There are several differences between the nature of live and online gambling. One is that for the past several years, online gambling activity has been operated by companies located outside of the United States. A second is that these offshore web sites almost never immediately transfer winnings into the customer’s bank account. So, does one treat gambling winnings from online play differently from winnings from live play for tax purposes?
In general, the answer is no.
Takeaway #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.
“But the income is earned overseas,” you say. This statement may or may not be true. Either way, it doesn’t matter. U.S. residents pay tax on all income, from whatever source derived. Whether the gambling winnings are from a home game in your basement, a Las Vegas casino, or an online gambling website, they are all equally taxable.
Takeaway #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. The IRS believes that some offshore online casinos may suggest that its U.S. players are not subject to U.S. tax laws. Clearly, such operators are wrong.
The next issue to examine is the timing of reporting gambling winnings. Time after time I hear the following statement: “I don’t have to report my online gambling winnings until they are deposited into my bank account.”
Takeaway #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. (Note: How Black Friday changes this analysis, if at all, will be covered next week.)
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.
Let’s conclude today’s discussion by addressing some possible banking issues associated with offshore online gambling accounts.
Takeaway #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.
Significant penalties may apply for failure to timely file the FBAR, if required. A non-willful failure to file, for example, is $10,000 per violation.
Some U.S. residents have decided to move outside the country in order to play online poker full-time. It’s very possible such individuals have opened a foreign bank account or two. Yes, foreign bank accounts are subject to FBAR reporting.
Are offshore online casino accounts subject to FBAR reporting? Due to a recent change in the regulations of the laws governing FBAR reporting requirements, it appears not.
I must note that the IRS has not commented on this issue, so we can’t be entirely sure what the government’s position is. Prior regulations considered an account with a “pooled fund” as a reportable account. The current regulations narrowed the pooled fund definition only to those which issue shares available to the general public, or that have a regular net asset value determination. As far as I know, companies handling casino customer deposits do not issue public shares for these funds.
Speaking of reporting requirements, the IRS has a new (and additional) foreign asset reporting requirement, Form 8938. Unlike the FBAR, this form is attached to a taxpayer’s tax return.
What falls under Form 8938 reporting? 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.
Next week, we examine several possible tax implications arising due to Black Friday.
Author’s note: I must remind all readers that it is impossible to offer comprehensive tax advice on the internet. Information I write on this blog is not legal advice, and is not intended to address anyone’s particular tax situation. Should you seek such advice, consult with a tax professional to discuss your facts and circumstances.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, I inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.