The Real Super Bowl LX Postgame Show: Reporting and Taxing Sports Betting & Fantasy Winnings

Sports gambling in the United States has experienced considerable growth over the past decade. The impetus for this growth was the 2018 Supreme Court decision that struck down the Professional and Amateur Sports Protection Act (PASPA) in Murphy v. NCAA, ending the federal prohibition that had limited legal sports betting primarily to Nevada. Since then, over 35 states and Washington, D.C. have legalized sports betting in some form, creating a rapidly expanding market that reached almost $150 billion in legal wagers in 2024. The Super Bowl alone is expected to carry $1.76 billion in betting. March madness nearly doubles that amount at $3.1 billion in wagers.

The rise of mobile betting platforms like FanDuel and DraftKings has been central to this growth, making wagering easily accessible and driving online betting to comprise roughly 80-90% of the market in states where it's permitted. Professional sports leagues, which once opposed gambling expansion citing integrity concerns, have embraced the new reality through lucrative partnerships with betting operators, integrated betting content in broadcasts, and official data deals even as recent integrity issues have arisen.

This change has generated tax revenues for state governments while also raising concerns about problem gambling and the social costs of widespread betting accessibility. The prevalence of sports gambling provides the federal government with an opportunity to raise revenue and/or reduce sports gambling.

“Sin Taxes” are taxes associated with harmful behaviors like smoking and drinking. The taxes on these goods are designed to curb the behaviors by increasing the price of the product or activity. Sin taxes are an example of government intervention in private behavior, targeting products and activities deemed harmful to individuals or society—cigarettes, alcohol, sugary drinks, and potentially activities like sports gambling. The name itself reflects a moral dimension, though economists prefer the more neutral term "Pigouvian taxes," named after economist Arthur Pigou, who argued that certain activities impose costs on society beyond what the consumer pays, and that taxes can help internalize these external costs. When someone smokes, for instance, they may later require expensive healthcare that burdens the public system, or their secondhand smoke may harm others. A sin tax, in theory, makes the smoker pay upfront for these broader social costs, aligning private incentives with public welfare.

However, sin taxes have always served a dual and somewhat contradictory purpose. On the one hand, they aim to discourage harmful behavior by making the behavior more expensive, while on the other hand, they generate substantial revenue that can fund essential services, from schools to healthcare to addiction treatment programs. This creates the inherent tension that if a sin tax is successful at curbing the targeted behavior, it will generate less revenue over time. Conversely, if the tax generates growing revenue, it suggests the tax is failing to meaningfully reduce the harmful behavior it was designed to discourage. One could also set the tax so high that instead of engaging in the behavior legally, it encourages people to conduct the behavior on the black market.

Governments must set sin taxes with a clear objective. If the primary goal is maximizing revenue, they should set the tax rate at the peak of the revenue maximizing rate, which might potentially be a rate that does not optimally discourage the behavior or sin. However, if the goal is to reduce harmful behavior as much as possible, they might set rates well beyond the revenue-maximizing point to reduce consumption of the sin. Different jurisdictions make different choices based on their priorities. Certain jurisdictions heavily tax cigarettes with explicit public health goals while accepting that smokers may turn to smuggled cigarettes rather than quit. Other jurisdictions establish moderate rates to preserve revenue streams while still providing a behavioral nudge. As a report from Common Sense media noted, 12% of boys between the ages of 11 and 17 engage in sports gambling. Given the harmful effects noted in the same report, jurisdictions may seek to reduce this behavior through taxes.

The practical challenge lies in determining where on the revenue curve any tax rate sits, which varies by product, population, and the availability of substitutes or black-market alternatives. Set cigarette taxes too high, and smokers may buy from neighboring states with lower taxes or from illicit sources, undermining both revenue and regulatory control. If the federal government were to set taxes on sports gambling beyond the revenue maximizing rate, bettors may shift to offshore or illegal platforms where consumer protections do not exist and revenue never materializes. This dynamic forces policymakers who are considering sports gambling to navigate the narrow path of discouraging the harmful behavior but not being so high as to drive sports gambling back underground.

Under current law, the Internal Revenue Service (IRS) treats gambling winnings as subject to federal income tax. The tax applies regardless of the amount won, the type of gambling activity, or whether the winnings are received in cash or as non-cash prizes. When a taxpayer wins a non-cash prize—such as a car, vacation, or other goods—the fair market value of that prize must be included as taxable income. All gambling winnings must be reported on Form 1040 (specifically on Schedule 1), and this income is taxed at the taxpayer's ordinary income tax rates.1 Until January 1, 2026, gambling losses could be deducted up to the full amount of gambling winnings for taxpayers who itemized their deductions. This allowed a taxpayer who won $50,000 but lost $50,000 to net to zero taxable gambling income (though they still had to report the $50,000 in winnings, which affected their adjusted gross income).

However, the One Big Beautiful Bill Act of 2025 changed this treatment by limiting gambling loss deductions. Taxpayers may now only deduct 90% of their gambling losses while still being limited by gambling winnings. The remaining 10% is effectively taxed even if the gambler broke even or lost money overall. The taxpayer is still required to itemize and keep records to use this deduction.2

In addition to income taxes paid by individual gamblers, the federal government imposes excise taxes on gambling operators like casinos, and sportsbooks. The IRS imposes a 0.25% tax on the total amount legally wagered; a 2% tax is imposed on the total amount illegally wagered.3 Sportsbooks and casinos are liable for this tax and report it using IRS Form 730.

Policymakers could impose taxes on betting transactions or amend taxes on operator revenues or winnings to make gambling more costly and less appealing. Such taxes could target the most problematic forms of gambling, like in-game or live betting, which research suggests may be particularly addictive due to their rapid pace and immediate gratification.4 The revenue generated could fund gambling addiction treatment programs, public awareness campaigns about the risks of problem gambling, and research into gambling-related harms. Higher taxes might slow the proliferation of gambling advertising and make operators less aggressive in their marketing, while also protecting vulnerable populations—including young adults and those with lower incomes—who might be most susceptible to developing gambling problems.

In March of 2025, the Bipartisan Policy Center proposed increasing the excise tax from 0.25% to 5%. This proposal would potentially raise considerable revenue above what is currently collected while also potentially discouraging sports gambling. However, an important consequence of this change is that sportsbooks may raise prices, which may potentially lead to shifting legal betting to illegal or offshore options. In July 2025, Representative Barr and others introduced the Winnings and Gains Expense Restoration Act of 2025 (WAGER-H). This bill would restore the ability for gamblers to fully deduct 100% of their wagering losses from their winnings for tax purposes as it was pre-OBBBA. In September of 2025, Senators Cortez Masto and Hyde-Smith introduced the Withdrawing Arduous Gaming Excise Rates Act (WAGER-S) that would exclude sports betting from the excise tax on the total amount wagered. This change would reduce federal revenue by $400 million per year.5