A sourcing question that turns on a visitor’s status

For a foreign visitor, the first question is whether the activity creates any U.S. tax obligation at all. James Creech, a principal in the specialty tax practice at Baker Tilly, said a fan in the country for the tournament generally would not become a U.S. taxpayer based on time alone, because the substantial presence test requires presence in the United States of 183 days over three years under a set formula.

If the prediction platforms are treated as gambling, Creech said, the income is sourced to the United States. “If you come into the country and you’re doing this because it’s exciting, if it’s gambling and you win a big jackpot, then it’s U.S. sourced income,” he said. A casino-style operator would “withhold 30% to make sure you file a U.S. tax return,” so a visitor who won $1 million might receive $700,000 up front.

The result changes if the platforms qualify as financial products. “Generally, we treat the gains on the sale of financial products as not U.S. sourced, they’re sourced to wherever I’m a resident,” Creech said. Under that treatment, the same win would carry no U.S. tax. “I can make the same bet at the same time in the same location,” he said, but “my tax filing obligations in the U.S. are completely different.”

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