Gambling winnings in cryptocurrency are taxable income, just like cash gambling winnings. Whether you won Bitcoin playing online poker, earned crypto through a prediction market like Polymarket, or hit a jackpot on a DeFi casino, the IRS expects you to report the income at fair market value when received.

Reporting Winnings

Gambling winnings are reported as other income on Schedule 1 of Form 1040. The amount reported is the fair market value of the crypto received at the time of the win. If you won 0.5 BTC when Bitcoin was $60,000, you report $30,000 in gambling income. This is ordinary income — not capital gains — and is taxed at your marginal rate.

Deducting Losses

Gambling losses are deductible only against gambling winnings, and only if you itemize deductions. You cannot deduct gambling losses against other income. If you won $30,000 and lost $25,000, your net gambling income is $5,000. If you won $10,000 and lost $15,000, you can only deduct $10,000 of losses — the remaining $5,000 in losses has no tax value.

Record-Keeping

The IRS requires contemporaneous records of gambling activity: date and type of wager, name and location of the gambling establishment (or platform), amounts won and lost, and the names of other persons present (if applicable). For crypto gambling on DeFi protocols, blockchain transaction records serve as documentation. Download and retain complete transaction histories.

Prediction Markets

Prediction market profits — from Polymarket, Augur, or similar platforms — present classification questions. Are they gambling winnings, investment gains, or something else? The IRS has not issued specific guidance. The conservative approach is to treat gains as ordinary income (gambling winnings). The aggressive approach may argue they are capital gains from trading prediction market shares. Document your position.

Compliance

Unreported crypto gambling income is discoverable through exchange data and blockchain analysis. If you have unreported winnings, Attorney Darrin T. Mish handles the correction and resolution process. Free consultation.