Colorado to eliminate free bet tax deductions for sportsbooks by mid-2026

Sportsbooks operating in Colorado will soon lose the ability to deduct free bets from their taxable revenue, following a new law signed by Governor Jared Polis on May 15. The measure, introduced as House Bill 1311, sets a timeline for phasing out promotional deductions, culminating in their complete removal by July 1, 2026.

Under Colorado’s current framework, sportsbooks pay a 10% tax on sports betting revenue but are allowed to reduce their taxable amount by subtracting the value of non-cash promotional wagers. As it stands, they can deduct up to 2.25% for such promotions. This cap was already slated to decrease incrementally, to 2% in July 2025 and 1.75% in 2026.

With the new law in place, the deduction limit will instead fall to 1% starting January 1, 2026, and will be eliminated entirely by midyear. A prior version of the bill proposed abolishing the deductions as early as September this year, but the timeline was pushed back during the legislative process.

House Bill 1311 passed the Colorado House with a 52-13 vote in April and cleared the Senate with a 28-7 majority on May 6. The legislative change is projected to generate approximately $13 million in additional revenue for the Water Plan Implementation Cash Fund during the 2026–27 fiscal year, according to the bill’s fiscal note.

This adjustment follows last year’s voter decision to lift the existing $29 million cap on tax revenue from sports betting. The cap, which stemmed from constitutional limits tied to legislative forecasts, had restricted how much tax revenue the state could collect, regardless of actual earnings. With sports betting revenue exceeding projections, reaching $29.9 million last year, lawmakers opted to place the cap’s removal on the ballot, where it passed.

So far in 2025, online sportsbooks in Colorado have reported over $143 million in gross gaming revenue through the first quarter. However, due to deductions and adjustments, only $101.4 million was subject to taxation. In March alone, $36.2 million in gross revenue yielded just $21.9 million in taxable revenue.