A friend of yours went out and purchased some bitcoins last week. Yesterday she logged on to an online casino, played a couple of rounds on Bitcoin slots, and walked away with some coin.

Now you're wondering whether her winnings are taxable or not. You also want to know if her playing via bitcoin makes a difference for tax purposes.

Confusion over Bitcoin gambling and taxes on winnings is pretty common. Because people don't understand how cryptocurrencies work, they mistakenly believe that bitcoin and its thousands of cousins are all tax-free financial instruments. That is not necessarily the case.

We will go through Bitcoin gambling and taxes in this post. But note that only general points will be made. Tax laws differ from one country to the next, and even within different regions of the same country. It would be impossible for us to investigate every taxing jurisdiction in the world in order to give you a comprehensive explanation.

Taxation of gambling winnings

The first thing to look at is whether winnings from gambling, in general, are subject to taxation. We will start with the UK. All gambling winnings in England, Wales, Scotland, and Northern Ireland are completely tax-free. It doesn't matter whether you gamble with British sterling, bitcoin, or anything else.

By contrast, gambling winnings are taxable in the US. The fact that online gambling is restricted in the U.S. creates an interesting conundrum. The government expects taxpayers to pay taxes on any winnings received from online gambling activities, though they do not want their citizens gambling online to begin with.

As you can see, tax laws vary between the UK and the US. But let us look at some other countries. Here is a list of 15 countries where gambling winnings are tax-free:

1. Austria
2. Australia
3. Belgium
4. Bulgaria
5. Canada
6. Czech Republic
7. Denmark
8. Finland
9. Germany
10. Hungary
11. Italy
12. Luxembourg
13. Malta
14. Romanian
15. Sweden

As a citizen of any of these 15 countries, you could win the biggest jackpot of your life and not have to pay a penny in taxes. It's no wonder that online gambling sites are quite popular in many of these countries.

How winnings are taxed

The next thing to consider is how gambling winnings are taxed in jurisdictions that do so. In most cases, they are taxed as regular income. Moreover, there is a legitimate reason for this. We will use the U.S. as an example once again.

U.S. taxpayers pay a percentage of their annual income as income tax. Gambling winnings are considered regular income because they are earned by participating directly in an activity that results in being paid. Contrast that to money earned from the stock market.

Stock earnings are based on ongoing activity and paid out as shares with higher value. In order to access earnings, shareholders have to liquidate some of their shares by selling them. As such, they are selling assets rather than earning income. Profits generated by securities are therefore taxed as capital gains.

Now, here's where things get sticky again. Bitcoin is not considered legal tender in the US. It is an asset. As such, any value added to bitcoin as a result of the price going up generates profits that are taxed as capital gains. If you use some of that bitcoins to gamble on slots, the jackpot you won would be taxed as income, not capital gains.

Confused yet? If so, you are not alone. Tax laws all over the world are convoluted to begin with. When you throw cryptocurrency and gambling into the equation, what was already hard to understand becomes an unimaginable regulatory mess.

Determining your tax situation

Hopefully you are not so confused as to give up on the rest of this post. Stick with us, because we want to talk about a couple of additional things. First is figuring out your own tax situation. In short, you will have to do some research by yourself.

There is no way for us to tell you whether gambling winnings are tax-free in your country. So your best bet is to go online and visit the website of the government agency responsible for collecting taxes. On that site you can probably search for gambling winnings.

You can always call the agency if your internet search doesn't yield the information you need. If you do make such a call, just be sure to be very clear about what you're asking. You want to know whether gambling winnings are taxable and, if so, whether they are taxed as income or capital gains.

You are ultimately responsible for following the tax laws in your country. Whether or not you do is entirely up to you. We offer no opinion on the matter one way or the other.

Avoiding taxes on gambling

Gambling winnings are taxed in many countries, leading gamblers to find workarounds. What we are about to describe is one such workaround. Once again, this is merely an explanation. Coinbet.com takes no position on whether you should employ the workaround to your benefit.

With all of that said, the workaround is based in gambling using Bitcoin or another cryptocurrency. You buy some bitcoins, make a deposit, and play away. Should you win, you then withdraw using the same bitcoins that funded your deposit. All is well.

The reason this works as a vehicle for getting around taxes lies in the nature of bitcoin itself. All cryptocurrencies, bitcoin included, are built around the philosophy of decentralization. Decentralization excludes government entities and central banks so as to not allow either institution to control the coin.

With decentralization comes the benefit of being able to freely transact business without government interference. Add to that the fact that cryptocurrency is incredibly secure, and you have a platform for transacting business free from government eyes.

It is entirely possible to gamble with bitcoin, win a huge sum, and keep your winnings hidden from government scrutiny by holding them in cryptocurrency. This is one way that online gamblers avoid taxation. They feel no need to report their winnings because they are virtually untraceable as long as they remain as bitcoin or another cryptocurrency.

Paying less tax

Gamblers sometimes employ another workaround that lets them pay their taxes but at a lower rate. This workaround only succeeds in jurisdictions where there is a distinction between regular income and capital gains. Here's how it works:

• The gambler purchases some bitcoins and then goes gambling.
• After winning a sizable amount, the gambler withdrawals his winnings in bitcoin.
• The bitcoins the gambler won is combined with existing bitcoins already in his wallet.
• The amount now in his wallet is greater than what he started with, giving him a net profit in bitcoins.
• Rather than report his gambling winnings and pay income tax, he reports profit on his bitcoin holdings and pays capital gains at a lower rate.

It is possible in some jurisdictions to reduce one's tax bill by going the capital gains route. Whether or not this is ethical is entirely up to you. Note that your government's taxing authority will probably not view the strategy favorably.

Operator taxes

Before closing this post, you might be interested to know how online gambling operators deal with taxes. This is something else that is governed by jurisdiction. There are some jurisdictions in which operator earnings are taxed as normal income. There are no special rules pertaining to online gambling.

There are other jurisdictions where online gambling is treated separately from other industries. Take Sweden, for example. Gambling winnings are not taxable, but operator earnings are. For operators, it depends on the kind of operation they are running.

Operators of state-owned casinos are not subject to any tax on their profits. That makes sense. All other operators are taxed per table. The larger the operation, the more taxes are paid.

In summary

As you can see, there is no black and white rule regarding gambling taxes. Where players are concerned, the only way to know if your winnings are taxable is to contact your national and regional taxing authorities. They will have all the information you need.

The only other thing we want to add is a reminder that each gambler is ultimately responsible for knowing and understanding tax regulations. It is not our job or mission here at Coinbet.com to provide tax advice. We are not qualified to do so anyway.

If you gamble online, make sure you understand the tax implications. Please do yourself and the industry a favor and pay all the taxes you are legally obligated to pay. You will be better off, the taxing authorities will be happier, and you will not be doing anything to harm the gambling industry.