Online Gambling Becomes Tax Issue

In the United States, gambling on the internet is considered to be illegal, according to most readings of the somewhat ambiguous laws. Since millions of Americans gamble online, this issue raises significant debate over whether their profits can be taxed by the IRS. 

Generally, legal experts say that internet gambling is illegal because of the Wire Act. The Wire Act, which was introduced in 1961, was part of a broader attempt to attack organized crime operations. The Wire Act banned sports betting, at that time considered to be largely the domain of the mob, over phone lines. Of course, there were no personal household computers in the 1960s, so the Wire Act does not address gambling on the internet, making the legal decisions somewhat murky.

Since the Wire Act, several attempts, none terribly successful, have been made to clarify the legal standing of gambling on the internet. Senator Jon Kyle, a Democrat from Arizona, put forth the Internet Gambling Prohibition Act in 1995. This bill sought to prohibit U.S. financial institutions from handling transactions related to online gambling. However, it did not pass, and similar measures since have also failed to gain sufficient support from Congress. 

Still, according to the U.S. Justice Department, gambling on the internet is illegal. Since millions of Americans play anyway, this is a big problem when it comes to tax time. 

The IRS requires that all gambling winnings, including those netted from gambling on the internet, be reported. However, online casino users may not want to report their earnings to any arm of the federal government, for fear of future prosecution. They are, then, caught up in something of a Catch-22, since the IRS may prosecute them if they do not report their profits earned from online gambling. 

U.S. based companies that operate gambling on the internet are requires, says the IRS, to report casino revenues and to send players a W2-G tax form so that they can report their own gambling profits. 

Online gambling companies that operate from outside of the United States, in places such as Gibraltar and Antigua, have it somewhat easier. While these companies send the appropriate tax forms to players of other nations, they do not send tax forms to U.S. players. Instead, these companies tell players that it is their responsibility to pay all applicable federal, state and local taxes. 

"In the rest of the world, they are looking at trying to regulate and tax [online gambling],'' said Nelson Rose, a professor at Whittier Law School in Costa Mesa, California who is considered to be the United State’s foremost expert on gaming law. He pointed out that Americans win billions of dollars each year from online gambling, a significant amount of which could in theory find its way into state coffers.  


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