New U.S. federal tax on gambling causing outrage

A look inside the gambling loss deduction change

When non-Americans read about winners of the Powerball or Mega Millions lottery they are often confused about how a jackpot win of $1 billion only nets the lottery player about a quarter of that amount. And more confusing to non-Americans is when they win a jackpot (even one of ass little as $2,000) in Las Vegas on a slot machine, they immediately have 30% of their winnings confiscated by the casino.

The answers to both relate to the U.S. income tax act and the decision in 1913 (when the U.S. first started collecting income tax) that all income regardless of source is taxable and it applies to worldwide income. There was some confusion of whether that meant gross income, i.e. wins only, or net win, which was the total amount of wins less losses. That was finally resolved in 1954 when the Internal Revenue Service Code explicitly indicated that gambling winnings were taxable and that all net winnings must be declared as income. So, when an American wins a lottery jackpot they have federal tax withheld, state tax withheld (depending on the state), and they have to decide whether to take it as a 30 year annuity or as a lump sum, which gives the present value of the 30 year annuity. Sadly, the governments justify the annuity by saying it was put in place to protect jackpot winners from losing it all by taking a big lump sum payment, but well over three quarters of lottery winners take the win as a lump sum and the amount increases substantially if the lottery player is older. It also is insulting by suggesting that people must be micromanaged on how to spend their money.

Gambling Taxation Around the World

In countries like Canada, the UK, Australia, and most of Europe, gambling winnings are considered windfalls and are not taxable. So, if a Canadian wins $70 million in Lotto Max, they will get $70 million as a lump sum with no taxes withheld or need to decide on whether to take it as an annuity. The money listed as the jackpot is the amount they win. Lottery wins will always be treated as a windfall. But for poker, horse racing and sports gambling, the government may declare the person a professional gambler if they bet enough and that is their main source of income. And if that is the case, they will have to pay taxes on their net wins.

As for the 30% that is withheld for large wins on slot machines, poker, horse racing or lotteries, that relates to Internal Revenue Code Section 871 that requires non-residents to pay a 30% flat tax on U.S. source income that is fixed, determinable, annual or periodic of which gambling applies since the amount that can be won is known before the non-American pulls the slot machine handle, pays a poker entry fee or buys a lottery ticket. Canada and the UK have tax treaties with the U.S. which is supposed to allow gambling funds withheld to be refunded, but speaking to many Canadians in this situation, they say that despite the wording of the Canadian form 8833 that indicates they can get a refund, they never get back the 30% and only get a small refund if the can show gambling losses that equal the amount withheld. And then . . . they still have to fill out a U.S. tax return in addition to their Canadian ones. Consequently, most foreigners just eat the withheld amounts, unless it is astronomical.

Taxes on gambling in the U.S.

This decision to tax gambling in the U.S. has always led to people to look for ways not to declare all winnings or trying to find sources of losses that may not have even existed to show the IRS that their revenue was not as high as believed. For example, before the days of automatic teller machines it was common for gamblers to scour the grounds of racetracks and pick up losing tickets off the ground to say that all those tickets were losses to be applied against income. And for those who went to Vegas and lost say $5,000 playing blackjack, they would ask the pit bosses to provide a note from the casino that Mr. so and so bet $5,000 at the casino and didn’t win anything so the net losses were $5,000. Now with almost everything done via player cards and other electronic sources that automatically keep track of wins and losses that is far less commonplace. And for those who bet online at sites like DraftKings or FanDuel, their programs automatically keep track of all transactions and there is even a link to click that will provide the total bets and returns for a given period, as well as a downloadable W2-G, so there is little way to hide net wins online, at least at state regulated websites. This is one of the reasons many Americans continue to bet offshore even if the state has regulated websites like DraftKings. No one wants to pay taxes and whether they should be paying taxes on gambling winnings has always been contentious, despite the 1954 rule.

One issue that was never contentious, however, was whether Americans could apply losses against wins and only pay tax on the net winnings. The answer unequivocally was yes. The only question that was still unresolved was whether past losses could be applied against wins from the tax year in question. In 1987 the question was brought before a federal court, and the ruling was that only losses in the same tax year could be applied to winnings.

New Taxes inside Big Beautiful Bill

The One Big Beautiful Bill (BBB), however, has a rule that will prohibit gamblers from applying all losses against wins. One of the provisions in the new law would only allow gamblers to apply 90% of their losses against wins. Since very few gamblers, even professionals, win close to that amount, it could mean that American gamblers would owe tax that would put them in a negative position.

As an example, let’s say a bettor plays exclusively at FanDuel and wagers $50,000 on sports. Say his total wins equal $55,000, (including the stake), so technically he took back $105,000 of which $55,000 were wins and $50,000 were losses. So right now, he would pay tax on $5,000 of winnings. With this rule in the new BBB, however, only 90% of the $50,000 ($45,000) would be deductible. So instead of $5,000 in winnings, the IRS will deem the bettor won $10,000. If the tax rate is high enough and if the bettor has other gambling losses on horse racing, casinos, etc., they could end up owing more in taxes than they actually won! This was never the intent of the income tax law on gambling and effectively amounts to a consumption tax (i.e. where taxes are withdrawn at the source of the bet and are not refundable), which is what led to the first offshore companies like Intertops and Bowman’s International to move to a tax haven where they didn’t have to take taxes at the source or submit any forms to bettors to use for tax purposes.

In the early days of Intertops when they were in Austria, for example, 10% of the bet was automatically deducted for taxes and the company said this was not feasible so they moved to Antigua to avoid that rule. Instead, they told bettors that it was up to them to use their discretion on what to report to the IRS or any taxation agency.

Not surprisingly this new rule in the One Big Beautiful Bill has many bettors, including Josh from Rochester, NY, to reconsider whether to continue to play with New York regulated sites or go back to offshore companies.

"I was excited to have legal companies to bet with and I closed my offshore accounts. And for doing the right thing the government wants to f*ck me over. I confess the main reason I stopped betting offshore was the hassle of getting payments to the sites and withdrawing but now they all have Bitcoin as a payment option and if I bet that way there is absolutely no audit trail whatsoever, so I can keep all my gambling wins. My wife still bets with these offshore casinos since casino gambling isn’t available here and I may join her for sports. The odds are often better offshore and it will save me a lot of hassle. If this bill doesn’t allow me to deduct ALL my losses against wins, then I’ll seriously have to reconsider how I want to bet on sports moving forward."

And for his part, Josh is a fairly small better who wagers in the low 6 figures each year. Imagine a professional gambler like Billy Walters. What possible reason would he have to do all transactions with legal, regulated books if in the end it results in an obscene tax bill? And what about professional poker players? Do you think they’ll be upfront with all winnings if they can’t deduct all losses, including entry fees, against the wins? There were already discussions which said that the existing income tax laws harm poker players the most and make it almost impossible for them to profit, unlike other poker players around the world that don’t have to abide by similar taxation.

Efforts to bring change

Industry experts and lobbyists seem to realize the danger too and are fighting back. U.S. Rep. Dina Titus (D-NV), who represents Las Vegas, introduced the FAIR BET Act to amend the BBB and other industry lobbyists have asked for the government to reconsider the bill that was signed. The one group that surprisingly has not said anything vocally about it is The American Gaming Association, although I’ve been told that behind the scenes they are looking at the whole situation and may be planning some lobbying efforts for change if the consequences of the bill turn out to severely harm professional and even large betting amateur gamblers.

I just introduced the FAIR BET Act with @RepRoKhanna to rightfully restore the 100% tax deduction for gaming losses.

I encourage other members to support this critical fix.

— Dina Titus (@repdinatitus) July 7, 2025

So, the One Big Beautiful Bill could be the impetus to forcing many bettors to start wagering offshore again and the irony is that the law that struck down PASPA, which led to 36 states now offering legal and regulated sports betting, was initiated by the Supreme Court under Trump in his first term. Trump has also been vocal that he believes the U.S. lagged other countries in legal online gambling and wanted that changed. Whether this was a Senate or House initiative that was conceded by the Senate or House leader to get the bill passed is unknown, but almost everyone agrees that taxes should never lead to losses. There is an old saying that no one ever went broke paying taxes, but if gamblers pay more in taxes than they win over a long enough period that may not be true.

Unfortunately, for the legal industry it’s also bringing to the forefront the age-old question of why the U.S. is so different than most countries by taxing gambling wins at all? The issue was certainly not seriously considered recently, but as the tax issue becomes paramount there is no doubt a lot of Americans will be wondering if this law is fair and whether some party (such as the proposed America Party that Elon Musk claims he will be forming) could actually win an election by declaring windfalls non-taxable going forward. If nothing else, like Josh, it has many seriously reconsidering offshore betting using cryptocurrency that would provide an opportunity to bet without having to pay taxes at all. If that does indeed occur, laws like this one and rules that give the middle finger to gamblers will be the reason the do so, and the governments will have no one to blame but themselves.

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