Archive for the ‘Gambling’ Category

No Sales Tax on DFS in New Jersey

October 19th, 2016 No comments

Earlier this month, the New Jersey Division of Taxation issued a ruling that entry fees paid to enter into daily fantasy sports contests are not subject to the State’s sales tax. This is good news for players, as the tax would have been borne by the players.

Of course, rulings from state tax agencies are not binding on all taxpayers. For this letter ruling, the decision is binding only on the Division of Taxation and the operator that actually requested the ruling. The New Jersey Tax Court court could rule differently if the issue was litigated.

One cannot assume other state tax courts or agencies would arrive at the same conclusion. Each state’s sales tax laws (if a state imposes sales tax) are different.

At some point, states (and the IRS) will have to address a related question: whether daily fantasy sports is considered gambling for income tax purposes. I’ve discussed before why the answer to that question is significant.

Categories: DFS, Gambling, New Jersey Tags:

Federal Judge: Offshore Online Gambling Accounts Are Reportable Foreign Financial Accounts

June 6th, 2014 No comments

A federal district court judge in California has ruled that FirePay, PartyPoker, and PokerStars online gambling accounts are subject to the foreign financial account reporting rules.

Ok, so who cares?

Any U.S. taxpayer who has or had offshore online gambling accounts. If a U.S. taxpayer’s total maximum balances in foreign financial accounts exceed $10,000 at any point during a tax year, he must file FinCEN Form 114, formerly known as the FBAR.

In the case United States v. Hom, the defendant had online gambling accounts with PokerStars, PartyPoker, and FirePay in 2006 and 2007. The defendant acknowledged that the aggregate amount of the funds in these accounts exceeded $10,000 in U.S. dollars during 2006 and 2007. But, he contended that they were not foreign financial accounts.

The judge disagreed. Because FirePay, PokerStars, and PartyPoker all functioned as banks, said the court, they fall within the scope of the definition for a reportable account. The judge granted the IRS’s motion to impose against the taxpayer FBAR penalties of $10,000 per account not reported per year.

We’ve discussed this issue before. I said:

1. It is possible Treasury could at some point view offshore online casino accounts as subject to FBAR disclosure, and

2. It is becoming more and more likely the IRS will have access to the records of offshore online casinos if and when offshore online casinos bring their operations to U.S. soil.

That was written two weeks before the Department of Justice seized the U.S. domains of Absolute Poker, Full Tilt Poker, and PokerStars on April 15, 2011.

As for (1):

Our judicial branch is tasked with interpreting the law. Our executive branch, including the Department of Justice, is tasked with enforcing the law. Will the DOJ suddenly allocate resources to penalize taxpayers who didn’t report offshore online gambling accounts because of this one decision?

Perhaps not, unless the violation also involves a serious offense such as tax evasion or it’s simply convenient to. Which brings us to (2):

I had suspected the federal government might obtain access to the records of offshore online gambling companies sometime in the future. Turns out I was correct, just for the wrong reason: Full Tilt Poker and PokerStars agreed to maintain all records relating to its business in the United States in connection with their domain seizures in 2011.

In order to retrieve funds on their offshore online gambling accounts that were frozen by the Department of Justice, some U.S. taxpayers had to provide their social security numbers. It’s clear the government can easily look into whether these U.S. taxpayers with larger balances filed FBARs. The questions remains of whether they will.

As Russ Fox notes, this is one court decision in one district. A federal district court decision is mandatory authority only on some lower specialized courts in that particular district. This case was decided in the Northern District of California. The court is headquartered in San Francisco and covers fifteen northern California counties.

If Mr. Hom appeals to United States Court of Appeals for the Ninth Circuit and the Ninth Circuit affirms the lower court’s decision, then the decision is mandatory authority on all district courts within the Ninth Circuit.

In all districts other than Northern California, the case is merely persuasive authority for now. This means all the other district courts may follow the decision but do not have to.

How should implicated U.S. taxpayers respond to the decision?

As I’ve said before, I don’t see the downside to playing it safe and filing the Form 114 going forward.

For taxpayers with prior years at issue, there are some options to consider. One is by coming forward through the IRS Offshore Voluntary Disclosure Program. This option may not be most appropriate for all taxpayers, as each taxpayer’s particular situation is different. A taxpayer should consult a tax professional to discuss specific facts and circumstances.

We’ll see if Hom decides to appeal or if the DOJ issues a statement on this…

Full Tilt Money Soon, with a Tax Bill?

January 22nd, 2014 No comments

According to the Poker Player’s Alliance, the Department of Justice has approved the release of $82 million in funds to approximately 30,000 U.S. players who submitted a petition for remission for their Full Tilt Poker funds seized on April 15, 2011. Nearly three years after seizure, the funds (or a portion of) may be finally returned.

Do players have to pay federal and state taxes on the funds received? It depends.

Consider this scenario I described a couple of years ago:

Let’s say 2010 was the first year I played on Full Tilt, initially depositing $100. During the year, I played four “sessions.” I had two winning sessions of $25 and $75, and two losing sessions of $30 and $60. Throughout the year, I successfully withdrew $50 from my Full Tilt account. On my 2010 tax return, I claimed $100 in gambling winnings and $90 in gambling losses. Note that the $50 withdrawal has no impact on my tax consequences for the 2010 year.

At the beginning of 2011, my Full Tilt balance was $60 (initial deposit of $100, less $50 withdrawal, plus net winnings of $10). Before Black Friday, I played another four sessions. I had two winning sessions of $60 and $70, and two losing sessions of $30 and $50. I also withdrew another $50 before Black Friday, so my frozen account balance on Black Friday was $60 ($60 at the beginning of the year, less $50 withdrawal, plus $50 net winnings).

For the 2011 tax year, are any of my gambling winnings or losses reportable? As I said above, any gambling winnings that were successfully withdrawn would be considered taxable income because they were actually received. In my situation, however, that wasn’t the case. Why?

The $50 withdrawal in 2011 was not attributable to the 2011 gambling activity, but to the $100 deposit I made in 2010. To arrive at this result, I applied an accounting method called “First-in first-out” (FIFO), which is often used to determine the cost basis of securities sold. Before making the 2011 withdrawal, I had recovered only $50 of the $100 initial deposit made in 2010. Since the 2011 withdrawal was less than or equal to the remaining portion of the 2010 deposit, none of the $50 withdrawn in 2011 was attributable to the gambling activity in 2011. Therefore, due to a lack of constructive receipt of the 2011 gambling winnings, I would not report any gambling winnings or losses in 2011 attributable to Full Tilt. In addition, I would not report the $60 frozen balance as a loss because it was not considered permanent as of the close of the 2011 tax year.

I must note that there is no direct legal precedent that explicitly says to use FIFO when ascertaining the tax consequences in the context of Black Friday. Considering FIFO is sometimes used for computing the gain on securities purchased at different times, an activity arguably similar to gambling activity, it seems like a reasonable method to me. Some may say there’s no difference between gambling and investing in securities. In both cases, one deposits a specified sum and at some future time either cashes out or loses the entire investment once the sum becomes worthless.

Now suppose I receive from the claims administrator, Garden City Group, only $50 of the $60 that was in my Full Tilt account on April 14, 2011. In 2011, I didn’t claim any taxable gambling winnings or losses on Full Tilt Poker because the company didn’t have the money to pay the balances in player’s accounts. During the year, I had winning sessions totaling $130, and losing sessions totaling $80, for a net of $50.

$10 of the $50 received from the claims administrator should be attributed to the initial 2011 balance in the account; taxes were paid on those winnings in 2010. The remaining $40 is attributable to the $50 “net” winnings from the year, and taxable in 2014.

What about the remaining $10 I am never going to receive? Here are two options to consider for the 2014 tax year:

  1. Reduce the gross gambling winnings from $130 to $120, resulting in net gambling winnings of $40 for 2011, instead of the $50 on the site. The theory is that since I never constructively (or actually) received the $10, then it was never income to me.
  2. Claim the $50 net winnings, but also claim the $10 not received as a casualty loss.

For recreational gamblers, there is a $100 deductible for casualty losses, and a casualty loss is deductible only to the extent it exceeds 10% of the taxpayer’s adjusted gross income.

So I couldn’t claim my $10 as a casualty loss since it is less than the $100 deductible.

Professional gamblers, however, may be able to claim a casualty loss on Schedule C, and avoid the casualty loss limitations that recreational gamblers face. If I were a professional, then I could possibly claim the full $10 as a casualty loss.

Garden City Group is expected to release additional details here in less than twenty-four hours, at which point we can further assess the implications.

One question I’m wondering above all: Will Garden City Group issue a 1099-MISC or another tax form in connection with the return of funds to players? If so, I hope GCG does not simply report on the form the total amount received.

As seen in the scenario above, the amount received could include some combination of both winnings and deposits. Of course, only the former is taxable income.

Disclaimer: This blog discusses tax concepts generally, and does not address anyone’s specific tax situation. Consult a tax professional to discuss particular facts and circumstances.

Withholding Massachusetts Gambling Winnings: Searching for a Better Solution

January 20th, 2014 No comments

Over the weekend the Boston Globe ran a story about an interpretation of Massachusetts law requiring the state’s casinos to withhold and report a patron’s gambling winnings of $600 or more.

The law would capture far more than the corresponding withholding and reporting rules for gambling winnings under federal law. The Internal Revenue Code requires informational reporting for slot machine winnings of at least $1,200 or more and for poker tournament winnings of more than $5,000. There are no reporting requirements for table games such as blackjack, unless the player wins more than $600 and the odds are no better than 300-to-1.

Here’s the law at issue:

Every person, including the United States, the commonwealth or any other state, or any political subdivision or instrumentality of the foregoing, making any payment of lottery or wagering winnings which are subject to tax under chapter 62 and which are subject to withholding under section 3402 of the Internal Revenue Code, without the exception for slot machines, keno and bingo played at licensed casinos in subsections (q)(5) and (r) of said section 3402 of the Internal Revenue Code, shall deduct and withhold from such payment an amount equal to 5 percent of such payment, except that such withholding for purposes of this chapter shall apply to payments of winnings of $600 or greater notwithstanding any contrary provision of the Internal Revenue Code.

In other words, the law requires five percent withholding for state income tax on all winnings of $600 or more in MA casinos. Read more in the Massachusetts Department of Revenue Technical Information Release 13-4.

With Massachusetts in the process of determining casino licensees, prospective operators are making a fuss. There will be more paperwork to deal with. More significantly, higher stakes players may be less inclined to gamble at MA casinos, because a lot of their winnings would be subject to the reporting and withholding.

This possibly slight shift from the status quo that is unfavorable to the industry demonstrates a higher need to completely overhaul the reporting and withholding rules for gambling winnings. There has to be a more effective method that makes the government, operators, and players all happy.

I’ve discussed before a federal bill that included tax reporting and withholding rules for internet gambling winnings:

H.R. 2230, Internet Gambling Regulation and Tax Enforcement Act of 2011, for example, sought to require “Internet gambling licensees” to report to the IRS, among other things, the “net Internet gambling winnings” for the calendar year of each person placing a bet or wager with the licensee. Such a requirement would maximize the reporting to the IRS. But would it be prohibitively costly for iGaming operators to not only document but also report the net winnings of all persons placing wagers, including nominal amounts (e.g. less than $100)?

Players are happy here, because their losses are built into the amount reported to the tax authorities. There is no issue of substantiating gambling losses, which is a big problem for taxpayers at brick and mortar casinos.

Issuing annual tax forms to all patrons with winnings at brick and mortar casinos is not similarly practical. Or is it?

The IRS and casinos could establish a streamlined process for first-time patrons to provide tax information. Once a patron is in the system, all the casino must do is keep track of a patron’s winnings and losses, which can be done upon issuing and retrieving chips, and then report and withhold accordingly. It’s not quite that simple, but it’s a starting point.

As the possibility—however unlikely—of federal legislation for online gambling remains, an overhaul of the reporting and withholding rules should be kept in mind.

Gambling Loss Deduction Removed from Kansas Tax Code Beginning in 2014

July 29th, 2013 10 comments

Kansas is home to three land-based casinos as well as five Indian-owned casinos. Hosting eight profitable casinos in a state of less than 2.9 million people, the State should not want to discourage its residents from participating in the entertainment.

At least that’s what common sense tells me.

Well, the 2013 legislative session in Kansas appeared to lack some common sense when deciding to remove the gambling loss deduction from the state’s personal income tax beginning in 2014, as reported by the Topeka Capital-Journal.

We know the reason for the change. States are hungry for revenue. Removing a so-called “subsidy” for an entertainment activity is an easy political sell.

Regular readers of this blog know the implications. A taxpayer with gambling winnings in Kansas will have to pay the State personal income tax on gross winnings, and cannot even partially offset the winnings via a gambling loss deduction. The result is paying taxes on “phantom” income.

The article mentions that no one came forward in opposition to defend the gambling loss deduction. I’m surprised the local casino lobbyists did not make any fuss.

The initial impact won’t be felt until April 2015, when taxpayers in Kansas have a balance due on their 2014 Kansas tax returns due to gambling winnings. All it takes is one unhappy taxpayer to make a large fuss about it. That’s when Kansans could be tempted to travel outside the state to gamble or turn to other forms of entertainment.

Online Poker Tournaments Now Taxable in Nevada

July 28th, 2013 2 comments

Back in February, the Las Vegas Review-Journal reported that the Nevada Gaming Control Board introduced a bill to tax online poker tournaments. Last month, Governor Brian Sandoval signed Senate Bill 9 into law.

Control Board Chairman A.G. Burnett had noted that in-person poker tournaments are not taxed in Nevada because of the significant costs incurred by the hosts to run these promotional events. Online tournaments, however, do not require the same expenses, such as utilities, floor space rental fees, and food and beverages.

Senate Bill 9 amended, among other things, Nevada Revised Statutes Chapter 463.0161(1) (amendments in bold italics):

“Gross revenue” means the total of all:
(a) Cash received as winnings;
(b) Cash received in payment for credit extended by a licensee to a patron for purposes of gaming; and
(c) Compensation received for conducting any game, or any
contest or tournament in conjunction with interactive gaming, in
which the licensee is not party to a wager,
¬ less the total of all cash paid out as losses to patrons, those amounts paid to fund periodic payments and any other items made deductible as losses by NRS 463.3715. For the purposes of this section, cash or the value of noncash prizes awarded to patrons in a contest or tournament are not losses, except that losses in a contest or tournament conducted in conjunction with an inter-casino linked system or interactive gaming may be deducted to the extent of the compensation received for the right to participate in that contest or tournament.

To be clear, this amendment does not make a player’s winnings from online poker tournaments subject to personal income tax in Nevada. (Nevada does not have a personal income tax.) Rather, an interactive gaming operator’s cut from online poker tournaments is now included as part of the 6.75 percent tax imposed on gross gaming revenue in Nevada.

This amendment has not yet been updated on the Nevada Legislature’s website.

Ohio Tax Man Giveth, then Taketh from Gamblers

July 11th, 2013 1 comment

On June 30, 2013, Ohio Governor John Kasich signed into law Amended Substitute House Bill Number 59. The 3,747 page bill sets forth the Buckeye State’s 2014-15 fiscal year budget.

But that’s not all. Tucked into the bill is the following:

Sec. 5747.01….

As used in this chapter:

(A) “Adjusted gross income” or “Ohio adjusted gross income” means federal adjusted gross income, as defined and used in the Internal Revenue Code, adjusted as provided in this section:

(29) Deduct, to the extent not otherwise deducted or excluded in computing federal or Ohio adjusted gross income for the taxable year, any loss from wagering transactions that is allowed as an itemized deduction under section 165 of the Internal Revenue Code and that the taxpayer deducted in computing federal taxable income.

Gambling losses are no longer deductible as an itemized deduction for purposes of the Ohio income tax, effective immediately.

Gambling losses became deductible under Ohio tax law beginning January 1, 2013, as part of legislation expanding commercial gambling in Ohio.

I located one remark after a brief search for the purpose behind the repeal, in an article quoting a GOP budget fact sheet: “Why should Ohioans subsidize the risky behaviors and bad luck of others?”

I wasn’t fully satisfied, so I kept searching, and found this 2010 Columbus Dispatch op-ed that details the circumstances arising to allowing the deduction in the first place. Legislators have since been convinced otherwise, apparently.

From my reading, the repeal is retroactive. In other words, gambling losses are not deducible in Ohio in 2013 for any part of the tax year.

Ohio rejoins the list of other “bad” gambling states that do not permit gambling losses as an itemized deduction at all for income tax purposes:

  • Connecticut
  • Illinois
  • Indiana
  • Massachusetts
  • Michigan
  • West Virginia
  • Wisconsin

This change in the law does not impact professional gamblers in Ohio, of course. Professionals may deduct gambling losses up to the extent of gambling winnings as a trade or business expense.

Nonresident Gamblers Take a Step Closer to Equality

July 9th, 2013 No comments

Compared to U.S. resident gamblers, nonresident gamblers have had it far worse: Gambling losses are not deductible at all unless connected to a trade or business. Also, games like poker and slots are subject to thirty-percent withholding on a per-bet basis, as opposed to a per-session basis.

Until today, that is.

The District of Columbia Court of Appeals has ruled in Park v. Commissioner that a nonresident gambler may calculate gambling winnings or losses on a per-session basis.

To elucidate the practical significance of this holding, the court explained the tax outcomes when applying each method:

Consider two people. The first, a U.S. citizen, walks into a casino and sits down to play slots. The player first wins $100 but then loses the $100 before leaving the casino for the night. In that hypothetical, the U.S. citizen would have $0 in income to report because the IRS interprets the applicable provision of the Tax Code to cover only gains measured over a session of gambling.

The second person, a non-resident alien, also wins $100 and then loses $100. The non-resident alien is in the same financial situation as our U.S. friend. But according to the IRS, the non-resident alien has $100 in income to report (the $100 he won in the initial bet) because the IRS interprets the applicable provision to require non-resident aliens to pay taxes on gains from each bet.

Section 165(d) of the Internal Revenue Code states that a U.S. resident taxpayer may deduct losses from wagering transactions only to the extent of gains from such transactions. Section 871(a)(1)(A) requires nonresident taxpayers to include in income, among other things, “gains” received from sources in the United States.

The IRS has held the view that “gains” under 165(d) may be calculated over a series of separate plays or wagers. The IRS demonstrated some common sense when stating in 2008 that “fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” the amount realized.

The IRS demonstrated an equivalent lack of common sense interpreting “gains” under section 871 to mean a per-bet approach for gambling. In Park, the IRS argued that because losses aren’t deductible, then all winning bets are taxable.

This logic is backwards: We need to figure out how to calculate winnings and losses first, the court noted.

The taxpayer, Sang Park, played the slot machines. A lot. His case has been remanded to the U.S. Tax Court for the parties to calculate his proper tax liability.

For a summary of the U.S. Tax Court’s opinion that was reversed in part by the D.C. Court of Appeals, check out this post from Russ Fox. If Park’s gambling records are as poor as the Tax Court opinion indicates, he may not fare any better on remand.

Are there any other significant implications from the appellate court’s holding?

In general, payers of gambling winnings to nonresidents are required to withhold 30% of the winnings and issue the payee a Form 1042-S (exception: proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel are not amounts subject to reporting).

Based on the IRS position in Park, theoretically U.S. casino operators should have been withholding (if appropriate) 30% on any winning bet subject to 1042-S reporting (such as slot machines and poker). As the decision notes, this reporting does not necessarily economically reflect the player’s gains from gambling per session.

Park essentially requires U.S. casino operators to make the Form 1042-S reporting and withholding determinations for slot machine play when the nonresident player seeks to cash out tokens or redeem a ticket.

Although this is how U.S. casino operators are also supposed to approach reporting and withholding determinations for slot machine play by U.S. residents, I believe there is inconsistent application of this rule. I’ve heard casinos issuing Form W-2Gs to U.S. residents when their slot machine pull results in a win exceeding $1,200. If a casino has been issuing W-2Gs on a per-bet basis in some situations now, I question whether Park would impact its approach for either U.S. residents or nonresidents.

Unfortunately, the decision does not attempt to further define what a gaming “session” means beyond slot machine play. There is little court precedent for what a gambling “session” is for other games, such as poker. In any event, since this case was about slot machine play, such interpretation would likely be considered dicta.

Nevertheless, the case is a victory for nonresident gamblers. Their treatment just became a bit more similar to resident gamblers for tax purposes.

Case: Park v. Commissioner, No. 12-1058 (D.C. Ct. App. 2013).

Comments on NJ iGaming Regs Part II: Account Transfers and Staking

June 24th, 2013 No comments

We continue our discussion of New Jersey’s Division of Gaming Enforcement draft regulations for internet gaming with player-to-player transfers and staking considerations.

New Jersey’s draft iGaming regulations expressly prohibit player-to-player fund transfers.

N.J.A.C. 13:69O-1.3(g) reads: “A casino licensee shall not permit a patron to transfer funds to another patron.”

Nevada, the only jurisdiction in the U.S. currently with live real-money internet poker taking place, has promulgated the same prohibition in its interactive gaming regulations.

Why, at least initially, are states prohibiting player-to-player fund transfers?

The transfer of funds from one account to another inherently raises money laundering questions.

In the United States, the Bank Secrecy Act (“BSA”) is the primary anti-money laundering federal statute. Under the BSA, casinos are required to report to the U.S. Department of Treasury certain suspicious financial transactions. (Read this for background discussion on how the BSA may apply to intrastate iGaming in the U.S.) It’s possible a player-to-player transfer on an iGaming site could be deemed suspicious, implicating the BSA.

Player-to-player transfers would require iGaming operators to have suitable mechanisms in place to ensure compliance with the BSA. Developing and testing such mechanisms would almost certainly significantly prolong the process an operator must endure before receiving approval from the regulators to launch an iGaming site.

Primarily for this reason, I believe New Jersey regulators, like Nevada, feel that the benefits from authorizing player-to-player transfers is outweighed by the added burdens in the early stages of the iGaming market.

Why do we care about having player-to-player transfers?

A player-to-player transfer adds much ease to engaging in staking activity. Suppose Player 1 agrees to pay for Player 2’s online poker tournament buy-in of $1,000. With transfers authorized, Player 1 could simply send from his online account $1,000 to Player 2’s account to buy the seat.

Without a player-to-player transfer, a number of other fund delivery methods are available, such as bank account transfer, writing a check, or delivering cash.

With alternative transfer options, what’s the big deal if there are no player-to-player transfers on an iGaming site?

Following the money for tax purposes.

Let’s follow the money with and without authorized transfers in the Player 1 and Player 2 example. If Player 2 places in the money, they agree to split the winnings 50-50.

With iGaming Account-to-Account Transfers

Suppose Player 2 wins $20,000 (net of the buy-in) in the tournament. Assuming Player 2 is a U.S. resident, the iGaming operator would normally issue a Form W-2G to Player 2 reflecting the winnings.[1]

A W-2G of $20,000 to Player 2, however, does not mirror the economics of the transaction between Player 1 and 2. Player 1 and Player 2 actually won $10,000 apiece.

Player 2 could have to explain to the IRS with sufficient documentation the staking arrangement. This could create an unnecessary burden for Player 2, as many IRS employees do not understand gambling issues. It could take several months before a case disputing with the IRS is transferred to someone knowledgeable at the IRS who does understand the issues. It would be much better to avoid the situation altogether, if possible.

To avoid the accounting issue for its players, an iGaming site could have an option set up that actually has Player 1 directly buying Player 2’s seat for a $1,000 entry online poker tournament, with the players also letting the site know before the tournament of their agreed percentage distribution of winnings, if any.

That way, when Player 2 wins the $20,000, the site already knows that $10,000 is attributable to Player 1. The site could automatically credit each account $10,000 instead of crediting Player 2’s account $20,000 and leaving it to Player 2 to transfer the $10,000 to Player 1.

It’s easy to follow the money with account-to-account transfers: Player 1 buys Player 2’s seat for $1,000. Player 2 wins $20,000, and the site credits Player 1 and Player 2’s accounts $10,000 apiece, also issuing W-2Gs to each for the same amount. Very transparent and easy to explain to the tax authorities if questioned.

Without iGaming Account-to-Account Transfers

Without a transparent transfer between Player 1 and 2 on the iGaming site, is there any way for the players to have the operator issue two W-2Gs of $10,000 apiece?


The IRS created Form 5754 to address the situation. Upon placing in the tournament, Player 1 and 2 could provide to the iGaming operator a completed 5754 so that the operator issues two W-2Gs, similar to above.

Unfortunately, however, I don’t see all iGaming operators accepting the form, similar to the brick and mortar casino situation.

If an operator doesn’t accept 5754, then the players are left in the cold to prepare other documentation to substantiate each step of the staking process.

Under these circumstances, it would be foolish for Player 1 to give Player 2 the buy-in money in cash. How would Player 2 then prove to the authorities that the buy-in wasn’t his original funds? Receipt of the funds by check or bank wire would make far more sense.

Plus, the players would likely have to prove that they agreed to split the winnings, and that the winnings, if any, were distributed pursuant to the agreement.

Miss any of these crucial steps in “following the money” and Player 2 could have insufficient evidence to prove that half of the winnings were in fact not his. Then Player 2 could be responsible for paying income tax on the full $20,000. Not a situation Player 2 wants to be in.

Yes, player-to-player transfers and staking activity for iGaming are for the benefit of the players. An iGaming site shouldn’t care how player’s winnings are distributed.

As gaming industry stakeholders jockey for position in the emerging iGaming industry in the U.S., it’s easy to lose sight of adequately looking out for the players. Considering the express prohibitions on player-to-player transfers, this issue may be just one of many examples.

[1] If Player 2 is not a U.S resident, then the operator would issue a Form 1042-S and withhold thirty percent of the winnings. For this post, we will keep the discussion to U.S. residents. Read this for a detailed discussion of the issues facing nonresidents for staking activity.

Comments on NJ iGaming Regs Part I: International Players

June 17th, 2013 No comments

On June 3, 2013, draft regulations for internet gaming by the NJ Division of Gaming Enforcement (DGE) were published in the New Jersey Register for a sixty-day public comment period. Check out a great “cliffs” of these proposed regs at, here.

I have already covered some of the tax aspects of New Jersey’s enacted iGaming legislation. In a series of a few weekly posts, I will now examine the draft regulations in light of those aspects as well as other general tax considerations for iGaming in the U.S.

The goal with this short series is to raise awareness, obtain input, and then submit formal comments on the proposed regs to the DGE if appropriate. Please do not hesitate to share your thoughts in a comment below or by e-mail (brad AT taxdood DOT com).

The first item addressed here is international players. The New Jersey iGaming legislation authorizes sites to accept wagers from patrons who are physically located in New Jersey. Theoretically—and eventually in reality—someone who lives outside of the U.S. will travel to New Jersey and attempt to deposit funds on and place wagers using an internet gaming account.

To be clear, this post is not addressing players who are physically located outside of New Jersey and would attempt to deposit funds on an internet gaming account. Such a scenario could be authorized by a “reciprocal agreement,” a topic for another post. For this post, international player generally means a player who is ineligible to obtain a social security number.

Although the New Jersey legislation does not explicitly prohibit an international player from establishing an internet gaming account in New Jersey, the regulations are unclear on this issue.

Unless an international player is a U.S. citizen living abroad, it is unlikely that person has a social security number. In general, noncitizens may be eligible for a social security number only if authorized to work in the U.S. by the Department of Homeland Security.

One may conclude that an individual without a social security number cannot establish an account under proposed regulation N.J.A.C. 13:69O-1.3(b):

In order to establish an Internet or mobile gaming account, a casino licensee shall:

1. Create an electronic patron file, which shall be encrypted and include at a minimum:

a. Patron’s legal name;

b. Patron’s date of birth;

c. Patron’s Social Security number;

d. Patron’s Internet and/or mobile account number;

e. Patron’s address;

f. Patron’s electronic mail address;

g. Patron’s telephone number;

h. The method used to verify the patron’s identity; and

i. Date of verification.

(Emphasis added.) So if a casino licensee cannot obtain a patron’s social security number because the patron does not have a social security number, must the licensee refuse the patron’s business in order to comply with the regulation?

There may be a fix to this issue. Before we go there, we should first see whether the issue is addressed elsewhere in the proposed regs.

Continue reading N.J.A.C. 13:69O-1.3(b). Under (b)(2), a casino licensee shall verify a patron’s identity in accordance with:

1. N.J.A.C. 13:69D-1.5A and, in addition, record the document number of the governmental issued credential examined; or

2. Other methodology for remote multi-sourced authentication, which may include third-party and governmental databases, as approved by the Division.

N.J.A.C. 13:69D-1.5A is a promulgated regulation addressing situations when a casino licensee is required to verify the identity of person or the validity of a signature on a document, found here. The verification involves establishing a “patron identification file.” To establish the file, a casino employee must require the person to present two identification credentials, at least one of which must be government issued.

To meet N.J.A.C. 13:69D-1.5A, an international player may present documents such a civil birth certificate, passport, or national identification card. It just seems impractical to require international players to present these documents to meet the standard every time the patron seeks to establish an online gaming account with a licensee in New Jersey.

Fortunately, proposed reg N.J.A.C. 13:69O-1.3(b)(2)(2) above provides some flexibility for the Division to approve other methodologies for identification verification for international players, but the lack of any specific methodology in this provision does not leave me very confident that regulators and casino licensees will be prepared at the outset to smoothly handle patrons of international origin in New Jersey.

This brings us back to a possible solution.

A state’s internet gaming regulations should require players who are not eligible to obtain a social security number to provide an individual taxpayer identification number (ITIN) to verify the international player’s identity and establish an internet gaming account.

What is an individual taxpayer identification number?

Similar to social security number, an ITIN is a nine-digit number issued by the Internal Revenue Service to individuals who are required to have a U.S. taxpayer identification number but who do not have and are not eligible to obtain a social security number.

In what situations are individuals required to have a U.S. taxpayer identification number but do not have and are not eligible to obtain a social security number?

Situation 1: In general, nonresident aliens (i.e. taxpayers who are not considered U.S. residents) who generate income in the United States may be required to file a U.S. tax return. In order to file the return, the taxpayer needs to obtain an ITIN.

Gambling winnings of nonresident aliens won in the United States is taxable income in the U.S. A patron traveling from abroad to New Jersey may have a U.S. tax return filing requirement if such patron has winnings on a NJ regulated iGaming site.

Situation 2: Nonresident aliens who generate income in the United States and seek to claim treaty benefits (which may or may not impact the requirement to file a U.S. tax return) would need to obtain an ITIN to claim the benefits.

Some tax treaties entered into between the U.S. and foreign countries exempt gambling winnings earned by residents of a foreign county from U.S. income tax. Taxpayers who are residents of such foreign countries and generate gambling winnings on a NJ regulated iGaming site should look to obtain the benefit of the exemption.

Applying either situation to our international player who attempts to establish an internet gaming account in New Jersey produces the same outcome: The international player will need to obtain an ITIN.

How does one obtain an individual taxpayer identification number?

To obtain an ITIN, a taxpayer must submit to the Internal Revenue Service Form W-7 with supporting documentation and must also file a tax return with the Form W-7.

What supporting documentation may be provided along with Form W-7?

The supporting documentation may include a government issued credential such a civil birth certificate, passport, or national identification card.

Sound familiar? These are governmental issued credentials that may satisfy the player identification verification standard under N.J.A.C. 13:69D-1.5A.

There is a practical benefit to having international players obtain ITIN for establishing an internet gaming account in New Jersey. Once the ITIN is obtained, the player would not have to present the other government issued documents each time the player seeks to open an additional account on another NJ iGaming site. The player may instead provide the ITIN each time.

How does the international player address the tax return filing requirement for Form W-7?

There is a potential timing obstacle with the tax return filing requirement in the iGaming context.

An international player without an ITIN may not be in a position to prepare a tax return until after the close of the first calendar year that the international player has gambling winnings in the United States.

Without going into the detail here, there are exceptions to the tax return filing requirement in the Form W-7 Instructions applicable to our international player with gambling winnings in the United States.

The iGaming regulators and operators could work with the Internal Revenue Service in an effort to establish a streamlined process for international players to obtain an ITIN.

Such a process seems like a “win-win.” Getting the IRS on board, however, may be wishful thinking.

The international players benefit by addressing the bulk of the identification verification up front. In addition, the players will be more prepared to address U.S. income tax obligations, if any.

The operators benefit with more consistency in their patron’s files: All electronic patron accounts would either have a social security number or ITIN on file.

The bottom line is that state-issued iGaming regulations should include an explicit mechanism for accepting wagers from a patron physically present in the state but ineligible for social security number by requiring the patron to provide an ITIN.

If New Jersey intends to accept wagers from patrons ineligible for a social security number, then at a minimum I propose N.J.A.C. 13:69O-1.3(b)(1)(c) be amended by adding the language “or individual taxpayer identification number” after “Patron’s Social Security number.” One step further, I propose the regulations to include a provision requiring patrons ineligible for a social security number to provide an ITIN before being permitted to deposit funds on an iGaming site.

Next time I will discuss how player-to-player transfers and staking could be covered under New Jersey’s proposed iGaming regulations.

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