Online Poker: Cheating, Taxes, and the Law

[Editor’s note: this post originally appeared as a stand-alone page on this site; because of a new site structure I am rolling out in the next few days, I am re-posting it on my blog. Another useful resource on this topic is my paper, Tapping the Aquarium: Legal Implications of Advertising for Online Gambling Sites in the United States.]

It’s very questionable whether or not online gambling is legal in the United States – in some states, it is definitely not legal. While online gambling is most likely not a prosecutable federal crime, it is almost certainly prosecutable by most states. Granted, no players have been prosecuted in the United States, but that doesn’t mean it won’t happen. Just as importantly, it is not really safe – although there are online “tells”, there is nothing like seeing your opponent across the table; when you gamble online, you may very well be up against any number of types of cheats or even playing a “bot” (computer software) and not realize it. If you’re good, the bots are probably not a problem, but the unreality of the game should concern you. Additionally, you’re giving personal information (like banking account numbers) to people overseas, who are outside the jurisdiction of U.S. authorities and may never have to answer for it if your identity is stolen.

Another problem is that I know of no good – or even reasonable – way to pay taxes on online gambling winnings. Like it or not, they are taxable, so you should pay taxes, but the government says it’s illegal, so how do you report your winnings? Fail to report any winnings over $600, and you are committing tax fraud, a serious crime (most forms of tax frauds are felonies). If you are any good and win a lot of money – say, enough to become a poker pro or even supplement your income by any significant amount – whether or not you choose to report it, the likelihood of getting audited and/or charged with tax fraud and/or some gambling crime gets much higher. Many high-profile online gamblers have gotten by, just fine, so far, but there is no guarantee that this situation will continue.

Still, the biggest concern is (or should be) the hazy legal status of online poker. See, for example, this article on online gambling from CNN. The article failed to note that federal courts, so far, have held that the Wire Wager act only covers sports betting. Still, you can bet that the states and the federal government will find a way to regulate and tax or eliminate entirely online gambling, and soon, and it’s likely that many people will be brought up on charges before that happens. In each of the last few sessions of Congress, bills have been introduced to outlaw online gambling; while the legislators may be struggling with finding the right wording, they are trying to ban online poker playing in the United States. There is a real likelihood that, much like pot-smoking in the ’60s or file-sharing in the ’90s, many unsuspecting online players will suddenly find that their hobby, previously legally “iffy,” but conveniently overlooked, has turned into a legal, personal, and professional liability, overnight. Better safe than sorry, right?

Some good resources on the legality and safety of Internet poker include:

DISCLAIMER: I am not a lawyer; nothing on this page should be construed as legal advice. If you are considering playing poker for real money on the Internet, you should seek legal counsel before doing so.  UPDATE 1/2/2010: While I have been admitted to the Texas bar since writing this post, the disclaimer above still applies. The law regarding online poker is unsettled and complex, and nothing on this page is legal advice. The links in this post likewise do not represent legal advice — they are merely information you may find useful, but I have no control over the content at those links and I do not guarantee the accuracy of that information.

If you suspect you have a gambling problem – or if those close to you think you might – please visit Gambler’s Anonymous.