Senate GOP Tax Bill's $1.1 Billion Gamble: Risks and Rewards for Investors

The Senate's recent passage of the One Big Beautiful Bill Act (H.R. 1) has ignited a firestorm in the $72 billion U.S. gaming industry. A controversial provision in the tax-and-spending package—reducing the deductibility of gambling losses from 100% to 90%—threatens to reshape the sector's financial landscape. For investors, this policy shift represents both a regulatory headwind and a potential opportunity to capitalize on volatility. Here's how to navigate the risks and rewards.

The Tax Change Explained: Phantom Income, Real Pain

The bill's Section 70014 (amending the Internal Revenue Code) imposes a 10% “penalty” on gambling income by capping deductions for losses at 90% of winnings. For example:
- A gambler with $500,000 in winnings and $500,000 in losses would previously report $0 taxable income. Under the new rule, they'd pay taxes on $50,000 (10% of losses not deductible).
- A professional poker player earning $5.2 million in winnings and $5 million in losses would face a taxable income of $700,000—more than tripling their tax burden compared to current rules.

This creates “phantom income,” forcing gamblers to pay taxes on money they never actually earned. Critics, including Nevada Congresswoman Dina Titus and poker champion Chris Moneymaker, argue this could drive bettors to offshore markets or unregulated platforms, eroding state tax revenue and jobs.

Stock Market Reactions: Winners and Losers

The tax provision has already triggered a sector split:

Casino Giants: Short-Term Gains, Long-Term Uncertainty

• Las Vegas Sands (LVS) and Wynn Resorts (WYNN) rose +8.9% and +8.8%, respectively, in early July, fueled by strong Macau gaming revenue.
• MGM Resorts (MGM) also surged, benefiting from Macau's rebound.

However, these gains are tied to regional optimism, not the U.S. tax bill. Analysts warn that broader margin pressures from federal and state taxes (e.g., New Jersey's 13% gross gaming tax) could eventually weigh on all casino operators.

Online Gambling Platforms: Under Pressure

• DraftKings (DKNG) and FanDuel (FDKU) have been hit hardest, with DKNG falling -3.6% YTD. The tax change directly impacts their user base, as casual and professional bettors may curtail activity or flee to unregulated markets.
• The Sports Betting & iGaming ETF (BETZ) has underperformed the S&P 500 by ~20% YTD, reflecting sector-specific risks.

Regulatory Lobbying: A Window for Amendments

Lawmakers like Titus are pushing to restore the 100% deduction in the House version of the bill. Success hinges on three factors:
1. Revenue Flexibility: The $1.1 billion raised by the gambling provision represents only 0.03% of the bill's $3.3 trillion deficit increase. This gives negotiators room to compromise.
2. Industry Pressure: The American Gaming Association and state officials are mobilizing to highlight the risk of revenue loss from offshore flight.
3. Political Timing: The bill must pass the House before the July 4 deadline, creating a 10-day window for amendments. Investors should monitor headlines for bipartisan compromises or sticking points.

Investment Strategy: Hedging Against Uncertainty

1. Short-Term Play:
2. Short DKNG/FDKU: If the tax provision remains intact, online gambling stocks could underperform further.

3. Avoid New Longs: Wait for legislative clarity before committing to positions in pure-play U.S. gambling stocks.

4. Long-Term Opportunities:

5. Resilient Casinos: LVS and MGM may outperform if Macau's recovery continues, but consider their exposure to broader U.S. tax risks.

6. ETF Diversification: The BETZ ETF offers sector exposure at a discount, but its ~6–8x EV/EBITDA multiple suggests limited upside until margins stabilize.

7. Hedging Tools:

8. Options: Use put options on DKNG/FDKU to protect against further declines.
9. Inverse ETFs: Consider FSDC, which profits from declines in the S&P 500 Consumer Discretionary sector, to offset gambling-specific risks.

Risk-Reward Assessment

The bill's fate is still uncertain, creating asymmetry in outcomes:
- Upside: If the House removes the gambling tax or softens it, stocks could rebound sharply.
- Downside: If the provision stays, the sector faces margin compression, reduced consumer spending, and regulatory blowback.

The sweet spot for investors is to wait until the House vote concludes (likely by July 14) before reentering positions. Until then, the sector's volatility offers opportunities for traders but poses risks for buy-and-hold investors.

Conclusion

The Senate GOP's tax hike on gamblers is a policy gamble with real economic consequences. While traditional casinos may temporarily benefit from regional tailwinds, online platforms face existential risks. Investors should focus on hedging exposures, tracking legislative negotiations, and prioritizing cash flows over speculation. For now, patience—and a sharp eye on Washington—is the best strategy.

Nick Timiraos is a pseudonym for a financial analyst specializing in tax policy and sector-specific risk analysis.