NYC Tax Accountant
Computer games are not just for kids anymore. With the advent of online gambling, some adults are now spending as much time “playing” on the computer as their children do. While some of these virtual casinos allow players to play with “pretend” money, there are a growing number of websites devoted to real world gambling. Unfortunately, there are also a number of myths and misconceptions about how a taxpayer should treat winnings from an online casino. For example, people often believe that as long as winnings are kept in a virtual account with the casino there is no need to report the winnings as income to the Internal Revenue Service, or IRS. Gambling winnings, however, are considered income and must be reported as such regardless of whether you elect to “cash out” or not.
Online casinos operate much like brick and mortar casinos in that a player begins by purchasing chips that are then used to bet at the various games. The goal, of course, is to accumulate chips by winning at the various games. In a real life casino a player will typically “cash out”, or convert chips back to cash, before leaving the casino. Players at an online casino usually have the option to cash out or leave the chips in their online account for the next time the player wishes to play. Either way, winnings are considered income and must be reported to the IRS.
The Internal Revenue Code Section 61(a) of the Internal Revenue Code defines gross income as “all income from whatever source derived,” a definition that clearly includes gambling winnings. If a player chooses to leave his or her winnings in an online account at a casino though, must those winnings be reported as income to the IRS? To determine when that income must be reported we have to dig a little deeper in to the Internal Revenue Code and review the concept of “constructive receipt of income.”
Sometimes, income is earned but the recipient has chosen not to access the funds yet, as is the case with gambling winnings left in an online account. When this is the case, the recipient is said to have “constructive receipt” of the income. This is different from a situation where income is earned but has not yet been paid. IRS Publication 334 provides a definition for the concept of constructive receipt of income that states as follows: “You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it.”
Using that definition it becomes clear that gambling winnings that remain in an account must still be reported as income on Line 21 of IRS Form 1040.