The U.S. Internal Revenue Service and some states tax gambling income. Because of online gambling’s ambiguous legal status, you may be apprehensive about reporting your winnings. I strongly suggest that you consult legal and/or tax counsel before you report your online gambling winnings.
The position of the IRS is at best amusing if not darn right frightening. For example, IRS Publication 525 reads: “If you receive a bribe, include it in your income.”
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In the 1950s the IRS tried giving the tax returns of citizens reporting illegal income to federal authorities for prosecution. The Supreme Court ruled against this practice stating that forcing people to report criminal activity to the government violated the fifth amendment right against self-incrimination. The IRS next tried turning over information received on tax returns to individual state authorities, but the high court ruled that this maneuver was unconstitutional as well. Today the IRS does not and cannot legally turn over tax returns to law enforcement. But please be forewarned: You are dealing with lawyers and complex laws here and their intent is not to have your best interests at heart, so tread lightly and arm yourself with adequate legal consul before venturing forth.
In light of the passage of the UIGEA, your accountant or tax lawyer may recommend that you keep your online winnings to yourself under the Fifth Amendment. Here is the current IRS position:
You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings.
You cannot subtract your losses from your winnings to arrive at your yearly gambling figure and, according to the IRS, you must add all of your winnings from casinos online and offline. Income Tax Regulations Section 6001 requires that you document your gaming income, losses and deductions.
What you have to do is list your total wins from each gambling session and report that number on line 21 of your 1040 form under Other Income. Then, you can deduct the amounts of losing sessions only as an Itemized Deduction on Schedule A. If you donít itemize your deductions, then you are screwed (my language, not the official terminology).
While law enforcement has shown no interest in prosecuting individuals for playing games like blackjack online, the IRS is always interesting in chasing down income tax evaders.
Unlike traditional games which will issue you a W-9 Form for Gambling Winnings if your winnings exceed a certain amount, online casinos do not report anything to the IRS.
You are strictly on the honor system with online gambling winnings.
With the passage of the UIGEA, we feel that the loss of revenue from U.S. online players
not reporting online winning will probably skyrocket.
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