Abstract
There are numerous online interactive casinos that accept cryptocurrency as a medium of funding player accounts. The use of cryptocurrency presents a new enforcement challenge in jurisdictions that seek to limit or control online gambling. One of the big challenges for online gambling companies is enabling players to move funds in and out of accounts. For the most part, online gambling is illegal in the United States (Unlawful Internet Gambling Enforcement Act or UIGEA). The challenge for enforcement agencies, including taxing authorities, that cryptocurrency presents is that users of cryptocurrency can move funds freely outside the banking system and do so in relative anonymity. Sports gambling sites are likely to be the biggest beneficiaries of this alternative currency.
Sports betting is a huge industry. Billions of dollars get bet and winnings go untaxed using an often‐opaque network of money transfer systems to offshore sites. Cryptocurrency removes the funds transfer hurdles and 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 identities of account holders may remain concealed since there is no international reporting and disclosure law applicable to such exchanges. A law such as the Foreign Account Tax Compliance Act or Common Reporting Standard is needed to compel annual reporting by a “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 regimes are amended or created there is an enormous opportunity for tax avoidance. An annual report much like the IRS Form 1099‐C issued by merchant processors would be a good start in the taxation of cryptocurrency gambling and other transactions.
There is a unique economic risk to the user of cryptocurrency as the valuation fluctuates moment by moment. In the period May 2017 through January 2018, the value of bitcoin fluctuated from a low near US$2,000 to a high near US$20,000. 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 recordkeeping 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 of 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 limit expenses incurred in gambling to total wins, but taxes due on the use of cryptocurrency are not deductible expenses.
Cryptocurrency has the potential to neuter the enforcement of state and federal gambling restrictions as they affect online interactive sites. The sports bettor of today has the option of bypassing 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 online gambling.