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Congress Mulls Taxes on Internet Gambling

May 12, 2010

The House Ways and Means Committee is rolling the dice and planning to convene a hearing next week on tax proposals related to legislation to legalize Internet gambling.

If the legislation ever gets passed, it could finally enable this popular form of gambling to finally be legalized in the U.S., which is where most of the players come from anyway.

Right now, the Unlawful Internet Gambling Enforcement Act prohibits people in the U.S. from knowingly accepting payments in connection with Internet gambling. Regulations implementing the UIGEA were issued by Treasury and the Board of Governors of the Federal Reserve System last year and are scheduled to take effect on June 1, 2010. 

However, as the Ways and Means Committee noted in its announcement of the hearing, legislation has been introduced in this and prior sessions of Congress to license and regulate online gambling. Companion legislation would impose gambling licensing fees and certain information reporting and other requirements on gamblers and online gambling sites. 

The IRS, of course, already imposes taxes on both legal and illegal gambling activities. The excise and occupational taxes are equal to 0.25 percent of the wager and $50 per year, if the wager is authorized under the state law where it is accepted, and 2 percent of the wager and $500 per year, if unauthorized under the state law. Parimutuel wagering, coin-operated devices, and state-conducted lotteries are exempt from taxation. In addition, individual and corporate income taxes, and third-party information reporting requirements, are applicable to income from gambling. 

The committee is currently soliciting comments for the hearing, which has been scheduled for May 19. If legalized Internet gambling ever does get approved, the resulting tax revenues might put a dent in the federal budget deficit.

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