The Federal Excise Tax on Wagering

The **Federal Excise Tax on Wagering** (IRC § 4401) is a federal levy on sports betting handle that originated in the **Revenue Act of 1951**. Initially set at a punitive **10% of total handle**, the tax was not designed to raise revenue but to suppress organized crime by forcing bookmakers to register with the IRS, thereby exposing them to prosecution. **Key Historical Developments:** * **The Kefauver Era (1951):** The tax was implemented to dismantle the Mafia's control over the "Wire Service" and illegal booking parlors. * **Marchetti v. United States (1968):** The Supreme Court ruled that the registration requirement violated the **Fifth Amendment** (protection against self-incrimination), as gambling was illegal in most states. * **The Nevada Adjustment (1974/1982):** To allow legal books to survive, the rate was lowered to **0.25%** for state-authorized wagers, while remaining at **2%** for illegal wagers. **Current Impact:** Today, the tax remains a source of friction. Because it is levied on **Handle** (total volume) rather than **Revenue** (profit), the 0.25% rate effectively functions as a **~5% tax on Gross Gaming Revenue** (assuming a 5% hold). This creates a structural disadvantage for legal US operators compared to offshore books and renders high-volume, low-margin algorithmic trading strategies unviable in the regulated market.