The gambling black market is cashing in on the cryptocurrency rage.

Cryptocurrency-funded gambling is on the rise for offshore bookmakers, with more than 40 percent of online bets funded via crypocurrency at one of the largest and well-known online sports betting sites.

While cryptocurrency is gaining a strong foothold in the offshore betting market, its prevalence yields concerns about how to cash in on cryptocurrency winnings without drawing Internal Revenue Service scrutiny.

U.S. citizens who place bets online through offshore bookmakers are already treading on legally shaky ground, and coupling offshore betting with bitcoin further complicates gambling tax reporting requirements.

Cryptocurrency on the Rise

The adoption of cryptocurrency has been “swift” for leading online sports book BookMaker.eu, marketing manager John Milton told Bloomberg Law Jan. 5.

BookMaker.eu, which is considered a “top five” sportsbook for U.S. gamblers according to gamblingsites.com, reported a significant jump in cryptocurrency during the past two years.

“By the end of 2017, 42 percent of BookMaker.eu customers had used crypto-currencies for deposits and 85 percent had used them to receive withdrawals of funds,” Milton said in an emailed statement.

The site reported that only 10 percent of customers used cryptocurrencies for deposits in 2015, and only 8 percent of users chose cryptocurrencies to receive withdrawals the same year.

The online betting venue said it expects 100 percent cryptocurrency withdraw and deposit rates in 2018.

Bloomberg Law reached out to Pinnacle Sports, 5 Dimes Casino & Sportsbook, BetOnline, and Heritage Sports bookmakers, none of which responded to a request for comment.

Anonymity Factor

The use of cryptocurrencies in online wagering is preferable because of the anonymous nature of such transactions, Adam S. Tracy, founder of the Tracy Firm Ltd. in Chicago, told Bloomberg Law.

Tracy, an attorney who represents individuals and businesses that operate with Bitcoin and other forms of cryptocurrency, said for online gamblers, cryptocurrencies—through their anonymous structure—allow U.S. citizens to bypass federal laws that prohibit offshore betting.

“With bitcoin (or cryptocurrencies in general) no one can stop you from doing whatever you want with your money. That’s why many gambling sites have opted into accepting it as payment,” Ofir Beigel, general manager of 99 Bitcoins, told Bloomberg Law Jan. 5 in an email. According to its website, 99 Bitcoins is the largest information source for bitcoin newcomers.

Online gamblers in the U.S. will most likely have their credit cards declined if they try to deposit funds online, due to federal regulations that prohibit gambling businesses from accepting credit card payments. Cryptocurrencies change all of that, Beigel said.

“It’s really become one of the only ways, if not the only way, to be able to get funds for those who chose to gamble via an offshore site,” Lawrence G. Walters, managing partner at the Walters Law Group, which specializes in internet gaming law, told Bloomberg Law Jan. 5.

Americans in Offshore Market

The legality of offshore sports betting in the U.S. is murky. Many state laws explicitly prohibit such gambling.

The 2006 Unlawful Internet Gambling Enforcement Act (Pub. L. No. 109-347) outlaws the business of betting or wagering, but the statute has only been applied to gambling operators, not individuals, Walters said.

For the most part, under broad interpretations of both state and multiple federal laws, online betting is illegal in the U.S., Kate Lowenhar-Fisher, a Nevada-based gaming attorney at Dickinson Wright PLLC, told Bloomberg Law Jan. 3.

“The reality is from a gambling law perspective, whether that’s state gambling law or the Unlawful Internet Gambling Enforcement Act or the Illegal Gambling Business Act or the Wire Act, that transaction with a U.S. customer placing a bet offshore is illegal, absolutely,” she said.

Despite the uncertain legal nature of online gambling activity, Americans are consistently drawn to offshore accounts. The black market in the U.S. handles about $50 billion to $60 billion a year, with total annual revenue estimated between $2.5 billion and $3 billion, according to Eilers & Krejcik Gaming LLC, a California-based market research firm specializing in the global gaming industry.

Eilers & Krejcik estimates that 12 million to 15 million Americans are active in illegal gambling, which includes illicit gambling on U.S. soil and online through offshore bookies.

Tax Reporting Complications

While cryptocurrency-funded gambling allows individuals to maintain their anonymity, U.S. gamblers are still required to report their winnings to the IRS.

“You are obligated to pay an excise tax from winnings, even from illegal gambling wins,” Lowenhar-Fisher said. “People always miss this issue.”

Legal wagers are subject to an excise tax of 0.25 percent, and illegal wagers are subject to a rate of 2 percent, according to the IRS.

For federal tax purposes, cryptocurrencies are treated as property and taxpayers must include the fair market value of cryptocurrencies when reporting gross income, according to IRS Notice 2014-21. As with gambling with traditional currency, one can offset loses with wins via cryptocurrency-funded bets.

The volatile nature of cryptocurrenices—particularly bitcoin, which dropped by more than $1,000 in less than 48 hours on Nov. 10—adds a layer of complexity to calculating the fair market value. One must take into account both the price of the cryptocurrency when initially purchased and its price once it has been sold in order to account for gains or losses, according to IRS guidance.

Buying With Bitcoin

Many gamblers may wish to cash in on cryptocurrencies sooner rather than later due to its volatile nature, Joel Waterfield, managing director and national tax lead for the technology industry practice at Grant Thornton LLP in Washington, told Bloomberg Law Jan. 8.

“The longer you keep gambling winnings in crypto format, you can lose a lot of what you consider wealth,” he said.

Cryptocurrency owners eventually will cash in on their digital currency through the purchase of goods or services. Many gamblers who make large purchases—such as a home or a car—or choose to diversify cryptocurrency into different assets or investments could draw IRS scrutiny, Waterfield said.

“Other types of investments or large purchases, where there is not a corresponding transfer out of some bank account, that’s a tipoff,” he said.

U.S.-based gamblers who don’t want to turn their winnings into U.S. dollars and then straight into a bank account typically choose to purchase goods, investments, or services outright with cryptocurrencies, he said.

If the IRS doesn’t see a corresponding transfer of money from a bank account to fund a large purchase, that could signal something is awry, Waterfield said.

The federal government generally doesn’t pursue individual gamblers who bet offshore, but has investigated massive illegal gambling rings and individuals affiliated with each of the gambling rings were indicted, such as PokerStars in 2006, which violated the UIGEA along with Full Tilt Poker and Absolute Poker. The PokerStars indictment had a chilling effect on the industry, Lowenhar-Fisher said.

Once the federal government figures out there is a problem, “they will pool their resources and focus on that, it becomes an area where it’s the most bang for their buck,” Lisa M. Zarlenga, a partner at Steptoe & Johnson LLP in Washington, told Bloomberg Law Jan. 5.

The federal government is likely to take note of the marketplaces laden with heavy cryptocurrency action, including offshore betting ventures, Zarlenga said.

People engaging in offshore gambling with cryptocurrencies “should be aware that the U.S. government has had success in the past in getting enough information through the distributed ledger and through certain individuals who took part in the actual transactions,” Waterfield said.

If gamblers “are completely relying on the fact that the government will never know who they are, well, that is pretty much hanging your hat on something very uncertain,” he said.