Crypto Gambling Taxes (2023 IRS Rules)

Crypto gambling refers to online gambling platforms that accept cryptocurrencies, Bitcoin being the most common. Similar to traditional online casinos, these crypto gambling sites offer a wide range of games, including slots, roulette, blackjack, and more. The primary distinction lies in the payment method, as users can deposit and withdraw funds using cryptocurrencies like Bitcoin.

In 2022 there were more than 70 online, crypto-friendly casinos.^[1] By accepting Bitcoin and other cryptocurrencies—and setting up headquarters outside the US—to date they’ve been able to largely sidestep federal and state laws prohibiting and/or regulating online casinos and sports betting. 

However, while Bitcoin gambling sites may be able to skirt US gambling regulations, winnings earned from them are still subject to federal taxes at your ordinary income tax rate. 

The legality of gambling with cryptocurrencies varies significantly depending on the jurisdiction and its specific laws governing online gambling. In general, some of the more accepting nations for online gambling include many EU countries, Canada, the United Kingdom, and Australia. 

The US follows a mixed approach, with different states adopting varying stances on online gambling, being more lenient with sports betting but still restrictive in other areas. 

States in which online casino games, online poker, or both are legal include:

• Connecticut

• Delaware

• Michigan

• Nevada

• New Jersey

• Pennsylvania

• West Virginia

Certain countries such as China, Indonesia, and the UAE, have imposed bans on online gambling, which extends to gambling with cryptocurrencies as well.

It is crucial for individuals to research and understand the regulations governing online gambling and the use of cryptocurrencies in their respective regions to ensure compliance with the law.

Beyond the obvious risks and potential rewards of any gambling, there are special considerations to take when gambling crypto. Here are some pros and cons when thinking about gambling crypto.

Pros of Crypto Gambling

• High levels of security and anonymity: Using cryptocurrencies like Bitcoin ensures enhanced security and privacy for gamblers, as personal information is not required for transactions, reducing the risk of data compromise.

• Availability of bonuses and promotions: Many crypto gambling sites offer attractive bonuses and promotions to entice players, such as free spins and cashback on deposits, due to the growing trend of gambling crypto.

• Easy registration: Unlike traditional online casinos, most crypto gambling platforms allow users to sign up without divulging personal details, streamlining the registration process.

Cons of Crypto Gambling

• Volatility: The value of cryptocurrency can experience significant fluctuations in a short period, leading to the possibility of the deposited amount being worth more or less than initially intended.

• Lack of regulation: As cryptocurrencies operate independently of government or financial institutions, the absence of regulation may raise concerns about the responsible handling of funds on crypto gambling sites.

• High transaction fees: Transaction fees associated with using cryptocurrencies can vary widely, and in certain instances, they may surpass the initial deposit amount, impacting the overall gambling experience.

To compute your capital gains resulting from the sale of cryptocurrency, it is essential to determine your crypto cost basis, which refers to the original cost of acquiring the cryptocurrency. 

Typically, your cost basis for gambling rewards in crypto will comprise the fair market value of the crypto at the time you received it along with any applicable fees you incurred during the acquisition process. Simply put, if you win $1,000 worth of Bitcoin, that is your cost basis. You’ll owe income taxes on it upon receipt and capital gains taxes later if you sell it for profit.

Non-professional gamblers who are US taxpayers should include gambling income on Form 1040 Schedule 1 under the section designated for 'Gambling income.'

As for reporting gambling losses, you can do so on Form 1040 Schedule A as an itemized deduction. Please note that your losses will only reduce your tax liability if your combined itemized deductions (e.g., donations, mortgage interest, local tax, etc.) surpass your standard deduction. Additionally, capital gains from cryptocurrencies and other assets must be reported on Form 8949.

If you are a professional gambler, all relevant income, losses, and expenses related to your gambling activities should be reported on Form 1040 Schedule C.

It’s important to understand the regulations and crypto gambling taxes in your region. International taxpayers can refer to our helpful country guides for more information about their region.

When received, crypto gambling winnings are taxed as ordinary income at a federal and state level. Your crypto tax rates depend on your gross income, but range from 0-37%. If you have gambling winnings from a US-based operation, typically a flat 24% will be withheld by the payer. These are estimated taxes, and you may owe more or less depending on your personal circumstances. 

However, crypto casinos and betting sites will not make this automatic deduction for you. You need to report gambling winnings as “other income” on your Schedule 1 Form 1040. 

Additionally, when you sell or trade your crypto gambling winnings for fiat or another coin, you will report and pay crypto capital gains taxes on any increase in its value. 

Bitcoin gambling income is taxed at its fair market value when it is earned. For example, if you won .25 Bitcoin from a sports bet when Bitcoin was valued at $30,000, you would report $7,500 of taxable income.

You can deduct losses from crypto gambling—but only up to the amount of your crypto winnings and only if they exceed the standard deduction and any other allowable deductions. In other words, you can’t use gambling losses to offset earnings from investments or other income.

For example, imagining all other conditions are met, if you won $3,000 worth of Bitcoin from online gambling, but lost $5,000 from gambling during the same period, you would only be able to deduct $3,000 of those losses against the $3,000 previously won.

In the past, professional gamblers could claim net losses from their gambling activities. They are only allowed to deduct wagering losses up to the amount of their gambling winnings. In simple terms, the deductions for gambling losses cannot exceed the income generated from their gambling winnings.

Navigating the complexities of crypto gambling taxes can be daunting, but with TokenTax, you gain access to an all-in-one crypto tax calculator and accounting firm that caters to your specific needs. From seamless data import to detailed tax reports and advanced reconciliation services, TokenTax offers a comprehensive solution to ensure your crypto taxes are handled accurately and efficiently.

TokenTax eliminates the hassle of manual data entry by seamlessly syncing with all your wallets and accounts. Whether you've engaged in DeFi, NFTs, margin, or futures trading, TokenTax's API and wallet integrations cover a wide range of crypto activities, allowing you to view and analyze all your data in one convenient place. Easily identify and rectify errors or missing information to make your tax prep process a breeze.

When it’s time to file, our software at TokenTax automatically generates all the necessary tax forms required to complete your filings, whether you choose to file with TokenTax or use another provider like TurboTax. From Form 8949 and Schedule D to FBAR and international forms, TokenTax has you covered. The TurboTax integration streamlines the filing process further, and you can also opt for the full filing add-on for added convenience.

For investors with more intricate accounting requirements, TokenTax offers advanced reconciliation services. Our crypto tax professionals are pros at handling data situations involving missing cost basis, messy data, high transaction volume, and cross-chain transactions. Rest assured that your tax calculations will be accurate and thorough with TokenTax's expert assistance.

Here are answers to frequently asked questions about crypto gambling taxes for those gambling crypto.

Is converting my cryptocurrency to USD a taxable event?

Yes. For US taxpayers, taxes on crypto typically occur when you trade, sell for USD, swap for other crypto, or otherwise dispose of crypto for a capital gain or loss.

Do I have to pay taxes on crypto if I don't cash out?

Yes. You must report all gambling winnings as “other income” on your tax return. This includes the fair market value of noncash prizes you win, which includes crypto.

How do taxes work for crypto gambling?

US taxpayers need to report gambling winnings as “other income” on their Schedule 1 Form 1040. Additionally, when you sell or trade your crypto gambling winnings for fiat or a different crypto, you’ll be expected to pay crypto capital gains taxes on any increase in its value.