Sports Betting 2026 Federal, State Income Tax Guide - Prediction Market Questions Remain
With April 15 Tax Day Wednesday, here's all the key information sports bettors need to know — especially if they use the best betting sites before filing their federal and state income tax returns. This year, our Sports Betting 2026 Federal, State Income Tax Guide will try to answer your questions.
The IRS is not expected issue its long-awaited guidance on how filers should treat profits and losses from prediction market trades before this week's filing deadline. Those platforms (designated as Designated Contract Markets (DCMs) by federal regulators) are caught in the middle, since they don't know how to report their information to the IRS.
Prediction market operators have told bookies.com that they are awaiting that same IRS guidance and have yet to send the appropriate forms to their traders.
They are not alone.
"That is something we are also still wrestling with," Lead U.S. Tax Partner for Gaming at KPMG Robert Stoddard told bookies.com. "The DCMs are struggling with this. We've heard informally that there are differences in views amongst if DCMs were to issue a reporting form to one of their customers. There are divergent opinions on which form, whether that be a 1099 miscellaneous, a 1099 B, or no form."
All prediction market income should be reported. The question remains: How? Various taxable outcomes hinge on whether those profits are reported as income or capital gains.
"It may come down to an individual's risk tolerance," Stoddard said.
If someone reports prediction market profits as miscellaneous income, they will face different tax rules and rates vs. reporting those same figures as a capital gain. A filer reporting prediction market income as a capital gain - and taking any allowable offsets - could be facing a tax bill down the line if the IRS deems it to be earned income. A filer reporting those profits as earned income, meanwhile, and forgoing the offsets of a capital gain when it comes to deductibility, could be paying more taxes than was necessary if the IRS determines otherwise.
Specific IRS guidance may be a ways off.
"Treasury may wait until some of these court cases play out," Stoddard said.
Stoddard added that some states have begun to formulate unique reporting requirements for prediction market income that could help them offset revenue lost to potential sports wagers.
New Tax Deduction Rule Does Not Apply - Yet
One thing is clear.
"You should report your income. All income is reportable, taxable income," Stoddard said. Thus, it could well impact both what you pay in federal and state income taxes.
Millions who legally wagered on sports in 2025 and/or engaged in prediction market trades again face the sometimes-challenging task of determining what they may owe in taxes from their gambling and trading activities.
Therefore, it’s important to keep detailed records of the money you wager, what you win, and what you lose. You may be better off taking the standard deduction or itemizing, depending on the numbers.
The IRS allows you to deduct 100% of gambling losses up to the amount of your winnings, but only if you itemize all your deductions. You must also track all of your wagering activity.
As part of the One Big Beautiful Bill signed into law last year, the amount of losses that gamblers could deduct from their taxes will change.
Starting with the 2026 tax year, gamblers who itemize will be able to deduct losses only up to 90% of their winnings.
However, that change in the law does NOT affect tax returns filed for income earned in 2025.
The limits on the deductibility of losses rocked stakeholders across the betting ecosystem. Multiple attempts to change the new deductibility limits have already failed in Congress.
Thus, it remains in effect, again, starting with next year's tax return.
The good news is that nothing else has changed when it comes to filing your taxes on gambling-related income on the state and federal front - save for those in Missouri. Our Sports Betting 2026 Federal, State Income Tax Guide is here to help.
New Changes For Missouri Taxpayers This Year
Sports betting launched in Missouri on December 1.
Missouri residents pay 4.7% on adjusted gross income over $9,191.
In Missouri, gambling income (including sports wagering) is included in your federal adjusted gross income. If you itemize your deductions on the federal return, (non-professional gambler) losses may be deducted as a miscellaneous itemized deduction. If you elect to itemize deductions on your Missouri return, your gambling losses will reduce your Missouri taxable income.
As of the end of 2025, 39 states and Washington, D.C., had some form of legal sports betting. Puerto Rico offers both online and retail betting. However, full-time residents of Puerto Rico pay no U.S. tax on income derived from sources in Puerto Rico. They do, however, have to pay local taxes to the Commonwealth.
3 Top Tax Tips For Sports Bettors
The key to not being on the losing end of a bet with the IRS is good record keeping, says Alison Flores, Manager, The Tax Institute at H&R Block.
She offers these initial tips to avoid trouble when determining your taxable gambling income.
- Keep records of each wagering transaction, including the date, wager amount, and any wins and/or losses. Even if the betting organization or platform sends a Form for the activity, it’s better to be safe and maintain your own records.
- Report all your winnings, even if you think the amount is too small to be a big deal. Failing to report all your winnings could result in penalties and interest for underreporting your income.
- Determine your losses. Most taxpayers choose not to itemize their deductions. It often remains more advantageous to take the new, and expanded, standard deduction. But the only way to deduct your betting losses is to itemize.
Save The W-2Gs You Get From Betting Operators
Bettors using the best betting apps should have received a W-2G from any platform where they received $600 or more, and the odds were 300-1 or greater. “You will still need to report your winnings on your taxes, even if you don’t receive the form,” Flores said.
On individual winnings of $5,000 or more, books may withhold 24% for federal taxes. This appears in Box 4 of your W-2G, if it applies.
If you itemize your federal deductions, your net gambling winnings after 100% of your losses add to your AGI.
Those who opt for the standard deduction should add all their gambling winnings - without subtracting any losses - into their AGI.
“To complete your tax return, you’ll report your winnings as ‘gambling income’ on Form 1040, Schedule 1. If you have losses, you’ll report them on Schedule A if you itemize deductions. Take note, though, that you only get to deduct your losses to the extent of your winnings,” Flores said.
Your federal tax rate depends on your bracket. Federal Adjusted Gross Income (AGI) determines your bracket/tax rate.
States Carry Different Rules, Tax Rates
Bettors in Florida can stop right there since the Sunshine State has no state income tax. Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming also have legal sports betting and no state income tax.
States that have their own income tax use different formulas to determine the income baseline.
“Some states start with your federal adjusted gross income. Some start with federal taxable income. And others come up with their own starting point. This is an important distinction as the starting point for your state return dictates how you include your losses and winnings,” Flores said.
If your state uses the federal AGI figure to determine your tax liability, gambling winnings have already been taken into consideration since they were determined on your federal return.
Not All Losses Apply To Your State Returns
“If the state in question uses some other income for your starting point, then you must remember to report your winnings just like all your other income. Ohio starts its return with federal adjusted gross income as the baseline. Your winnings should already be accounted for. Alternatively, you will have to report your winnings separately on a Massachusetts return," Flores said.
States also treat losses differently. Neither Massachusetts nor Ohio allows gambling losses to be deducted on a state tax return. So if you used them in determining any federal tax liability, they have to be added back in on the state tax return.
“If the state starts with federal taxable income (income after the standard or itemized deduction) for your individual return, and you itemized on your federal return, then your losses will already be taken into account. However, if the state doesn’t allow for a deduction of losses, you may have to add any deduction you took on your federal return back to the state return,” Flores said.
Increase In Betting Means Increase In Questions
With each new state legalizing sports betting, millions of new taxpayers find themselves liable for taxes on their gambling winnings. They end up asking questions they may have never considered before playing their first legal sports wager.
This is the seventh Tax Season since the Supreme Court’s PASPA 2018 decision. That ruling cleared the way for nationwide sports betting in May 2018.
Prediction markets offering sports-based event contracts in all 50 states in 2025 (a preliminary injunction remains in effect against Kalshi in Nevada).
Yet the IRS remains silent on that front. Consult a tax professional or financial advisor to answer questions about your individual situation.
“Many people assume losses should be directly netted with gains, but they can’t,” Flores said. “We have gotten more requests for information than we used to. Luckily, the rules haven’t changed much over that period for federal gambling winnings. But with the increase in the standard deduction, limits on state and local income tax deductions, and the repeal of miscellaneous itemized deductions because of the Tax Cuts and Jobs Act, there has been some confusion about losses because fewer people are itemizing than in the past.”
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