Question

Describe the current issues relating to taxing winnings from online gambling.

Answer 1

Current Issues relating to taxing winnings from online gambling

1. All Online gambling winnings of U.S. residents are taxable under the Internal Revenue Code:

The Internal Revenue Code does not differentiate between gambling winnings from brick and mortar casinos and from online play. All gambling winnings are taxable.

2. Illegal income is taxable income:

The legality of offshore online gambling under federal and state laws is cloudy. (Exception: It is a felony under Washington state law to engage in internet gambling.) For tax purposes, the legality is insignificant: Whether legal or illegal, gambling winnings from online gambling play is taxable.

3. In general, online gambling winnings are taxable when credited to the taxpayer’s online casino account:

This may be the most misunderstood concept with respect to the taxation of gambling. The doctrine of constructive receipt sometimes requires cash method taxpayers to include an item in income even if no cash, services, or property are actually received in hand during that year. When are some of those times? A taxpayer has constructive receipt of income in the taxable year during which it is:

• credited to the taxpayer’s account;
• set apart for the taxpayer; or
• otherwise made available such that the taxpayer may draw upon it during the taxable year if notice of intention to withdraw had been given.

Applied to online gambling winnings, there is constructive receipt when the winnings are credited to the taxpayer’s online gambling account. For tax purposes, it doesn’t matter when the taxpayer actually withdraws the funds from the online casino account.

From a recordkeeping standpoint, actual withdrawal and deposit amounts on online gambling sites in most cases do not mirror actual winnings or losses. Winnings and losses must be kept track by session, as discussed in a prior post.

4. Online gambling accounts with offshore gambling sites are likely not foreign financial accounts subject to FBAR reporting or specified financial assets subject to Form 8938 reporting:

You may have heard about the “FBAR.” It’s a Treasury Department form. You can view it here. The primary purpose of the FBAR is to discourage taxpayers from hiding income overseas. If the total maximum balances of all foreign financial accounts of a U.S. person during the tax year exceed $10,000, then that person must file the FBAR by June 30 of the following tax year.

Section 6038D of the Internal Revenue Code says that a “specified person” holding an interest in a “specified foreign financial asset” during the tax year must attach to his tax return certain information for each such asset if the total value of all such assets exceeds $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

The Form 8938 Instructions discuss who is considered a “specified person” and what items are considered “specified foreign financial assets.” There are several caveats and exceptions. Make no mistake about it: These reporting rules are complicated. In short, I can say foreign bank accounts are covered, but it appears that offshore online gambling accounts are not.