digital currencies, it’s becoming increasingly difficult to keep up with the flow of money. It’s time for lawmakers to take a closer look at how they can strengthen regulations and enforcement measures to prevent these kinds of loopholes from emerging in the first place.

Hoopes’ three-inch stack of losing tickets serves as a reminder of the complex world of tax evasion – and the resourcefulness of those seeking to exploit it.