As the saga of Neteller, the Isle of Man based financial intermediary, drags on, I’ve gotten many questions regarding the money that’s tied up. For those who are unaware, some of the Neteller money was seized by the US government as it was moving over the wires between Neteller’s banks and customers’ banks, and some is sitting in customer accounts at Neteller. All of it, though, remains out-of-reach of American customers of Neteller. So the question is, do customers of Neteller have to pay tax on gambling proceeds won in 2006 that are stuck at Neteller?
Yes.
When an American must pay tax on income is governed by the doctrine of “constructive receipt.” Suppose you gamble on an online poker site, and you win $1000. However, right when you win that money the poker site goes out of business, and you never collect a penny of the $1000. You’ve never had access to the money—you never were able to use it. You didn’t have constructive receipt of the money.
Now suppose you win $1000 on December 31, 2006, and the money is immediately put in your account. On January 16, 2007, you withdrew the money into Neteller. You immediately requested Neteller to transfer the money into your American bank account. On January 17th that money was either seized or is stuck at Neteller.
That individual has $1000 of gambling income in 2006. The gambler could have withdrew the money on January 1, 2007 or he could have gambled with it on January 1. He had constructive receipt of the money. That he was unlucky in that the money was seized or stuck at Neteller is unfortunate. He or she must pay tax on the $1000.
So what should an individual do who has significant funds stuck at Neteller—so significant that he may not be able to pay what he owes in taxes? Talk to a professional tax advisor now; don’t wait until April 10th. Most tax preparers are very busy between now and April 17th. We’re not (in general) going to be able to give you specific advice if you wait until the very last minute.
Realize that you owe the money. Find out what your total tax is (including your state income tax, if applicable). Determine what you can afford to pay. Options include going on extension and installment plans. But not filing a tax return (or at least an extension) by April 17th will subject you to the failure to file penalty!
The phrase caveat emptor (let the buyer beware) applies to many offshore entities. The IRS considers online gambling to be just another tax avoidance scheme. They’re not going to be very sympathetic to taxpayers using a financial intermediary that serviced offshore online gambling firms.
Tags: Neteller