In 2018, the U.S. Supreme Court’s decision in Murphy v. Nat’l Collegiate Athletic Ass’n struck down the federal ban on sports betting as unconstitutional, leaving the question of legalization to individual states. The effect was immediate and lasting. In the years since, sports betting has spread rapidly across the country. As of 2026, 39 states and Washington, D.C. have legalized sports betting in some form.
With that growth has come a tightening of the tax rules governing it. Anyone who has placed, or may place, a bet should understand how the landscape has shifted.
New 2026 Tax Changes:
The most significant federal tax changes stem from provisions in the law commonly known as the One Big Beautiful Bill Act (“OBBBA”), which was signed into law in July 2025. Among the provisions affecting gamblers:
- Beginning with the 2026 tax year, individual taxpayers may deduct only up to 90% of their gambling losses against their winnings; the remaining 10% cannot be carried forward or offset against other income. This means taxpayers may owe tax on income they never actually realized.
- The IRS has updated the Form W-2G instructions to specifically address sports wagering. The minimum threshold amount for payors (e.g., a casino or racetrack) to report payments of gambling winnings from sports wagering has increased from $1,200 to $2,000 to adjust for inflation. The IRS has not released guidance interpreting the statutory threshold increase, so the application of the threshold to gambling winnings is subject to change.
Additionally, tax requirements differ from state to state. Each state taxes gambling winnings on its own terms, and where an individual taxpayer resides can affect the bottom line as to how much to wager. States such as Nevada and Texas impose zero state income tax on gambling winnings, whereas states like Illinois and Kansas tax gross gambling winnings with no deduction for gambling losses. There are also states, such as Missouri, that generally follow the federal framework where losses are deductible up to the amount of winnings. Two taxpayers with identical gambling income can therefore owe materially different tax amounts based on nothing more than their state of residence.
What Does This Mean for You?
As sports betting continues to expand, additional states are expected to legalize, regulate, and tax it. Critically, for federal income tax purposes, you can no longer fully offset your winnings with your losses. For the 2026 tax year and future tax years, the 90% deduction cap means you may owe federal tax even if you broke even or realized a gambling loss. In practical terms, a taxpayer who wins $10,000 and loses $10,000 over the year can still be taxed on $1,000 of gambling income because only $9,000 of those losses are now deductible for federal income tax.
Beyond the federal rules, each state taxes gambling winnings and losses differently. Before filing, it is worth knowing exactly what tax rules your state follows, as your state’s treatment can soften or sharpen the federal rules outlined above.
Special thanks to summer associate Rebecca Lim, who contributed significantly to this post.
