The rapid rise of cryptocurrencies has changed the ways we do things in many fields and online casinos are not exempted. Players now enjoy the thrill of gambling with digital currencies from the corner of their rooms. However, players and operators don’t fully understand the complexities of taxation that come with this new technology.
Every casino player dreams of multiplying their capital whenever they take a chance. The smile on their faces when they hit the jackpot in an online casino is priceless. It is another pure joy when they watch their winnings soar as they are in the form of cryptocurrency. As they watch their earnings in crypto, they have a headache: how will they handle the taxes?
Taxation Basics about Gambling
You have to make money before the government will tax it. So, the money you earn from wagers or a game of chances with uncertain outcomes is known as Gambling Income. This money is taxable. Whether the winnings are from lotteries, casinos, raffles, horse and dog races, betting pools, or sweepstakes, the government wants a slice of your money. Even non-cash prizes such as cars are caught in the crossfire.
Some gambling establishments withhold a certain percentage (depending on the regulation) of gains for federal and state taxes. They will let the winner know that they have already deducted the taxable chunk of the money and it will be sent to the government. Shared gambling income that is usually divided between two or more players is also taxable.
How are crypto gambling winnings taxed?
Currently, there is no global standard on how crypto casinos winning will be taxed. Most taxation on crypto gambling income depends on the regulations of your location.
In the US, the IRS treats tax for crypto gambling income via two elements: gambling activity and cryptocurrency transactions. When you gamble with Bitcoin, the government treats this activity like a stock sale. The taxes on cryptocurrency transactions come when you bet your crypto, win, and sell your crypto winnings for fiat currency (USD). The IRS permits you to deduct gambling losses, but only up to the amount of your reported gambling winnings.
In Australia, Canada, and the United Kingdom, gambling winnings are tax-free. So, your crypto gambling income is tax-free. However, when you spend crypto to play online games or place wagers, you are subjected to capital gains tax. The spending of crypto to play games is the same as purchasing goods or services.
Capital gains tax is imposed on the difference between the value of an asset when you acquired it and its value at the time of sale. When the value hits a certain amount, you will pay a tax percentage according to the asset’s cost basis. Most times, the cost basis of crypto gambling winnings is zero thus making your entire winnings subject to capital gains tax.
In Thailand, the government exempts cryptocurrency traders from the value-added tax (VAT) on earnings on trading cryptocurrencies and digital tokens.
In the Philippines, gambling income via traditional and crypto casinos is taxable.
Tax compliance as players
As a non-professional gambler in the US, you should include gambling income on Form 1040 Schedule 1 under the ‘Gambling income’ section.
When reporting your losses, use Form 1040 Schedule A as an itemized deduction. Your gambling losses can only reduce your tax liability if your total itemized deductions—such as charitable donations, mortgage interest, and local taxes—exceed the standard deduction. Additionally, you must report capital gains from cryptocurrencies and other assets on Form 8949.
For professional gamblers, all relevant income, losses, and expenses related to your gambling activities will go into Form 1040 Schedule C.
Tax compliance for crypto casinos
There are two factors to consider for crypto casinos. The first element is the legality of gambling. Online gambling is illegal in most Asian countries even China. In Europe, most countries allow online gambling with strict regulations. In the US, states have different opinions on crypto gambling. This other level of adoption and regulation has made it difficult for most crypto casinos to comply with the legal framework surrounding their business.
The second element is the legality of crypto assets themselves. Cryptocurrencies aren’t legal in all jurisdictions. This has made all cryptocurrency features such as crypto casinos to be illegal in such regions.
In the US, some regulated casinos use a W-2G form to withhold 24% of gains for federal income tax. Casinos do this when a player passes $5,000 from lotteries, sweepstakes, wagering pools, and other wagers. This is also applicable to winnings that exceed 300 times the amount wagered.
Taxation Challenges
Government authorities are sceptical about how to tax cryptocurrency majorly because of its pseudonymous nature. Some crypto casinos use cryptocurrency and traditional fiat currencies like US Dollars and Pounds. Authorities are wary of the anonymity and cross-border transactions in crypto casinos, making identification and proper taxation difficult.
Crypto casinos process over 1 million transactions daily via different public addresses. Some gamblers use non-custodial wallets to interact with crypto casinos that contain public addresses that aren’t directly linked to real-world identities – most users access the same casino with multiple addresses. This is causing havoc for the authorities as they don’t know the individual or group using the address.
Criminals have increasingly turned to cryptocurrencies to hide their income and launder illicit funds, posing significant challenges for authorities in tracking and preventing illegal activities.
Identification issues can be easily tackled if people transact on crypto casinos through centralized exchanges since most of them implement standard Know Your Customer (KYC) rules.
Some trusted online casinos are working on a legal solution that can help this sector to be easier for taxable gamblers. They are deploying KYC regulations to make the gambling space safer for players.
Conclusion
Crypto casino taxation varies depending on the jurisdiction. Enforcing these regulations is also difficult as people are playing from different countries. It is better to research the gambling laws of your country.