A game at cards not unlike loo, but with this difference—the winner of one trick has to put in a double stake, the winner of two tricks a triple stake, and so on. Thus: if six persons are playing, and the general stake is ls., and A gains three tricks, he gains 6s., and has to “hand i' the cap” or pool 3s. for the next deal. Suppose A gains two tricks and B one, then A gains 4s. and B 2s., and A has to stake 3s. and B 2s. for the next deal.
“To the `Mitre Tavern' in Wood Street, a house of the greatest note in London. Here some of us fell to handicap, a sport I never knew before, which was very good.” —Pepys: His Diary, Sept. 18th, 1680.
Handicap, in racing, is the adjudging of various weights to horses differing in age, power, or speed, in order to place them all, as far as possible, on an equality. If two unequal players challenge each other at chess, the superior gives up a piece, and this is his handicap. So called from the ancient game referred to by Pepys. (See Sweepstakes, Plate-Race, etc.)
The Winner's Handicap. The winning horses of previous races being pitted together in a race royal are first handicapped according to their respective merits: the horse that has won three races has to carry a greater weight than the horse that has won only two, and this latter more than its competitor who is winner of a single race only.
Source: Dictionary of Phrase and Fable, E. Cobham Brewer, 1894