Taxation of Gambling Income and Deductions: Key Points to Recall
In the United States, gambling winnings, including those from online sports betting, are now considered taxable income at the federal level and must be reported on your tax return. This change, which comes into effect from 2026, means that gamblers will no longer be able to fully offset their losses against their winnings when it comes to tax deductions.
Federal Gambling Taxes
Prior to 2026, taxpayers could deduct 100% of their gambling losses against their winnings if they itemized deductions and kept proper records. However, starting in the 2026 tax year, the new tax law limits the deduction of gambling losses to 90% of losses, meaning taxpayers cannot fully offset their winnings with losses, making some winning income taxable even if they break even overall.
Casinos and betting platforms typically report winnings to the IRS, and taxpayers must keep careful records of bets and losses to substantiate loss deductions. Winnings from gambling are fully taxable and must be reported as income.
State Sports Betting Taxes
At the state level, taxes primarily target sportsbooks, affecting the industry environment and indirectly bettors. The tax rates vary widely, with some states charging as low as 6.75% (Nevada, Iowa) and others as high as 51% (New Hampshire, New York, Rhode Island). Some states have tiered tax systems, with higher taxes on online betting compared to retail.
As of now, around 38 states allow legal sports betting, with 27 states and DC permitting online betting. The tax rates affect operators rather than players directly but can influence betting odds or promotions.
How Winnings Are Taxed for Players
Gambling winnings are considered taxable income on your federal return and may be subject to withholding reporting if winnings exceed certain thresholds. If you are gambling or betting online, you should track both winnings and losses carefully to comply with tax rules and consult a tax professional, especially given the recent changes in loss deduction limits.
Summary
This change in federal rules starting 2026 effectively increases the taxation on gamblers, including online sports bettors, who previously could fully offset losses against winnings. The American Gaming Association provides data on gambling in the United States, and it is clear that the taxation of gambling winnings is a significant aspect of the gambling industry in the United States. The United States gaming industry is currently booming, with various forms of gambling available, including new casinos, lotteries, and online sports betting. Approximately 55% of all American adults gambled in the last year.
In light of the upcoming change in 2026, gambling winnings, including those from online sports betting, will be partially taxable for taxpayers, as they can only deduct 90% of their gambling losses against their winnings. Thus, finance professionals and business strategists in the casino-and-gambling sector will need to adjust their tax planning accordingly to comply with the new tax law.
Additionally, online taxpayers engaging in sports betting should be aware that winnings from gambling activities are fully taxable income and subject to IRS reporting, necessitating careful record-keeping of both winnings and losses to substantiate any loss deductions. As such, seeking advice from a tax professional is advisable for minimizing tax liabilities.
