Taxing Times Ahead for U.S. Gaming: Why the 90% Loss Cap Threatens Valuations and Investor Returns

The U.S. gaming and sports betting sectors face a pivotal challenge as federal and state tax reforms threaten to upend profitability, cash flows, and long-term growth. The proposed 90% loss deduction cap under the federal "One Big Beautiful Bill Act" (H.R. 1), combined with rising state-level taxes in jurisdictions like Illinois and New Jersey, creates a perfect storm of regulatory risk. For investors in operators such as DraftKings (DKNG), FanDuel (FDKU), and betting-related ETFs like the Global X Sports Betting & iGaming ETF (BRKS), these changes demand a cautious stance.

The 90% Loss Cap: A Tax on "Breaking Even"

Under current law, gamblers can deduct 100% of losses against winnings, ensuring taxation on net profit only. The proposed federal reform would cap this deduction at 90%, effectively taxing bettors on 10% of their reported losses—even if they end the year with no net profit.

Consider an example: A bettor with $500,000 in winnings and $500,000 in losses would now face a tax bill of $12,000 (assuming a 24% rate) on $50,000 of "phantom income"—despite no actual profit. For professional gamblers treated as small businesses (Schedule C), the impact is even more severe. A $5.2 million winnings/$5 million losses scenario would triple their tax burden, potentially forcing many to flee to unregulated offshore markets.

DraftKings' shares have already fallen ~15% since the bill's Senate passage, reflecting investor anxiety about margin pressure and regulatory overhang.

State-Level Taxes: Compounding the Pain

Federal changes are compounded by rising state-level levies. Illinois' new per-wager fees and New Jersey's increased tax rates are squeezing operators' margins. These costs are likely to be passed on to consumers via surcharges, further deterring bettors.

New Jersey's tax rate on gross gaming revenue is set to rise from 8.5% to 13%, with additional fees for online platforms.

The dual burden of federal and state taxes could drive bettors to unregulated offshore sites or event futures markets (exempt from the 90% cap), hollowing out legal operators' revenue streams. Analysts warn this could reduce DraftKings' and FanDuel's top-line growth by 10–15% annually, with EBITDA margins pressured to sub-20% levels—far below the industry's current 30%+ average.

Equity and ETF Implications: Valuations at Risk

The ripple effects are already visible in equities. Betting stocks like DKNG and FDKU trade at ~6–8x forward EV/EBITDA, near cyclical lows, but further downside looms if tax-driven margin compression materializes. ETFs like BRKS, which holds ~30% of its assets in DraftKings and FanDuel, face correlated volatility.

BRKS has underperformed the S&P 500 by ~20% YTD, with sector-specific risks amplifying its beta.

Critically, the tax reforms threaten the "growth narrative" underpinning these stocks. Reduced profitability could force companies to cut marketing spend or defer expansion plans, stifling the sector's long-term potential.

Regulatory Uncertainty: A Call for Caution

While the Senate passed H.R. 1 on July 1, 2025, the House may amend the 90% cap before final passage. Nevada Congresswoman Dina Titus has pledged fixes to restore fair treatment of gambling losses, but delays and dilution are risks. The effective date (2026) provides a grace period, but markets often price in regulatory changes prematurely.

Investors should note two key uncertainties:
1. Taxpayer Compliance Costs: The IRS's strict record-keeping requirements for gamblers could lead to audits, penalties, or reduced deductions for casual bettors, further dampening demand.
2. Industry Flight to Offshore Markets: If professionals exit legal platforms, states reliant on gaming revenue (e.g., Nevada, New Jersey) may face job losses and tax base erosion, prompting retaliatory measures.

Investment Stance: Reduce Exposure Until Clarity Emerges

The confluence of federal and state tax risks, coupled with regulatory uncertainty, argues for a cautious approach:
- Avoid new long positions in pure-play operators like DKNG and FDKU until the 90% cap is either removed or softened.
- Consider hedging exposure to betting ETFs (e.g., BRKS) via inverse ETFs or options.
- Monitor legislative developments: A fix to the loss deduction cap or a delay in state tax hikes could create a buying opportunity.

The sector's valuation multiples already reflect some downside, but the asymmetry here is stark: upside is limited unless reforms are rolled back, while downside is amplified by margin pressures and consumer flight.

In conclusion, the U.S. gaming and sports betting sectors are entering a period of heightened regulatory and financial risk. Investors would be wise to tread carefully until the policy environment stabilizes—and even then, to remain skeptical of the sector's ability to deliver sustained growth amid this tax-driven headwind.

This analysis assumes the 90% loss cap and state-level taxes are enacted as proposed. Market dynamics and legislative outcomes remain fluid.