Why the IRS draft update for gambling tax reporting matters

The Internal Revenue Service (IRS) has issued a draft update to gambling tax reporting, and a review of the details reveals several noteworthy changes for operators, such as the threshold.

This administrative guidance is the first of its kind for half a century in the corridors of legal and reporting power.

Titled “Instructions for Forms W-2G and 5754 (Rev. January 2026),” the update primarily affects casinos, sportsbooks, and other gaming entities that report winnings to federal authorities.

However, with any change on one end of the gambling spectrum, it generally causes ripple effects to those on the opposite end, in this case, the player.

IRS gambling tax reporting change for W-2G/5754

Forms are the backbone of the IRS’s compliance with U.S. tax law and provide gamblers with the documentation they need to file their returns accurately.

If a gambler receives a substantial payout from casinos, racetracks, or sportsbooks, this process captures key details, including the amount of the prize, the type of wager, and any federal income tax withheld.

IRS gambling threshold revised

Threshold reporting in the draft guidance represents a substantial change, as historically, tax forms were required for low levels of winnings.

These would be $600 or more per day requirements when winnings are at least 300 times the wager, or higher thresholds for certain games such as slot machines and poker.

The new reporting system changes this and formally defines it as the “inflation-indexed reporting threshold.”

This means the minimum draft payout level could be $2,000, which would require fewer smaller payouts to be reported. From tax year 2025 onward, the minimum payout levels that trigger reporting and withholding requirements will adjust annually.

The draft states, “For calendar years after 2025, the minimum threshold amount for reporting certain payments and backup withholding on certain information returns, including the Form W-2G, will be adjusted yearly for inflation. The minimum threshold amount for payments made in calendar year 2026 is $2,000.”

This adjustment affects federal reporting requirements, not a player’s underlying tax liability. As draft guidance, the reporting requirement and implementation details may still change before final IRS adoption.

Is the IRS attempting to modernize gambling reporting?

The IRS draft update does not appear to be a direct response to ongoing legal disputes involving prediction markets or sportsbook operators. However, the rapid growth of new wagering formats, including prediction markets, has materially expanded the scope of what constitutes “gambling” activity in the U.S.

Kalshi, Polymarket, and numerous others faced substantial legal challenges in their efforts to gain a foothold in the region, as we reported. Some of the most heated disputes have appeared in Nevada, New Jersey, and Ohio on sportsbook legality. It points out the regulatory strain created by these emerging products, reinforcing the need for clearer, more adaptable federal reporting frameworks.

This didn’t stop Polymarket CEO Shane Coplan from branding established sportsbooks a “scam” in a marquee throw of the gauntlet at Axios Live with Dan Primack in the latter half of 2025.

This means the IRS will need to update its existing administrative guidance to keep pace with betting markets, and this may be only the beginning of regulatory changes to match the rate of expansion.

IRS updated W-2G/5754 to include sportsbooks

In recognition of the gambling boom, the IRS draft includes a dedicated section on sports wagering to ensure these bets are clearly addressed under federal reporting rules.

One of the key parts of the relationship between a gambling operator and the IRS is the process of withholding, which will be common to U.S. citizens with a legal gambling account.

There are two types of reporting: Regular and Backup. The latter is punitive if player records are not up to date or if winnings are recorded without a taxpayer identification number (TIN).

This is like a holding pen for winnings, where a player must allow the IRS to withhold a portion as a tax liability. This is generally set at 24% of the winnings and then undergoes federal due diligence to ensure the correct portions are allocated to the IRS and the player.

This only happens when reporting thresholds are reached, and a player’s tax information is incomplete or otherwise triggers backup withholding requirements, such as a win of $10,000 on a sports bet that meets IRS reporting criteria, then the operator withholds $2,400 (24%) and pays the player $7,600.

What does this mean for players?

W-2G/5754’s draft updates are a double-edged sword, as on one hand, the reporting threshold is now much higher, resulting in a little less paperwork.

The other side of the regulatory sword is that new forms of gambling, like states that still permit sweepstakes, pools, parimutuel bets, and now sports wagering, including the wider offerings of prediction markets, could require specific reporting depending on the size of the win.

For players, the draft update does not change the fundamental tax treatment of gambling winnings. Casual bettors may receive fewer Forms W-2G for smaller wins if higher reporting thresholds are finalized, but all gambling income remains taxable under U.S. law, whether or not a form is issued. Record-keeping responsibilities also remain unchanged, and players are still expected to track winnings and losses independently when filing their returns.

So, a little luck at the table, or on your favorite team for a bit of beer money, is going to be alright, but for those big winners, there might be some value in scanning the W-2G/5754’s draft update and the wider IRS tax reporting to avoid penalties.

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