Internet Gambling, Cryptocurrency and IRS Enforcement
By of MillarLaw A Professional Corporation On Sunday, February 11, 2018
“The U.S. Internal Revenue Service, fresh off its success in uncovering U.S. assets hidden in Swiss banks, has assigned elite criminal agents to investigate whether Bitcoin and other cryptocurrencies are being used to cheat the taxman.” Bloomberg, 02/08/2018
Could Internet Gambling Sites be one of their targets?
There are numerous on-line interactive casinos that accept cryptocurrency as a medium of funding player accounts. The use of cryptocurrency presents a new enforcement challenge in jurisdictions that seeks to limit or control on-line gambling. One of the big challenges for on-line gambling companies is enabling players to move funds in and out of accounts. For the most part on-line gambling is illegal in the United States, (Unlawful Internet Gambling Enforcement Act “UIGEA”). The challenge for enforcement agencies, including taxing authorities that cryptocurrency presents is that users of cryptocurrency can move cryptocurrency freely outside the banking system and do so in relative anonymity. Sports gambling sites are likely to be the biggest beneficiaries of this alt currency.
Sports betting is a huge industry. Billions of dollars get bet and winnings go untaxed by using an often opaque system of money transfer systems to offshore sites. Cryptocurrency removes the funds transfer hurdles and some of the associated costs. Gone are the days of using false credit card merchant processing codes. There are no codes because there is a direct deposit from one cryptocurrency account holder to another, whether done through a “private wallet” transfer or a public exchange.
If a “Public Exchange” is used that is located outside the U.S. jurisdiction the identity of account holders may remain concealed since there is no international reporting and disclosure law applicable to such exchanges. A law such as the U.S. Foreign Account Tax Compliance Act (“FATCA”) or EU Common Reporting Standards (“CRS”) is needed to compel annual reporting by “public exchange” of account holder activity. Such laws would force disclosure of not only of gambling activity but all transactions and provide some basis for tax collection. Until such tax reporting regimes are amended or created there is an enormous opportunity for tax avoidance. An annual report much like the IRS From 1099-C issued by Merchant Processors would be a good start in the U.S. taxation of cryptocurrency gambling and other transactions. It would perhaps be a bette approach than that used in the “Coinbase” Summons Enforcement Proceeding.
Coinbase is a “public exchange” based in San Francisco, California. Based upon its physical presence there was jurisdiction for the IRS to issue a “John DOE Third Party Records Summons”. This is a process where the IRS sought to compel disclosure of records of cryptocurrency unknown account holders. The District Court ordered the disclsoure of approximately 14,000 account records relating to U.S. taxpayers. A John DOE Summons Enforcement Proceeding is a cumbersome and time consuming process abut curresntly is the only vehicle to compel disclosure.
There is a unique economic risk to the user of cryptocurrency as the valuation fluctuate moment by moment. In the period May 2017 through January, 2018 the value of Bitcoin fluctuated from a low near $2,000 USD to a high near $20,000 USD. Some merchants who accept cryptocurrency have payment processors who convert the cryptocurrency to fiat currency such as USD the same day as the transaction. There is still the currency conversion risk, however small . The other issue is that the holder of cryptocurrency faces a complex tax record keeping process if they are going to comply with U.S. tax laws. Each transaction has to be separately treated for income tax purposes. The holder is taxed on the gain or loss on the cryptocurrency measured by the difference between the price paid for the alt currency and its value on the day as use.
In the gambling context if a gambler uses cryptocurrency to place a bet, he or she must account for the gain or loss on the transaction when the bet is made and then for the winnings or losses. New rules under the Tax Cuts and Jobs Act (“TCJA”) limit expenses incurred in gambling to total wins, but taxes due on the use of cryptocurrency are not deductible expenses.
Cryptocurency has the potential to render the ability to neuter the enforcement of state and federal gambling restrictions as they affect on-line interactive sites. The sports better of today has the option of by-passing the banking and credit card system and there does not appear to be an effective deterrent in place. Brick and mortar establishments will face market share challenges as the use of cryptocurrency breaks down the barriers to on-line gambling. This is the kind of challenge that the IRS will face in it enforcement efforts.
If you have questions about reporting income from gambling or other sources feel free to contact us. There are several disclosure options available if you come forward before being contacted by the IRS.