My colleagues and I have been focusing on a couple of important issues recently. One is the impact that the One Big Beautiful Bill Act (OBBBA) is having on our economic growth. The other is the scrutiny some of the dodgier tax schemes have been getting. This week’s chart brings both to mind.
The Saratoga racing season ended a month ago, but the results of August’s yearling sales are worth a look. They’re about as clean a tax-policy experiment as you’ll find.
The OBBBA made 100% bonus depreciation permanent for property acquired after January 19, 2025. Racehorses count. Buy a $1 million yearling, put it in training, and you can deduct the whole price in year one.
Buyers noticed. Keeneland’s September sale in Lexington, KY grossed $510.5 million through the ring in 2025, up 24% from 2024. (The chart’s 2025 bar, $531.5 million, includes post-sale deals.) This September added another 5%, to a record $536.7 million. Here in Saratoga, the Fasig-Tipton sale grossed $118.2 million in August, up 17%.
The best evidence is what didn’t move. In 2025, Ontario’s yearling sale, where buyers get no U.S. write-off, saw its median fall 21%. And that year the gains piled up at the top: Keeneland’s median rose 14% while the New York-bred median rose 3%.
Now for the fine print. Bonus depreciation moves the deduction forward in time; the total stays the same. Sell the horse (or lose it in a claiming race) and the sale price, up to what you deducted, gets taxed as ordinary income. Losses only offset your salary or portfolio gains if you materially participate; otherwise they sit in the passive bucket. And without a profit in 2 of 7 years, you lose the presumption that your “business” is a business at all.
The states don’t play along either. Kentucky and New York both decouple from bonus depreciation for state income tax. Their help comes elsewhere.
Kentucky exempts breeding stock, and horses under 2 sold to nonresidents, from sales tax. Its historical horse racing machines pay an effective tax of about 7.3%, against 33% to 55% for slots elsewhere, and that money feeds purses.
New York has exempted racehorse purchases from sales tax since 1994. Its New York-bred program runs about 800 restricted races a year and pays breeders up to 40% of a New York-sired winner’s purse, funded by betting handle and video lottery revenue. I’d bet those awards are a big reason the New York-bred sale set a record median of $100,000 this year.
So can a racehorse make money? Rarely. An Australian study of about 3,000 yearlings sold in 2003 found that only 6.3% of the most expensive ones earned back their purchase price, before a dime of training bills. On the seller side, University of Kentucky researchers found that fewer than half of 74,789 U.S. yearling sales from 2001 to 2018 turned a profit for the breeder.
Here’s my take. A tax break this well known gets baked into the price, so much of it flows to the breeders selling the horses. And Uncle Sam covers at most 37% of your loss; you eat the rest.
My rule for any investment: merit first, tax second. If the deal only works after taxes, it’s a hobby. Hobbies are fine, but it’s important to budget for yours like one.
There’s an old joke on the backstretch: the easiest way to make a small fortune in horse racing is to start with a large one.
Sources: Genuine Impact, “The Weirdest Bull Market You Haven’t Heard About: Racehorses”; Keeneland, 2026 September Sale results; Keeneland, 2025 September Sale results; Fasig-Tipton, 2026 Saratoga Sale statistics; NYTB, 2026 New York-bred sale results; Paulick Report, “100 Percent Bonus Depreciation Drives Demand for Quality at Sales”; NJCPA, “No Horsing Around” (OBBBA, placed-in-service and hobby-loss rules); Dean Dorton, depreciation for Thoroughbred owners; State bonus depreciation conformity table (NY and KY); KRS 139.531, Kentucky sales tax and the horse industry; NY Tax Dept. TSB-M-95(6)S, racehorse sales tax exemption; OwnerView, New York incentive programs; Paulick Report, Australian yearling ROI study (2011); Bryant and Stowe, “Estimated Profitability of Thoroughbred Yearlings Sold in Auctions in the United States, 2001-2018,” Sustainability (2020).