Tax Reform's Silver Lining: How Deduction Limits Are Fueling a Gambling Industry Revival

The U.S. gambling industry is standing at a crossroads, with tax reform reshaping its financial landscape. While the Trump-era Tax Cuts and Jobs Act (TCJA) of 2017 and proposed 2026 changes to gambling loss deductions have sparked concerns among gamblers, they've quietly created a tailwind for casino operators, online platforms, and hospitality firms. By limiting the ability to deduct gambling losses, these policies are driving a reevaluation of industry valuations, positioning companies like Las Vegas Sands (LVS), Wynn Resorts (WYNN), and DraftKings (DKNG) as potential "cash flow darlings" in 2025. Here's why investors should take note.

The Tax Policy Shift: A Gamblers' Burden, Industry's Boon

The TCJA of 2017 restricted professional gamblers from deducting expenses or losses beyond their winnings, effectively treating them like casual gamblers. The proposed 2026 rule—capping deductions at 90% of winnings—adds a new layer: even gamblers who break even will face “phantom income” taxes on 10% of their losses. While critics argue this penalizes gamblers and risks driving them to offshore markets, the policy creates a hidden advantage for the industry.

Why? The rules reduce the incentive for gamblers to report losses aggressively, indirectly boosting taxable income for the industry's core customers. For instance, a professional poker player earning $200,000 in net profit but facing a $480,000 taxable income under the 90% cap must either increase bets to offset the tax burden or accept higher net losses. The result? Higher bet volumes, which directly lift revenue for casinos and online platforms.

Meanwhile, the 10% “phantom income” tax could incentivize gamblers to pursue high-stakes, high-reward bets, boosting revenue concentration among top-tier players—a sweet spot for operators like Wynn Resorts, which cater to VIPs.

The Earnings Catalyst: Cash Flow and Valuation Reassessment

The tax changes are already reshaping corporate financials. By reducing the proportion of reported losses relative to winnings, companies can present a rosier earnings picture. For example:
- Las Vegas Sands: Its Macau operations, which account for ~80% of revenue, could see margin expansion as higher bet volumes offset fixed costs like hotel upkeep.
- Wynn Resorts: Its high-margin VIP business, reliant on wealthy gamblers, benefits from the tax-driven shift toward larger bets.
- DraftKings: The cap on deductions may push casual gamblers toward its regulated sports betting platforms, where transactions are taxed transparently, rather than unregulated offshore alternatives.

Valuation Metrics: A Buying Opportunity?

Current stock multiples suggest these companies are undervalued relative to their growth potential. Take Las Vegas Sands:
- EV/EBITDA: ~8x vs. a 5-year average of ~10x.
- P/E: ~12x, reflecting conservative expectations.

Wynn Resorts trades at ~14x EV/EBITDA, below its historical range, while DraftKings' forward P/S ratio of 2.5x is half its 2021 peak. The tax tailwind could narrow these gaps as earnings beat estimates.

Risks and Mitigants

Critics warn of offshore migration, but U.S. operators are adapting. Kalshi and other regulated prediction markets, taxed differently, could absorb some demand, while Nevada's lobbying efforts (led by Rep. Dina Titus) aim to soften the 2026 rule. For now, the industry's resilience—casinos saw record revenue in Q1 2025—suggests structural demand remains intact.

Investment Thesis: Buy the Dip

The tax reforms are a near-term catalyst for re-rating these stocks. Look for:
1. Revenue Growth: Higher bet volumes and margin expansion will lift EPS estimates.
2. Multiple Expansion: Valuations should rise as the “cash flow positive” narrative takes hold.
3. M&A Activity: Cash-rich firms like LVS may acquire smaller online platforms to diversify tax-exposed revenue streams.

Target Price Adjustments:
- Las Vegas Sands: $85–$90 (vs. current $72) by year-end 2025.
- Wynn Resorts: $140–$150 (vs. $120) as VIP demand rebounds.
- DraftKings: $25–$30 (vs. $18) as regulated market share grows.

Conclusion

The gambling industry's tax-driven challenges are proving to be a blessing in disguise. By reducing reported losses and boosting taxable income for gamblers, the reforms are accelerating a shift toward higher revenue and better cash flows for operators. For investors, the math is clear: these stocks are undervalued and primed for a renaissance. The time to position for this upside is now.

JR Research