Mandatory end of year bet (for USA people)

How many hands of poker would you need to play before your results converged with expectations? How many years do you expect to be paying taxes?

Also, why do you include student loans with taxes?

I've never heard of this sort of tax arbitrage, which doesn't mean it isn't possible, but I am skeptical. So basically what you're saying is that if you have a gain of X that's short term, you should make a bet on a 1256 contract with stake X? And the idea is that the IRS sees all of this as falling under the umbrella of investment activity, so the gain of X would be canceled out if you lose your stake on the 1256 contract? I'm not sure if the latter is true or if the IRS compartmentalizes 1256 activity, and so any losses there couldn't be applied to offset other investment gains.

^The answer

The editorial from me:
Just take the win and pay your tax. You have 6K more, after tax, than you started with.

You could be greedy with the "freeroll" contract wager. But, you could lose that. And then maybe, we're not sure yet, you can write off that loss and your're even.

Yes, if you win your "freeroll" contract wager, you have more money. But, you're still not avoiding you're main problem, tax. And if you win that contract, you'll actually
be paying more tax

You don't want to pay tax, right? I think we should keep thinking, haha.

I luckily never had student loans.

But I think student loan ( interest) payments impact taxes.

I also believe when loan funds are disbursed to you the money is reported as income? So it impacts taxes.

That is precisely what I am saying. I've looked into this further and I do not see any reason why 1256 activity would be compartmentalized.

Lets say you make the bet and lose. If you look at lines 8 and 9 of Form 6781 (version 2024), it says to put your 60/40 gains or losses on lines 4 and 11 of Schedule D, respectively. Assuming my first example of $10k in short term gains and a $10k 1256 contract, line 7 of Schedule D is going to be $6000 (10k short gains minus 40% of the 1256 loss), and then line 15 is going to be -$6000. Line 16 says to combine lines 7 and 15, which nets to 0. Then it says if line 16 is zero, skip lines 17 through 21 and enter 0 on 1040 line 7. 1040 line 7 your aggregated capital gain or loss. In sum, the 1256 loss will clear out all of the short term gains.

On the other hand, if you had a loss on the 1256 bet, 60% would be treated as long-term capital losses, and those losses would eat away any long-term capital gains you have from other investments before they start to offset any short-term gains. This is why I said in the beginning that it's only a wise move if you have short term gains but little or no long-term gains.

So yeah a lot of this has to do with personal circumstances. I would be less concerned with convergence to the theoretical expectation and more concerned with my bankroll and risk preferences. Let's say I have $1 million dollars of net worth, then betting my $10k of short term gains in a coin toss is not that big of a deal and it is something I would do. On the other hand if I had only $10k of net worth, all of it being my short term gains, I might consider doing a smaller bet, say $1k.

Your tax marginal tax bracket is a big deal too. If you are in a small bracket, then this is a waste of time for you.

But if it's large, then it is worth pursuing. And this is why I mentioned student loans. Student loans are effectively an extra 10% income tax for a lot people because of the way they are structured. They are income based. They are actually a convoluted mess though. People in the news are talking about them as we speak. But anyway, it is applicable for a lot of people, probably in the millions, so that's why I mentioned it. You could be someone who makes an average salary and you're in the 24% tax bracket, but because of the income-based student loan payment, your bracket is more like 34% and all of the sudden it becomes worthwhile for you to pursue this strategy.

This comment kind of reminds me of sunk costs in economics but instead they are like "sunk" profits. Before the bet you already have 6k. You're paying the 4k in taxes no matter what, and you might as well treat is as you've already paid the taxes. So it is the same as taking $6k that's in your bank account tax all paid and then betting it on a coin toss that gets 20% more of your stake if you win, but with the odds still being even.

I did not know it, but apparently student loan interest is currently deductible on top of the standard deduction. TMYK

lol no. Your repayment schedule is income based, but that doesn't make it a tax. You are repaying a loan. It has no affect on your actual taxes.

Student loan interest is deductible, but only for people with low income. So unless you're getting this deduction, it has no effect on your actual taxes. That you are right about.

But then here are a few facts about student loans that I didn't mention that I guess a lot of people do not know about:

*They get forgiven after 20 years, and only 10 years if you work for the government or a non-profit.
*If you ever lose your job and your income goes to zero, your payment goes to zero, but the 20-year clock keeps ticking.
*During the COVID years, nobody was required to make payments, and no interest accrued, but the 20-year clock ticked during those years, regardless of income.
*The income-based monthly payment is capped at what the 10-year standard payment would be.
* Interest is not compounded. They use a simple interest formula.
*To this day, the income used to calculate for everyone's payment is based on pre-COVID numbers, not today's, and they just extended the income recertification date to 2026.

These features make student loans similar to a 10% tax for some people, but certainly not for everybody.

bet it all on Black...