How is crypto gambling taxed?

If you win money from crypto gambling, as with any other type of gambling, you will need to report that on your taxes. The IRS considers gambling winnings to be income, just like the income you earn from your job.

The tax rules for crypto gambling winnings are a bit more complex than those for traditional gambling since you may have several different types of transactions happening all at once, each of which may have different tax rules.

It’s essential to understand what you’re signing up for when you gamble with crypto and your potential tax implications.

Keep reading to learn how crypto gambling works, how winnings are taxed in the United States, and how to properly report and pay taxes on your crypto gambling winnings.

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What is crypto gambling?

Crypto gambling is exactly what it sounds like: combining the traditional world of gambling with the use of crypto assets. As crypto gambling has grown in popularity, so has the number of crypto casinos — these are typically online platforms that enable users to bet their crypto assets for a chance of winning.

Typically, these online crypto casinos consist of similar games as a normal casino: slots, poker, lotteries, sports betting, and more.

The exact process of crypto gambling may vary somewhat by platform. Rather than having you gamble your crypto directly, some platforms may require you to convert your crypto to U.S. dollars, which is a taxable event. You’ll have additional tax implications for winning crypto from gambling and, later on, for selling that crypto.

Is crypto gambling legal?

There are no laws that explicitly ban crypto gambling on a federal or state level. However, there are only seven states where online gambling (outside of sports betting) is legal:

• Connecticut
• Delaware
• Michigan
• New Jersey
• Pennsylvania
• Rhode Island
• West Virginia

How is crypto gambling taxed in the US?

According to the IRS, gambling winnings are considered taxable income. You’ll have to report them on your income tax return and pay taxes on them. While the IRS doesn’t directly address crypto gambling, we can assume the tax on gambling winnings also applies to crypto.

Generally speaking, any crypto you win from gambling will be taxed as income, similar to the income you’d earn at your job. You’ll be taxed based on the crypto’s value when you earn it. However, because crypto gambling may require additional transactions, there could be even more tax implications.

First, if your crypto gambling platform (aka crypto casino) requires you to convert your crypto to fiat currency to gamble, you may be subject to capital gains taxes.

Example 1 – Taxes when using crypto to gamble

let’s say you bought $1,000 of Ethereum (ETH). You later decide to gamble with that crypto but have to convert it to USD to do so. The IRS views this as you selling your cryptocurrency, and you may be subject to capital gains taxes. If your ETH has increased in value to $1,250, you’ll have a $250 capital gain.

The amount of capital gains taxes you’ll pay depends on several factors, including how long you held the ETH before selling (one year or less vs. more than one year) and your taxable income.

Finally, you’ll have another taxable event if and when you sell the crypto you won from gambling. Just like when you converted your crypto to USD earlier in the process, selling your crypto will trigger capital gains taxes.

Example 2 – Taxes on crypto gambling winnings

You’ll pay capital gains taxes on the difference between the value of your crypto when you win it and its value when you sell it.

For example, let’s say you won $500 ETH. You would pay income taxes on that $500 of income in the year you win it. If you sell it the following year for $750, you’ll pay capital gains taxes on the $250 in increased value.

How to report and pay your crypto gambling taxes

Unlike your employer, a crypto casino won’t withhold money from your winnings for income taxes. Instead, it’s your responsibility to report your winnings and capital gains to the IRS and to pay the appropriate taxes on them.

Note: The IRS requires an automatic tax withholding of 24% on winnings of $5,000 or more on sweepstakes, wagering pools, lotteries, and some other winnings, but this doesn’t apply to online crypto gambling platforms.

1. Document all transactions

Throughout the year, it’s important to maintain records of all your crypto transactions. While some platforms will provide you with records when you need them, this may not be the case with all gambling platforms. It’s best to keep your own records to ensure you’ll have them when tax season rolls around.

2. Determine your cost basis

If you’ve disposed of any cryptocurrency, whether it’s to convert it to USD for gambling or after you’ve won, you’ll have to pay capital gains taxes. Capital gains taxes apply to the difference between your cost basis (usually the value of your crypto when you buy or receive it) and the amount you sell or dispose of it for.

3. Use the right tax forms

There are several different tax forms you may use when reporting your crypto gambling winnings, depending on the situation. Here are some tax forms to be aware of:

• Form 8949: If you sold or disposed of crypto (including converting it to USD for gambling purposes), you’ll report those transactions on Form 8949, “Sales and Other Dispositions of Capital Assets.” You’ll report a description of the property, the dates you purchased and disposed of it, the price at which you disposed of it, your cost basis, and your total gain or loss.
• Schedule D (Form 1040): After reporting your disposal transactions on Form 8949, you’ll report your gains and losses on Schedule D (Form 1040), “Capital Gains and Losses.” You’ll report your short-term and long-term gains separately.
• Schedule 1 (Form 1040): If you have any crypto gambling winnings to report, you’ll do so on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.” This is the form where you report income other than what you earned from employment.

If you’re not comfortable completing these forms yourself, you may hire a tax professional to complete them on your behalf. And if you’re using tax software to file your taxes, they’ll complete these forms based on the information you provide.

4. Deduct your crypto gambling losses

The IRS allows you to reduce your crypto taxes by offsetting some of your gambling winnings with your gambling losses. If you itemize your deductions, you can claim your gambling losses on [Schedule A (Form 1040)].

You can only deduct up to the amount of your winnings. For example, if you have $2,500 of gambling losses and only $1,000 of gambling winnings, you can only deduct $1,000 of your losses.

Keep in mind that you won’t be able to deduct your gambling losses if you’re claiming the standard deduction. The majority of taxpayers claim the standard deduction rather than itemizing deductions. You can run the numbers both ways to see which is more beneficial.

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<h3 id="">Form 1099-DA and Crypto Gambling Tax</h3>
<p id="">When you sell crypto on a centralized exchange, the sale appears on Form 1099-DA regardless of how you originally acquired it. This includes:</p>
<ul id=""><li id="">Gross proceeds from the crypto sale</li>
<li id="">Transaction dates and exchange information</li>
<li id="">No indication of the crypto's gambling origin</li></ul>
<p id=""><strong id="">What you need to do: establish the cost basis for crypto aquired via gambling</strong></p>
<p id="">The main challenge is determining your cost basis for crypto you acquired through gambling:</p>
<ul id=""><li id="">If you won crypto through gambling, your cost basis is the fair market value when you won it</li>
<li id="">If you bought crypto with gambling winnings, your cost basis is what you paid for it</li>
<li id="">If you received crypto as a gambling bonus or reward, your cost basis is its value when received</li>
<li id="">You'll need records from the gambling platform showing when and how you acquired the crypto incase you are audited</li></ul>

How Summ can help with crypto gambling taxes

If you participated in crypto gambling last year or had any other crypto transactions, you’ll likely need to record the details to report them on your tax return.

That’s where Summ (formerly Crypto Tax Calculator) comes in. Our algorithm will help categorize buys, sells, and cost bases relating to your crypto gambling activity so that you won’t have to manually track these values.

Any gains, losses, and relevant cost bases made in conjunction with your crypto gambling winnings would also be taken into account when generating your final tax reports for a specific financial year.

Crypto gambling taxes in other regions

Every country has its own tax laws, especially for a complex subject like cryptocurrency. If you live outside of the United States, you should consult a local tax professional. They will be able to help you determine what the most appropriate treatment of your crypto gambling transactions is for tax purposes in your region. You can also research any regulations published by your country’s tax authority.

The risks of crypto gambling

As with any gambling, crypto gambling carries large financial risks. Firstly, there’s the chance of losing your crypto. If that’s not a risk you’re willing to run, gambling likely isn’t for you.

Additionally, with the increase in crypto gambling’s popularity, there’s been an increase in the amount of fraudulent crypto gambling sites. Malicious sites like these attempt to steal assets from the user, whether by not letting you withdraw your winnings, creating malignant smart contracts that drain your funds, and more.

Always make sure to do your own research to ascertain whether or not a crypto gambling site is reputable before engaging with it.