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Is trading on Intrade legal for US residents?
Yes 63% [ 27 ]
No 9% [ 4 ]
I don't know, and I don't care. 28% [ 12 ]
Total Votes : 43
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One World
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I wonder if it is legal for US residents to trade on Intrade.

I have heard about a letter John DeLaney wrote to CFTC saying that
".. it is perversely unclear as to whether Intrade, and indeed myself, are considered persona gratis by the United States."
Are you aware of any response he received from CFTC?

@Moderator: Feel free to remove this post if this issue has been discussed before.

Intrade
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One World,

I have spoken to John Delaney about your post and he has informed me that the CFTC has not commented on the many public comments that were filed here...

http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2008/08-004.html

The Intrade comment is here...

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/frcomment/08-004c014.pdf

Here is the CFTC primer on event markets

http://www.cftc.gov/newsroom/generalpressreleases/2008/pr5493-08.html

and...

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/file/e8-9981a.pdf







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Delphi
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Intrade, thank you for posting those links. I actually read some of the responses to the CFTC call for public comments and found them very thoughtful. I hope they are helping to nudge the CFTC toward a recognition, perhaps in the new year as this new administration comes in. I hope you will keep us aprised of the process, to the extent that it's appropriate to make the developments public.
John Delaney
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Hi Delphi,

Thanks for your post.

I certainly will do my best to deliver timely and relevant information on these very important developments.

Best regards,

John
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fod
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If the law doesn't change before I withdraw money (may not happen for a while), what will I write on my tax forms for where this money was earned?
OskarSchindler
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Joined: October 23, 2008 01:10:35 UTC
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Maybe simply something like "Other income"
Delphi
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OskarSchindler wrote: Maybe simply something like "Other income"


Actually, that's where I plan to report my earnings here (Line 21 on this past year's 1040). But I've been meaning to ask here if anyone would like to volunteer what descriptive term they have jotted in on that line in the past (as the 1040 booklet tells you to).

I don't consider buying and selling predictive futures on Intrade to be gambling, any more than investing in the stock market is. Both activities involve risking money in the hopes that developments will occur that make those holdings become worth more. Because the CFTC has not articulated a position on it, I currently consider it "unregulated futures trading".

Since the CFTC has not seen fit to edify us, I am in a quandry as to what to call it. I suppose "gambling winnings" is a common thing to list there, but then I feel like I'm admitting to something that could be prosecuted if they audited and asked which regulated casino it was in (to which the answer would be "none"), when I don't consider this to even fit under that term.

Anyone want to comment?
OskarSchindler
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I see a major problem here. Consider the following two claims:

Claim #1: the profit we make on Intrade increases our taxable income
Claim #2: if we loose money on Intrade, it will reduce our taxable income

Intuitively, I’d say that if Claim #1 is true than Claim #2 must be true as well. It would be just so unfair otherwise (both in the case of investing and gambling, BTW)! OK, maybe some of you would say: Yes, indeed the government (or the Revenue Agency at least) is unfair. I think that Claim #2 is false so I have tendency to say that Claim #1 must be false too.

Anyways, I suppose that:

a) Intrade does not withhold any tax (or whatever other than trading fees) on the profit we make.
b) Intrade does not inform any Revenue Agency about our profits (except maybe the Irish)
c) Intrade does not provide us any form (like Form W-2 in the case of US employers) we should attach to our income declaration

Could someone confirm these three points, please?
mattd241
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The Unlawful Internet Gambling Enforcement Act of 2006 makes it unlawful for a company to have a wagering site based within the US. It also extended it's reach to the financial institutions, preventing them from processing payments using the online services (ie., credit cards).

The law is so ambiguous, as it was passed in the 11th hour of of a session of Congress that a "gambling" site wasn't even properly defined and is open to interpretation.

Citizens of the United States are not prohibited by this Federal law from gambling online - with the exception of the state of Louisiana, which created a state law specifically stating that the bettor, using a computer, can be prosecuted for "aiding and abetting" a gambling site. If an offshore site accepts funding through paper means (check, M.O. cert. check), then they can gamble without fear of prosecution.

Currently, The Hon. Barney Frank, 4th District of Massachusetts has introduced a Bill to amend the UIGEA. The Bill has passed the Means and Appropriations Committee as it continues it's journey toward being accepted. The Bill calls for regulating and controlling the now banned gambling sites. This amendment would result in allowing the U.S. to set guidelines for use and also collecting taxes and fees from those sites, thereby making it easier for US citizens to enjoy gambling sites.

It would also alleviate the actions against the U.S. that other nations have instituted because of the restrictions the U.S. has imposed on free trade, as the U.S. is a member of the World Trade Organization.
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drhass
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OskarSchindler wrote: I see a major problem here. Consider the following two claims:

Claim #1: the profit we make on Intrade increases our taxable income
Claim #2: if we loose money on Intrade, it will reduce our taxable income

Intuitively, I’d say that if Claim #1 is true than Claim #2 must be true as well. It would be just so unfair otherwise (both in the case of investing and gambling, BTW)! OK, maybe some of you would say: Yes, indeed the government (or the Revenue Agency at least) is unfair. I think that Claim #2 is false so I have tendency to say that Claim #1 must be false too.


Not necessarily. Now, no matter what, Claim #1 is true. The US taxes any income derived from any source. Whether Claim #2 is true depends on (among other things) how the income is classified. If it is classified as gambling income (or, I believe, "other income") losses on intrade can only be used to offset winnings on intrade. So even if you end a year with a net loss of $5000, you can't lower your taxable income one cent. If you earn $1000 through your winnings and lose $900, though, your taxable income would be reduced by that $900 loss, meaning you'd pay tax only on your net winnings of $100.

But, if the income is considered some sort of futures trading, you would be able to deduct capital losses up to $3000 beyond your winnings, and then any extra losses could be used to offset gains in future years.

I'm not sure I can think of a situation where Claim #2 would be false in all situations though. Perhaps if your winnings on intrade were considered a "prize," the IRS would not let you deduct the cost you incurred to win that "prize." I'm not sure you can deduct the price of a lottery ticket you purchased to win the lottery---but I don't know for sure. Either way, I don't think intrade winnings could be classified as prize income.
One World
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Delphi wrote:

I don't consider buying and selling predictive futures on Intrade to be gambling, any more than investing in the stock market is. Both activities involve risking money in the hopes that developments will occur that make those holdings become worth more. Because the CFTC has not articulated a position on it, I currently consider it "unregulated futures trading".



I hope CFTC also understands this point.
drhass
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One World wrote:
Delphi wrote:

I don't consider buying and selling predictive futures on Intrade to be gambling, any more than investing in the stock market is. Both activities involve risking money in the hopes that developments will occur that make those holdings become worth more. Because the CFTC has not articulated a position on it, I currently consider it "unregulated futures trading".



I hope CFTC also understands this point.


I wonder if the CFTC will try to draw some distinction between those contracts which are held in the long-term (US going into depression in 2009, Osama being caught by X date, etc.) and those which are held in the very short term (hourly Dows, for instance). The former is much more like a stock market trade, while the latter is much more like gambling.

And for those of you steeped more in the theory of predictive market trading, how does the fact that an event contract will expire at a predetermined date and at one of two predetermined values make it different from the trading in the stock market (which has neither an end nor an ending value)?
One World
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drhass wrote:
I wonder if the CFTC will try to draw some distinction between those contracts which are held in the long-term (US going into depression in 2009, Osama being caught by X date, etc.) and those which are held in the very short term (hourly Dows, for instance). The former is much more like a stock market trade, while the latter is much more like gambling.

How does the holding period decide what is gambling and what is not? By this definition, day trading in stock market can also be characterized as gambling.
Is making investment decisions based on intra-day political and financial developments gambling? Thats essentially what Daily Dow contract trading is all about.
Domer
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drhass wrote:
OskarSchindler wrote: I see a major problem here. Consider the following two claims:

Claim #1: the profit we make on Intrade increases our taxable income
Claim #2: if we loose money on Intrade, it will reduce our taxable income

Intuitively, I’d say that if Claim #1 is true than Claim #2 must be true as well. It would be just so unfair otherwise (both in the case of investing and gambling, BTW)! OK, maybe some of you would say: Yes, indeed the government (or the Revenue Agency at least) is unfair. I think that Claim #2 is false so I have tendency to say that Claim #1 must be false too.


Not necessarily. Now, no matter what, Claim #1 is true. The US taxes any income derived from any source. Whether Claim #2 is true depends on (among other things) how the income is classified. If it is classified as gambling income (or, I believe, "other income") losses on intrade can only be used to offset winnings on intrade. So even if you end a year with a net loss of $5000, you can't lower your taxable income one cent. If you earn $1000 through your winnings and lose $900, though, your taxable income would be reduced by that $900 loss, meaning you'd pay tax only on your net winnings of $100.

But, if the income is considered some sort of futures trading, you would be able to deduct capital losses up to $3000 beyond your winnings, and then any extra losses could be used to offset gains in future years.

I'm not sure I can think of a situation where Claim #2 would be false in all situations though. Perhaps if your winnings on intrade were considered a "prize," the IRS would not let you deduct the cost you incurred to win that "prize." I'm not sure you can deduct the price of a lottery ticket you purchased to win the lottery---but I don't know for sure. Either way, I don't think intrade winnings could be classified as prize income.


To further clarify your response (which was in most respects correct), you would not be able to net the Intrade income unless you are declaring as a professional. That is to say: if you won $4000 on Intrade and lost $2500 on Intrade, you would have taxable income of $4000 (line 21) and a taxable deduction of $2500 (you would also HAVE to itemize deductions to be able to claim this). You cannot simply write in $1500 on line 21.

The place I would start is the twoplustwo forums, which is a poker forum which has an entire subforum devoted to tax issues.

I would also recommend that if you have significant gains that you use a tax professional. In that same vein, I am not a tax professional, and probably no one else is, therefore all information read here should be considered non-professional advice and not relied upon for tax decisions.
drhass
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Domer wrote:
To further clarify your response (which was in most respects correct), you would not be able to net the Intrade income unless you are declaring as a professional. That is to say: if you won $4000 on Intrade and lost $2500 on Intrade, you would have taxable income of $4000 (line 21) and a taxable deduction of $2500 (you would also HAVE to itemize deductions to be able to claim this). You cannot simply write in $1500 on line 21.


Interesting---I did not know that. I itemize anyhow, so it would be moot for me, but I didn't realize you couldn't just write in the net and call it a day. All of this makes it very interesting what the CFTC decides to do. I imagine, if they are doing anything with this at all, they are also checking with the IRS to get their input.
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