Cryptocurrencies have revolutionized the way online transactions can function. That’s because crypto transactions are borderless, available to everyone in the world, and decentralized.
Thanks to cryptos, online gamblers have got a fantastic avenue to play their favorite games without having to wait for slow wire transfers. What’s more, they can enjoy complete privacy since they no longer have to share their banking information online to be able to play.
However, privacy and online anonymity are not the reason not to report your winnings if your country residence has laws on crypto gambling taxes.
The Legality of Crypto Gambling
Before going into details on paying taxes, you need to examine if it’s legal to gamble with cryptocurrencies. If your country has some legislation on cryptocurrency, it’ll generally concern what kind of assets they are and how much tax you need to pay if you exchange them for fiat currencies.
For example, there isn’t a specific law that forbids gambling with Bitcoin or other cryptocurrencies in the US. It’s completely legal to use Bitcoin to play poker online if you are in a state that has legalized online gambling.
However, most cryptocurrency tax regulations are relatively new, and some of them consider crypto as digital assets subject to capital gains tax. Some state jurisdictions mandate that every transaction with cryptocurrencies is taxable.
Bitcoin and other cryptocurrencies are not considered legal tender in most countries. (The only country that has adopted Bitcoin as legal tender is El Salvador.) This effectively means that crypto isn’t considered money but rather property. If you are selling or buying property, you might profit or suffer a loss on your initial investment. How much tax, or if you need to pay it at all, will vary depending on how profitable your transactions were.
Cryptocurrency transactions are completely or semianonymous. Therefore, the argument is that you can hide profits in cryptocurrencies from the government. However, this could lead to massive fines and even jail time as tax evasion is a serious felony in any country.
In the United States, the IRS treats cryptocurrency gains as any other capital gains. If you hold a certain amount of crypto for less than a year, any short-term capital gains are subject to regular tax rates of up to 37%, depending on your income. The cryptocurrency tax rate in the long term is much more affordable. If you hold your crypto for more than a year, you are subject to a long-term capital gains tax at lower rates between 0% and 20%.
Remember, the capital gains tax applies only to the profits you made. For example, if you invested $4,000 in Ethereum, and after one year, you sell it for $10,000, any taxes you need to pay are on the $6,000 profit.
Since each country regulates cryptocurrencies differently, it may be helpful to discuss crypto taxation with a tax accountant to ensure compliance with local laws.
Gambling Winnings Tax
Before we analyze how to tax Bitcoin received from gambling, we need to look at how winnings from gambling are handled. Some countries, such as Belgium, Austria, Bulgaria, Australia, Canada, France, Denmark, Germany, Italy, the United Kingdom, and Malta don’t tax gambling winnings at all. There are some exceptions, such as gambling professionally.
On the other hand, countries like the United States, Spain, Mexico, China, and India have taxes on gambling winnings. There is a flat 25% tax rate on any profits you make from gambling in the US. That’s under the assumption that you’ve registered at a Bitcoin sportsbook or crypto gambling website with your Social Security number and gone through the KYC procedure.
If you don’t disclose all the necessary information, the online gambling venue will take up to 30% of your profits to cover tax expenses. In such a case, make sure that the casino issues you the appropriate tax certificate as evidence that the winnings were taxed. Otherwise, you might have to pay taxes twice if you don’t have the proper documentation ready for audit.
Licensed online cryptocurrency casinos have a legal obligation to periodically report winnings paid to their customers. That’s how they can support their deduction claims on the gambling revenue. Therefore, tax regulators may use those reports to check if casino users have filed the necessary paperwork for their tax reports. Keep in mind this applies even to nonmonetary rewards. If you received goods as a prize, their fair market value is used as a basis for taxation and will be reported under other income.
If you registered at an offshore casino or sportsbook that uses cryptocurrencies, you most likely wouldn’t have to comply with a comprehensive registration process. However, you’ll still want to set aside some funds to pay your taxes, even though the tax department won’t notice any profits you make. Note that filing incorrect taxes is illegal.
Processing Crypto Gambling Taxes
In the US, Bitcoin was first treated as property in 2013 after the IRS made a last-minute change and moved away from treating it as currency. However, gambling profits are processed differently than cryptocurrencies which may lead to confusion when taxes need to be filed.
Taxpayers in the US pay a percentage of their annual income as income tax. Whenever you participate in any activity that directly earns you money, that money is considered as regular income, and it’s taxable as a result. This is not the same as any earnings you may have from the stock market.
Profits from investing in stocks result in them having higher value. When liquidating shares, you are selling them for money that’s subject to taxation as a capital gains tax we’ve already mentioned. The issue lies in the gambling profits being considered as regular income, while cryptocurrencies are regarded as an asset.
So, how to report cryptocurrency on taxes on gambling winnings? Is it income tax, capital gains tax, or a combination of both? Do you have to pay taxes on cryptocurrency gains?
Since cryptocurrencies are considered assets you received as a prize for winning, for example, an online game of BTC blackjack, they are treated as nonmonetary gambling winnings. Therefore, any tax you pay on them will be according to the current Bitcoin market price.
Remember that reportable gambling winnings from land-based and online casinos are for more than $1,200 (including wager) from a bingo game or slots, $1,500 without the stake for a keno game, and $5,000 from poker without the buy-in. If winnings from another game exceed $600 or are at least 300 times the wager amount, they are also subject to taxation, and you will need to report them with the W-2G form.
The good news for gamblers is that they can deduct some of the gambling losses from their taxes. If, for example, you won $2,500 but had $1,200 in losses, you’d only have to pay taxes on $1,300.
Of course, you can’t deduct gambling losses if you don’t have any winnings to report. The deductible limit is the amount you won in the same taxation period. Essentially, you can’t deduct more than you’ve won, no matter what currencies were used.
The taxation rules somewhat change when you decide to make a living from gambling in the US. However, losses are still only deductible up to your winnings. If you make it your regular activity, you can effectively make it your job and file a Schedule C as a self-employed individual.
This essentially allows you to deduct other costs as well and thus reduce the taxable amount. You can deduct your internet bill if you are wagering online, travel expenses if you are attending tournaments, and any other resources needed to conduct your business.
However, you’d exchange one type of expense for another, as you’d have to pay self-employment tax that covers Social Security and Medicare.
Are There Ways of Paying Less Tax?
While finding a workaround is possible, it’s also risky, as you are not disclosing the true scope of your income. Also, this solution is only applicable where there is a distinction between capital gains and regular income for cryptocurrencies.
Theoretically, you could purchase a cryptocurrency of your choice and use it as a gambling deposit at an offshore online casino. After scoring big, you can make a withdrawal in the same cryptocurrency to your wallet address, by which you increase the amount of crypto you already have, gaining you a net profit. Rather than reporting it as gambling winnings, you could disclose it as an investment in crypto, and delay making a withdrawal, effectively making it a long-term asset subject to lower tax fees.
Keep in mind this is rather risky due to the nature of cryptocurrencies. While they are private in the sense no personally identifiable information is associated with wallet addresses, anyone can see the transaction history through various blockchain explorers. If you must disclose your e-wallet address for your tax reports, taxation agents could easily check all incoming and outgoing transactions associated with your e-wallet.
Gambling sites that use cryptocurrencies offer many advantages to players. Digital transactions are faster, more private, independent of third parties, secure, and inclusive. Taxing winnings in cryptocurrencies can be daunting, but if you get yourself informed in time and do your research diligently, you can enjoy all the perks of having access to modern payment technology while staying compliant with the relevant rules and regulations.
How do taxes work on crypto gambling?
It’ll mostly depend on how online gambling and cryptocurrencies are regulated and taxed in your country. In many jurisdictions, cryptocurrencies are treated as digital assets subject to capital gains tax, and gambling winnings are taxed in some countries. Therefore, you may need to pay a combination of capital gains and income tax, depending on where you live.
How can I avoid paying taxes on crypto?
While evading taxes is highly inadvisable, as it may result in huge fines and even jail time, most of the time, you won’t be required to pay taxes on cryptocurrencies if you don’t exchange them for fiat currencies.
Do I pay taxes on my cryptocurrency?
Depending on how your country regulates cryptocurrency, you might not have to pay taxes on crypto, or you have to pay capital gains tax.
At what percentage is crypto taxed?
Cryptocurrency taxes vary from zero to 50% on capital gains tax.