NOTI wrote: <<You might be tempted to play something that is a likely loss in the short
term if you're well ahead for the current tax year, but this is dangerous
because you could end up paying taxes on noise or variance, which is
negative EV.>>
Cogno asked: "I'm not getting this. Can you give an example?"
It's only an issue if you go into the red for a tax year and that loss was only due to variance, which presumably would be the cause if you had an edge. The implication is that next tax year you might get luckier, again due to variance, but end up having to pay taxes on that luck. Variance is typically symmetrical or close to it, so if variance causes a loss one tax year but a gain the next, you are paying taxes on the variance, which is an additional negative EV. You want to pay taxes on EV, not on the variance, variance is a false gain, but can be taxable.
Example 1: your gamble for a tax year amounts to an even gamble but with a deviation of $200. So, for example, you could lose $200 one year and win $200 the next, but you would pay taxes on a $200 false gain, not your true gain of 0. You thought you had an even gamble but you don't, instead you are paying taxes on an illusionary gain.
Example 2: your gamble for a tax year amounts to an edge of +$100 but with a deviation of $200. So, for example, you could lose $100 one year and win $300 the next, but you would pay taxes on a $300 false gain, not your true gain of $200. You are paying taxes on your edge and your variance.
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Posted by: nightoftheiguana2000@yahoo.com
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