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U.S. Online Gambling Tax: News and Rules

Published on October 25, 2014, 4:32 pm

by Jeff Grant Twitter account Jeff Grant LinkedIn account

Washington state congressman Jim McDermott proposed a bill last week that would tax U.S. online gambling sites at a rate of 12 percent. Four pennies would go to the federal government and eight would go to government and/or tribal agencies in the region where the gaming took place. The bill, called the Internet Gambling Regulation and Tax Enforcement Act of 2013, represents McDermott's third attempt to uniformly quantify online gaming tax via law.

Introduction to the bill H.R. 3491: Internet Gambling Regulation and Tax Enforcement Act of 2013
Introduction to the bill H.R. 3491: Internet Gambling Regulation and Tax Enforcement Act of 2013

At this time, the only states affected by McDermott's bill would be Nevada, New Jersey, and Delaware. Nowhere else in the U.S. is online gambling legal. That is expected to change, however, as the U.S. online gambling landscape continues to evolve.

McDermott, a Democrat, hails from Chicago and has served in a congressional capacity since 1989. He and others are hoping that online gambling revenue dollars claimed by the U.S. government will inject the country's sagging economy with a much-needed adrenaline boost.

A Tax on All Deposits

Washington state congressman Jim McDermott
Washington state congressman Jim McDermott

McDermott's bill would tax all money wagered at online casinos. The disadvantages on the business side of this scenario present themselves rather quickly. When a guest wins, the house loses twice: Once in the form of the bet and once in the form of the four percent tax. When a guest loses, the house keeps the wager but still pays four percent of the patron's input. Either way, the house would be destined to lose some money under McDermott's bill. In many scenarios, the house would no longer maintain its "edge."

Eight Percent: "Optional"

The additional eight percent would be an "optional" take for states and tribes in which the online gambling occurs (read more about tribes and native American casinos here and here). Theoretically, for example, Nevada government could elect to pass on the extra eight percent. They could simply say, "No thank you. You keep the money." Given the depleted economic stores of the states at this time, however, such a refusal is unlikely to occur.

Penalties for Unauthorized Sites and Their Patrons

McDermott's bill would require gamblers, not casinos, to pay the full 12 percent tax in the event that an unauthorized casino site is used. This does not mean that unauthorized casinos would be getting off easy, though; a full 50 percent of all deposits would have to be returned by unauthorized online casinos in the form of tax dollars to the government under McDermott's plan. In short, both unauthorized online gambling sites and their users would be heavily penalized by this bill.

Online Gamblers Would Be Monitored by Government

If this law were passed, there would be no such thing as anonymous online gambling. Personal data such as name, address, and tax identification number would be collected by every online site under McDermott's bill. Online casino operators would be required to submit this data, along with the gross winnings of all bettors, to the government each year. Failure to do so would likely result in more financial penalties.

Misconceptions About Online Gambling Taxation

Online gaming has been illegal in the U.S for so long that most people don't understand the rules about its taxation. As the activity becomes legal in more areas, the following misconceptions will need to be addressed more vigorously:

Misconception #1: Illegal Income Needn't Be Taxed

The federal government requires a percentage of all income, whether the money was obtained legally or not, to be paid in taxes. People often try to get away with skipping payment on these taxes. Sometimes they are successful. If a person with illegal gambling income is audited, however, that extra money is likely to be discovered. Penalties and interest would undoubtedly be assessed. Furthermore, if the IRS wanted to press charges for tax evasion, they would have the right to do so. Read how to gamble avoid troubles with the IRS.

Misconception #2: Gambling Income Tax Needn't Be Paid if No Paperwork is Received

Some casinos provide winners with a W-2G form to report their winnings to the government. If a casino fails to provide this document, however, it doesn't mean the winner gets off tax-free. In the eyes of the U.S. government, it is the responsibility of each citizen to tabulate gambling income and pay taxes accordingly. To avoid penalties and interest, it behooves gamblers to take personal responsibility for the money they earn while gaming.

a 'W-2G' form
a 'W-2G' form about certain gambling winnings

Misconception #3: Money Won at Offshore Gambling Sites Needn't Be Taxed

If the U.S. government conducts an audit and discovers that a large sum of money was transmitted to an American bank account from Europe, Asia, or another territory, they're going to ask questions if appropriate taxes weren't also paid. The U.S. tax code states that income from "whatever source derived" must be taxed. This includes online gambling.

Misconception #4: Casual Online Gamblers Don't Need to Keep Records

The U.S. Tax Code requires that gamblers record all wins and losses on a session-by-session basis. This law applies equally to casual bettors who invest 20 dollars here and there and heavy-hitting bettors who wager thousands at a time. Should a casual gambler be audited, session-by-session gambling data would need to be provided.

Misconception #5: It's Acceptable to Pay Taxes on Net Wins Only

Some people think that if they win $10,000 but then lose $8,000, they must only pay tax on their net profit: $2,000. This is not true. Taxes must be paid on the $10,000 won even if most of the money is lost later. If a bettor were to be audited, penalties could be assessed if taxes were only paid on net profit. Note: It is possible to itemize the $8,000 loss as a deduction in the above scenario.

As 2013 draws to a close, it's important for gamblers to make sure their paperwork is in order in the event of an audit. McDermott's new bill would make record-keeping even more essential, both for online gamblers and online casino operators. Even if the Internet Gambling Regulation and Tax Enforcement Act is not passed, however, online gamblers would be wise to stay abreast of changing laws for their own financial protection.


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