Over the past decade, various forms of online gambling have been growing in popularity. Sources estimate that in 2013, the online gambling industry earned 30 billion dollars worldwide. Although federal law makes most internet gambling illegal across state lines, and although it’s illegal in many states as well—including GPL’s home state of Washington–it is a rapidly growing business in the U.S. also. Whether it’s legal or not, thousands of Americans are enjoying online poker and other games, and some are even winning money.
But what about those winnings?
Most gamblers who cash in their chips at physical casinos know that their winnings are taxable, unless they have documented losses that cancel them out for tax purposes. But what about the winnings from the virtual casinos and online card rooms? Is the money earned from online gambling taxable or not? And, if it is, when is it taxable?
Online Gambling and the IRS
While US lawmakers struggle to find ways to regulate online gambling, the IRS is very clear about the winnings earned from it. The IRS says those winnings are taxable. Period.
It doesn’t matter if the internet gambling you engage in is illegal under U.S. law. The IRS doesn’t care where your earnings come from. The Internal Revenue Service only cares that you have them, and they want the taxes that are due.
United States citizens and residents are taxed on all income worldwide, and that includes online gambling winnings. Some online casino operators may imply that your winnings are not taxable to the U.S. so long as they remain on deposit in their offshore, non-US jurisdiction accounts. The truth is that the winnings are taxable as soon as they are credited to the taxpayer’s online casino account (which is what the IRS calls “constructive receipt”).
Simply having the overseas accounts can complicate your life. The IRS considers online gambling accounts analogous to bank accounts, and it’s easy to understand why. Online gambling accounts operate the same way as bank accounts, with the account holder being able to deposit, withdrawal, and transfer funds at will. Therefore, online gambling accounts may be subject to FBAR reporting if they, alone or combined with any other foreign accounts, at any time during a year have a balance of at least $10,000. Failure to report such accounts can result in huge fines, something a few professional gamblers have discovered in recent years.
The bottom line is that you should treat your online gambling and losses as you treat those from brick-and-mortar gaming establishments: You report your winnings on Line 21 of your Form 1040, and you deduct your losses on your Schedule A.