Taxable Talk

I recently read a blog where a very successful online poker player wrote,

There really aren’t IRS regulations on online gambling. It exists in a grey area. As fun160 pointed out “In the financial markets money earned off-shore is not taxable until it is repatriated. A strong case can be made that the same is true for off-shore gambling.”

I have talked to CPAs about whether the taxes should be paid upon earning the money or upon cashing out and the answer I was given is that a strong argument could be made for either. In the end it would be up to a court.

Well, some of the statements this player made are true: there aren’t any IRS regulations on online gambling and I’m sure he spoke with a CPA. As to the rest…

1. The recognition of income is a long-decided principle in the United States based on the concept of Constructive Receipt of Income. As the IRS’s Publication 525 states, “You are generally taxed on income that is available to you, regardless of whether or not it is in your posession.” Let’s say you win $500 at the poker club, but you decide to leave it in the form of chips and put it in your safety deposit box. It’s still income.

2. “But I won the money online, and it’s in [Gibraltar, the Isle of Man, Costa Rica, etc.], and not in my hands….” So what! When there are no specific rules governing the online world, the rules of the real world govern. The rules for gambling income are quite clear. You must keep a log of your sessions, you must report wins and losses by session, with your wins going on Line 21 (Other Income) and losses as an itemizable deduction not subject to the 2% limitation on AGI. Repatriation of income as far as gambling is totally irrelevant. Offshore casinos are considered by the IRS as just another taxpayer avoidance scheme (see here).

3. Repatriation of investment income isn’t relevant, either. Let’s say you have an investment in a hypothetical British company, BritCo Ltd. They declare a dividend of £2 per share today and you own 10 shares. You will owe the dollar equivalent of tax based on £20 on this year’s tax return. You will get a tax credit for any British taxes imposed on your investment, and you may be able to deduct investment expenses on your investment.

4. “In the end it would be up to a court.” Well, anyone can bring a case in Tax Court. Since there has yet to be a case in Tax Court on online gambling, it’s unlikely you’ll end up paying a frivolous penalty. But you’re going to lose. There have been many Tax Court cases dealing with the issue of constructive receipt. The opinion in a recent case, Millard v. Commissioner (TC Memo 2005-192) notes, “Consequently, a cash method taxpayer constructively receives income as of the date that a check is received absent a substantial limitation. Furstenberg v. Commissioner, 83 T.C. 755, 791 n.28 (1984); Kahler v. Commissioner, 18 T.C. 31, 34-35 (1952); Roberts v. Commissioner, T.C. Memo. 2002-281.” Now, I find it hard to believe that the Tax Court would rule that money put in a players’ online casino account wasn’t constructively received.

The tax rules for online gambling are quite clear—the rules are the exact same as in the brick and mortar world of casinos. This may not be what the typical online gambler wants to hear, but it’s the bitter truth.

In Part 3 (coming next week), I’ll examine how to keep records, what a session really is, and whether or not you are (or want to be) a professional gambler.

This entry was posted on Wednesday, August 17th, 2005 at 10:51 pm and is filed under Gambling. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.