For online gamblers, yesterday was the day that banking regulations relating to the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 went into effect. The legislation itself passed in 2006 (it was attached to the Safe Ports Act). Kay Bell at her excellent blog, Don’t Mess With Taxes, stated, “Attention online gamblers. When you go to ante up today, your bet is likely to be refused.”
Not yet, anyway.
What changed yesterday is that banks are now required to have policies to prevent funds from flowing to purveyors of “unlawful internet gambling.” The law itself did not change what is unlawful internet gambling. Indeed, the UIGEA defines unlawful internet gambling as gambling that’s unlawful according to current state or federal laws. One of the complaints from financial institutions is that the law is vague as to what is or isn’t illegal.
The US Department of Justice considers all internet gambling to be unlawful. However, the courts haven’t agreed. In the only court case on point, the DOJ lost in Re: MasterCard that the Wire Act applies to non-sports betting. (Sports betting is clearly illegal under the Wire Act.) That doesn’t mean that a different US Circuit Court of Appeals won’t rule differently, or that the DOJ won’t attempt to apply some other law.
In any case, the sites offering sports betting are still offering those clearly illegal bets to Americans. For example, you can go to Bodog and make sports bets…and that’s definitely unlawful internet gambling.
Online poker operates in a gray area. Poker is a game of skill (in my opinion), though courts haven’t always agreed. That said, there’s a preponderance of evidence showing this to be the case. So whether or not poker is unlawful internet gambling today is debatable. (It is illegal in Washington state, though, where all online gambling is a Class C felony…the same as rape. The logic of that escapes me, but you’d have to ask Evergreen State politicians what they were thinking when they decided that.)
From a tax standpoint, though, nothing has changed. Illegal income is just as taxable as legal income. All gambling income is taxable, period. If you make money playing online poker you need to send some of that to the IRS and your state tax agency.
There is legislation circulating in Congress to legalize online gambling. The chance of passage this year is minimal as there is still significant opposition. While I do expect eventual legalization and regulation of online gambling, I suspect we are still a few years away from this happening. Until then, do remember to pay your taxes no matter if you operate in the gray or red areas of the law.
