Everyone who invests is gambling a little. Just like a poker player placing bets on good hands, investors assume risk by buying assets they believe are valuable. However, more and more of us are using cryptocurrency to bet on sports, events, and casino games online.

Whether on a weekend in Vegas or watching a football game with our buddies, most of us have won or lost a little money gambling.  But did you know that you must report gambling wins and losses to the Internal Revenue Service? With cryptocurrency-based gambling quickly increasing in popularity, Bitcoin users must be aware of the tax liability imposed on their winnings.

The professionals at Happy Tax understand the details of how cryptocurrencies are taxed. The Certified Public Accountants (“CPAs”) providing tax advice and planning to cryptocurrency users have the skills and experience you can rely on when the tax man comes.

Cryptocurrency Gambling is Moving into the Mainstream

Investors who bought Bitcoin earlier this year are winning big. However, many people in the gaming community have already used cryptocurrencies for years. Dozens of the world’s most active Bitcoin wallets belong to cryptocurrency gambling platforms.  In fact, some experts estimate that as much as 60% of all Bitcoin transactions – about 337 transactions per second – are gambling-related. An Irish company has even launched a Bitcoin Lottery that’s seriously competing with the Powerball and Mega Millions.

There are several reasons why gambling sites give users the option to play using digital currency. First, transactions using cryptocurrencies are very fast – in some cases, instant – and can be much more convenient than waiting days for a bank wire. Second, all transactions are publicly available on the blockchain, making all payments clear and transparent. Third, cryptocurrency payment processing fees are very low, and in some cases virtual transactions are virtually free.

Online gaming sites value cryptocurrencies for their fluidity and security. However, users also enjoy the ease and flexibility of using virtual currencies to play casino games or bet on sports. Because Bitcoin and most other cryptocurrencies are divisible down to several decimal places, they can be used to make micro-bets. So, by betting only tiny fractions of a Bitcoin in each wager, online gamers can enjoy the fun of gambling about without losing their shirts. As a result, the average bet of a Bitcoin gambler is actually lower than the online gaming industry average.

Blockchain technology is advancing at a breakneck speed. It’s only a matter of time before traditional brick-and-mortar casinos introduce games payable in virtual currencies right onto their floors. In fact, enterprising gaming entrepreneurs have already developed “smart” roulette tables that include QR scanners and touchscreens that gamblers can use to make bets from their crypto wallets.  

How Cryptocurrency Winnings are Taxes.

Just like the mafia of old Vegas, the IRS wants its cut after the fun and games are over. Anyone who wins money gambling or wagering must pay taxes. This includes not only typical card games, sports books, and casinos, but also racetrack bets, gameshow winnings, lotteries, and even Bingo.

Gamblers should be aware of the tax rules that apply to gambling income. Regardless if winnings are paid out in prizes, traditional cash, or cryptocurrency, winning bets create taxable income. In general, the IRS requires 25% of all gambling winnings to be withheld as taxes. Sometimes, the agency requires a “backup” withholding of 28%. Casinos and gaming sites may withhold these taxes for you. In these cases, they provide gamblers with a Form W-2G, which they use to report how much they won and how much tax was withheld. However, even if you don’t get a Form W-2G, you are responsible for reporting all gambling winnings to the IRS.

Gambling wins and losses typically must be reported separately, and gambling losses can be deducted from your taxable income as an itemized deduction. However, you’re allowed to deduct losses only up to the amount of your total gambling winnings. Gambling losses are listed on your Schedule A as a miscellaneous deduction, but they are not subject to the 2% limits of other deductions.

If you’re a professional gambler, tax rules are slightly different.  Professional gambling income is typically taxed at the effective income tax rate rather than the 25% applied to most gambling wins. In order to be sure of which tax rules affect your gambling income, be sure to consult with a qualified tax professional.

Recordkeeping Requirements for Bitcoin Gamblers

It’s critical to keep your records in proper order in case the IRS audits your tax return. The government expects all of us to keep detailed financial records, including gambling wins and losses. So, anyone who gambles using cryptocurrency or traditional money should keep all related receipts, tickets, payment slips, statements, and key tax forms like Form W-2G and Form 5754.

If you plan to deduct gambling losses, you must be able to prove your winnings and your losses. The IRS suggests that you do so using a gambling log or diary, but often online gaming sites provide a detailed history of your activity that can be used for this purpose. Regardless, in order to properly report your gambling activity to the IRS, you will need proof of the date of each win (or loss), the type of gambling activity involved, the establishment or website that you were gambling on, and the amounts of any wins and losses.

Bitcoin Gamblers May Need Professional Tax Guidance

Online gambling using Bitcoin and other cryptocurrencies has increased in popularity over the past few years. In fact, online gaming was one of the first mainstream uses of virtual currencies. As a result, many cryptocurrency users may have tax liability on their gambling winnings and not even know it.

If you gamble, you must report your wins and losses on your tax return.  Rather than rummaging through computer files and cabinet drawers for old receipts, tickets, and other documents, have one of the skilled professionals at Happy Tax put everything in order for your return. The CPAs at Happy Tax are specially trained to handle cryptocurrency tax issues, so you don’t have to worry about which forms and disclosures you’ll need to protect yourself from legal or financial liability. The friendly, qualified tax professionals at Happy Tax will walk you through the entire tax preparation process and make sure your return is complete and accurate before it’s sent to the IRS.

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