Beyond the usual catchphrase — only death and taxes are certain, US crypto gamblers don’t have much to hold on to when it comes to taxing their crypto winnings and losses.
The IRS does not explicitly mention crypto gambling in its rules about taxing gambling winnings, but the rule of thumb is that such winnings are taxable, regardless of the currency.
This article delves into the intricacies of tax rules for cryptocurrency gambling, highlighting the disconnect between modern digital betting practices and outdated tax laws. We aim to clarify how these rules apply to crypto gamblers, providing essential insights for compliant and efficient tax reporting.
How to Manage Your Crypto Gambling Winnings
The first thing to managing your crypto gambling winnings is understanding how the IRS views them and the currency you used to get them. There are two sides to this coin, no matter if it’s Bitcoin or Dogecoin.
The two critical elements are the cryptocurrency transactions and the gambling activity itself. Each of these is treated differently for tax purposes, making your duties even more difficult to grasp. That’s where we come into play.
When you use Bitcoin or another cryptocurrency to fund your gambling account, think of it as engaging in a stock sale. Transaction number one checked.
The IRS considers this a realization of capital gains or losses, depending on how long you’ve held the cryptocurrency. Suppose you bought Bitcoin worth $500, and now it’s worth $800. You decide to use it for gambling. The IRS sees this as you ”selling or converting” your Bitcoin for $800. So, you have to report this as a gain (profit) of $300 on your taxes.
Now, let’s talk about the actual gambling part.
If you win money at the crypto casino, that’s considered income by the IRS.
Still, they also let you report your losses to balance things out, as long as you don’t claim more losses than wins. They use the idea of “sessions” to group your wins and losses together. Think of a session like a day or a trip to the casino — you add up what you win and lose each time.
Accurately identify your sessions based on your betting volume. The longer your session, ie. annual session compared to a week long session, the more advantageous the tax benefit.
Michael Feuerstein
For example, if you win $1,000 in one session and lose $500 in another, you report $1,000 as income. The losses would be reported as an itemized deductions on the Schedule A. You can deduct the $500 loss, but only up to the amount of your winnings.
Oops Moments: Mistakes Gamblers Make with Taxes
Gamblers often stumble with taxes, especially in the realm of crypto gambling. A major pitfall is not reporting all gambling income. The IRS demands every penny won, whether from a local casino or an offshore online platform, must be declared.
Even though you are wagering on off-shore sports books, the income generated has to be reported on your individual tax return. The IRS states you have to report your worldwide income. The IRS will not receive any documentation from the offshore books, thus it is on the taxpayer/gambler to self report their gambling income
Michael Feuerstein
Another common error is poor record-keeping. Claiming deductions becomes a challenge without detailed documentation of wins and losses, often leading to unnecessarily higher taxes.
Additionally, a crucial mistake is mixing crypto transactions with gambling wins for tax purposes. They should be reported separately to avoid under-reporting or over-reporting of income.
Remember the quote from the start of this article — only death and taxes are certain. And we can’t be sure about death.
Tax Perks and State-Specific Considerations
It’s essential to keep in mind that each state has its own rules on how to tax your winnings. This varying landscape means the amount you get to pocket and how far the IRS and state agencies reach into it can differ significantly depending on where you’re playing.
There are two tax rates you need to be aware of when gambling: the withholding and ordinary income rates:
Federal Withholding Tax Rate
The federal withholding tax rate is 24% and is applicable to winnings of $5,000 or more from sweepstakes, wagering pools, certain parimutuel pools, jai alai, lotteries or any other type of wagering where the winnings are 300 times the amount wagered.
Plus, there’s the state withholding tax on gambling.
Personal Income Tax
The other and far more important rate for you to remember is the personal income tax rate, and almost all gambling winnings are subject to this tax in all states that allow gambling.
For example:
- In Indiana, the gross income tax rate for 2024 will be 3.05%.
- The situation in New York is more complicated, given that the state income tax rates range from 4% to 10.9% depending on your residency status, taxable income, and filing status.
- On your New Jersey Gross Income Tax return, for example, you need to report any winnings that accumulate to over $10,000 in value. The income tax ranges between 1.4%-10.75%.
- Pennsylvania levies a flat 3.07% tax on gambling income and mandates that all winners report the total winnings from line 6 of Schedule T on their Pennsylvania Income Tax Return PA-40. The Keystone State boasts the lowest of all flat income tax rates across the country.
- In Maryland, there’s a progressive personal income tax rate. After the federal withholding tax and a 9.25% state withholding tax on gambling winnings, players still have to pay a personal tax on gambling that begins at 2% on the first $1,000 and increases up to a maximum of 5.75% on incomes exceeding $250,000.
Playing It Safe: How to Stay Tax-Compliant
Staying tax-compliant as a crypto gambler is more challenging than it might look.
First, it’s all about keeping good records.
Document every bet, win, loss, and even the details of the gambling platforms you use. This not only makes tax filing easier but also covers you in case IRS agents come knocking.
Operators help out by issuing a Form W-2G. It’s where you report gambling winnings and any federal income tax withheld on those winnings, reporting your annual winnings is a matter of adding up the numbers from the form.
Here are the instructions regarding winnings that go on Form W-2G:
- $1,200 or more in gambling winnings generated from slots or bingo
- $1,500 or more in winnings coming from keno, minus the wager
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments)
- The payout that is at least 300 times the amount of the wager
- Any other gambling winnings are subject to federal income tax withholding.
Another critical aspect is understanding and reporting your gambling sessions correctly. The way you define these sessions can affect your tax calculations. Remember, both your crypto transactions and gambling income need to be accurately reported on specific forms in your tax return.
Identify the transactions that were specifically used to fund off-shore casinos or sportsbooks. Determine the gain/loss on the transactions. Many times crypto exchanges such as Coinbase, report the wrong realized capital gain/loss.
Michael Feuerstein
Crypto transactions should be reported on Schedule D of your individual tax return, form 1040. On the other hand, gambling income is supposed to be reported on Schedule 1, Line 8 of Form 1040, while losses are reported as itemized deductions on Schedule A.
Future Watch: Any Tax Changes Coming?
Crypto tax rules are not set in stone.
Lawmakers are pushing for a revision of the proposed digital assets taxation regime, aiming to refine the definition of digital asset “Brokers” and the tax reporting requirements.
This ongoing effort suggests that further regulatory changes may be on the horizon, potentially affecting how crypto gambling winnings are reported and taxed, but that still remains to be seen.
Final Thoughts and Additional Insights
Figuring out the IRS’s treatment of cryptocurrency transactions and gambling wins as separate taxable entities is essential. Crypto gamblers must meticulously document their activities and report winnings and losses accurately, considering session-based calculations.
State-specific tax regulations vary significantly, with states like New York imposing higher taxes compared to more lenient states like Pennsylvania.
Upcoming legislative changes may further impact crypto gambling tax rules, emphasizing the need for gamblers to stay informed and compliant to navigate this evolving crypto landscape successfully.
This information is provided for informational purposes only and should not be considered as legal advice; you should conduct your own research and consult with a qualified legal professional before making any decisions.
