IRS Proposes Updated Reporting Thresholds and Wagering Loss Deduction Limits Under OBBBA

Today's date is 5/1/2026.

The IRS proposed sweeping changes to information reporting thresholds under § 6041 and § 6041A, which govern payments made in the course of a trade or business. The agency raised the long-standing $600 threshold to $2,000 for payments made after December 31, 2025, marking the first adjustment to this provision since its enactment in 1954. Additionally, the IRS introduced annual inflation adjustments to the threshold for subsequent years, ensuring the amount keeps pace with economic changes.

This shift represents a significant reduction in paperwork burden for businesses, estimated to save $982 million in compliance costs for 3.6 million payors annually. The change aligns with broader efforts to modernize tax administration while easing regulatory pressure on small and mid-sized enterprises. Stakeholders—particularly freelancers, gig economy platforms, and payment processors—will see reduced reporting obligations, though the IRS emphasized that the adjustments do not alter the underlying statutory requirements for backup withholding under § 3406.

The proposed rule reflects a response to longstanding criticism that the $600 threshold had become outdated in an era of digital transactions and gig work. By raising the bar, the IRS aims to reduce unnecessary filings while maintaining sufficient transparency for tax enforcement. The move also sets the stage for further regulatory updates tied to the One, Big, Beautiful Bill Act (OBBBA), which provided the statutory authority for these changes.

The Old Rule: $600 Threshold Stands Unchanged Since 1954

The $600 reporting threshold under § 6041 of the Internal Revenue Code had remained frozen since its enactment in 1954, long before digital transactions, gig work, and third-party payment platforms reshaped the economy. This statutory anchor required businesses to file information returns—such as Form 1099-MISC (Miscellaneous Income) and Form 1099-NEC (Nonemployee Compensation)—only when aggregate payments to a single payee reached $600 or more during a calendar year. The threshold applied broadly to payments for services rendered, rents, royalties, prizes, awards, and other fixed or determinable income, serving as the baseline for third-party income verification under the tax system.

The threshold was not merely a compliance trigger; it was the dividing line between routine reporting and administrative silence. For decades, the IRS relied on this $600 floor to balance transparency with administrative feasibility, assuming that smaller payments were too minor to warrant systematic tracking. Yet over 70 years, inflation eroded its practical relevance. A $600 payment in 1954 is equivalent to approximately $7,000 today, rendering the threshold increasingly anachronistic in an era where a single freelance gig or side hustle could easily exceed it.

The regulatory framework under § 6041A extended similar logic to direct sales and attorney payments, though with higher thresholds (e.g., $5,000 for direct sales). But the core principle remained: only payments above a specified dollar amount triggered mandatory reporting. This system created predictable compliance obligations for millions of businesses, from small contractors to large corporations.

Gambling winnings presented a notable exception. While the statutory threshold under § 6041 remained $600, the IRS carved out specific regulatory thresholds for certain wagering activities under Form W-2G (Certain Gambling Winnings). These included:

• $1,200 for a single winning from bingo or slot machine play
• $1,500 for a single winning from keno

These higher regulatory thresholds reflected the IRS’s recognition that gambling transactions, though reportable, required nuanced treatment due to their sporadic and variable nature. The disparity between the general $600 threshold and the specialized gambling thresholds underscored the complexity of the pre-OBBBA regime.

The absence of inflation indexing compounded the threshold’s obsolescence. While other tax provisions—such as standard deduction amounts and tax brackets—were periodically adjusted for inflation, the $600 reporting threshold remained static, untouched by legislative or regulatory updates. This stagnation left businesses and tax professionals navigating a system where the rules of engagement had not evolved in generations, even as the economy had transformed beyond recognition.

The forms most directly affected by this long-standing rule included:

• Form 1099-MISC (for rents, royalties, prizes, and other income)
• Form 1099-NEC (for nonemployee compensation, reintroduced in 2020)
• Form W-2 (for wages, though subject to separate thresholds)
• Form W-2G (for gambling winnings, with specialized thresholds)
• Form 945 (for reporting backup withholding on non-payroll items)

Backup withholding under § 3406 also hinged on this $600 threshold, applying only when the aggregate payments to a payee met or exceeded the statutory floor. This created a feedback loop: the threshold determined not only when information returns were filed, but also when 24% backup withholding could be triggered for noncompliant payees.

In practice, the $600 threshold had become a relic of mid-20th century tax administration—a time before Venmo, DoorDash, and Airbnb. It functioned as a blunt instrument, capturing millions of small transactions that contributed little to tax enforcement but imposed significant compliance costs on businesses. The IRS’s long-overdue update under the One, Big, Beautiful Bill Act (OBBBA) finally addresses this disconnect, raising the threshold to $2,000 and indexing it for inflation. But until then, the $600 rule stood as a monument to regulatory inertia, unchanged for over seven decades.

The New Rule: $2,000 Threshold and Inflation Adjustments Under OBBBA

The IRS’s long-overdue update under the One, Big, Beautiful Bill Act (OBBBA) finally addresses the disconnect between the 1954-era $600 reporting threshold and today’s economy. For payments made after December 31, 2025, the threshold for information returns under § 6041 (payments to contractors, vendors, and service providers) rises to $2,000, replacing the static $600 rule that had remained unchanged for over seven decades. This change is not a one-time adjustment—it introduces a permanent inflation indexing mechanism under § 6041(h), ensuring the threshold adjusts annually for cost-of-living changes starting in 2027.

The new rule applies to § 6041 (general information reporting), § 6041A (direct sales and attorney payments), and § 3406 (backup withholding triggers), with updated regulatory references in §§ 1.6041-1, 1.6041-2, 1.6041-7, 1.6041-10, 1.6041A-1, 31.3406(b)(3)-1, and 31.3406(g)-2. For gambling winnings, the IRS also aligns the reporting thresholds for bingo, keno, and slot machines with the new $2,000 standard, replacing the prior $1,200 (bingo/slots) and $1,500 (keno) thresholds.

Key changes include:

• § 1.6041-1(a)(3) defines the $2,000 threshold for 2026, with annual inflation adjustments thereafter under § 6041(h).
• § 1.601-10 updates gambling winnings reporting to $2,000 (previously $1,200 for bingo/slots and $1,500 for keno), maintaining existing game-specific substantiation rules.
• § 6041A ties its $5,000 direct sales threshold to the new $2,000 base, ensuring consistency across reporting regimes.

The shift from $600 to $2,000 dramatically reduces the number of information returns required for small payments, particularly for gig economy transactions, freelance payments, and routine vendor transactions. Businesses will no longer be burdened with filing forms for payments that historically contributed little to tax enforcement but imposed significant compliance costs. The IRS estimates this change alone will reduce compliance costs by $982 million annually, as detailed in the economic impact section.

Backup Withholding: Aligning § 3406 with the New $2,000 Threshold

The IRS’s proposed regulations under § 3406(a)(1) align backup withholding rules with the new $2,000 reporting threshold established by the One Big Beautiful Bill Act (OBBBA). Backup withholding is a 24% tax the IRS requires payors to deduct from reportable payments when specific conditions are met, ensuring tax compliance when payees fail to properly report income. The current rule under § 3406(b)(6)(A) tied backup withholding to the $600 threshold for information returns under §§ 6041 and 6041A. With the OBBBA raising the reporting threshold to $2,000, the IRS updated § 3406 to reference the same inflation-adjusted amount, reducing unnecessary withholding on smaller payments.

The IRS amended § 3406(b)(6)(A) to cross-reference the dollar amount in effect under § 6041(a), effectively tying backup withholding to the new $2,000 threshold. The heading of § 3406(b)(6) was also revised from “$600 or More” to “Only Where in Excess of Threshold,” clarifying that backup withholding applies only when payments meet or exceed the reporting threshold. This change ensures consistency between information reporting and withholding rules, reducing compliance burdens for businesses that previously had to withhold on payments as small as $600.

Backup withholding under § 3406 applies in three primary scenarios:

• The payee fails to furnish a valid Taxpayer Identification Number (TIN) to the payor.
• The IRS notifies the payor that the TIN provided by the payee is incorrect.
• The payee underreports interest or dividend income, as identified by IRS mismatch notices (CP2100/CP2100A).

The impact of this alignment is significant for both payors and payees. Businesses will no longer be required to withhold 24% on payments below $2,000, reducing administrative costs and cash flow disruptions for small vendors, gig workers, and freelancers. Payees who previously faced backup withholding due to minor reporting errors will also benefit, as fewer payments will trigger withholding. The IRS estimates this change will reduce compliance costs by streamlining withholding processes and minimizing unnecessary tax remittances. The updated rules apply to payments made after December 31, 2025, giving businesses time to adapt their systems to the new threshold.

Wagering Losses: Deduction Limited to 90% of Gains Under § 165(d)

The IRS proposed changes to § 1.165-10, which governs the deduction for wagering losses under Section 165(d) of the Internal Revenue Code. This section historically limited gambling losses to the extent of gambling gains, preventing taxpayers from offsetting other income with gambling losses. The proposed amendments reflect statutory changes enacted under the One, Big, Beautiful Bill Act (OBBBA) § 70114(a), which now restricts wagering losses to 90% of gains rather than 100%.

The old rule, codified in § 165(d), allowed taxpayers to deduct gambling losses only to the extent of gambling gains. This meant that if a taxpayer won $10,000 but lost $12,000, they could only deduct $10,000 in losses. The IRS’s proposed regulation under OBBBA § 70114(a) tightens this further by capping deductions at 90% of gains, reducing the after-tax return for gamblers. For example, a taxpayer with $10,000 in winnings and $12,000 in losses could now deduct only $9,000 (90% of $10,000), leaving $3,000 of losses nondeductible.

Key changes to § 1.165-10 include:

• Joint returns: Combined losses for married couples filing jointly are now limited to 90% of combined gains.
• Separate tracking: Losses and gains must be tracked separately for each spouse if filing separately.
• No carryforward: Unused losses cannot be carried forward to future tax years, as was previously possible under limited circumstances.

The economic impact of this change is minimal for most taxpayers because most gamblers do not itemize deductions. The IRS estimates that fewer than 5% of taxpayers reporting gambling income itemize their deductions, meaning the vast majority of gamblers will see no change in their tax liability. However, for the small subset of high-net-worth or professional gamblers who do itemize, the reduction in deductible losses could result in higher taxable income. The IRS projects this change will generate minimal revenue (less than $10 million annually) due to the low itemization rates among gamblers.

The proposed regulation applies to taxable years beginning after December 31, 2025, giving taxpayers and tax professionals time to adapt to the new rules. Stakeholders, including professional gamblers, casinos, and tax practitioners, should review their recordkeeping and deduction strategies to ensure compliance with the updated § 1.165-10.

Winners and Losers: Who Benefits from the New Rules?

The IRS’s proposed changes to information reporting and wagering loss deductions create clear winners and losers, reshaping compliance burdens and tax visibility across key stakeholder groups.

The winners include small businesses, which will see a dramatic reduction in paperwork burden. The $2,000 reporting threshold eliminates the need to file 9.32 million Forms 1099-MISC and 19.54 million Forms 1099-NEC annually, saving an estimated $223 million and $285 million in compliance costs, respectively. Gig economy platforms, freelancers, and payment processors will also benefit from streamlined operations, as payments under $2,000 no longer require information returns. Casinos will similarly see reduced backup withholding obligations for non-TIN payees, thanks to the higher $2,000 threshold for Forms W-2G. For taxpayers with gambling losses, the change is minimal, as the IRS projects the new 90% deduction cap will generate less than $10 million in additional revenue annually, leaving most gamblers unaffected.

The losers include the IRS itself, which will lose visibility into small-dollar transactions that historically helped detect underreporting and tax evasion. The $982 million in reduced compliance costs for taxpayers comes at the expense of the agency’s enforcement capabilities. Tax practitioners may also see a decline in clients seeking assistance with compliance, particularly those specializing in small-business tax preparation. Taxpayers relying on information returns for recordkeeping may face challenges, as reduced reporting could lead to less accurate tax filings, disproportionately affecting low-income gig workers and freelancers who depend on 1099 forms.

The proposed regulation applies to taxable years beginning after December 31, 2025, giving stakeholders time to adapt. However, the long-term trade-off between reduced compliance burdens and diminished IRS oversight remains a contentious issue.

Economic Impact: $982 Million in Reduced Compliance Costs

The Treasury Department and IRS estimate the proposed regulations will yield $982 million in reduced compliance costs for calendar year 2027 (reflecting tax year 2026 returns), measured in 2024 dollars. This reduction stems from the higher reporting threshold under the One Big Beautiful Bill Act (OBBBA), which eliminates the need for millions of information returns. The economic analysis breaks down as follows:

• Form 1099-MISC: The IRS projected 42.60 million filings in 2027, but 9.32 million forms with payments in the affected range will no longer be required. This reduces burden hours by 3.82 million (0.41 hours per form) and saves $223 million.
• Form 1099-NEC: With 62.72 million projected filings, 19.54 million forms will be eliminated. This saves 4.89 million burden hours (0.25 hours per form) and $285 million.
• Form W-2G: The IRS projected 34.06 million filings, but 19.06 million will no longer be necessary. This reduces burden hours by 7.62 million (0.4 hours per form) and saves $445 million.
• Form W-2: Of 267.82 million projected filings, only 0.94 million will be affected, saving 0.48 million burden hours (0.51 hours per form) and $28 million.
• Form 945: The IRS projected 47,800 filings, with only 600 forms affected. This saves 5,000 burden hours (8.18 hours per form) and $292,000.

The wagering loss deduction change under § 165(d)—limiting deductions to 90% of gains—is expected to affect only 673,000 taxpayers, resulting in minimal economic impact. The proposed regulations primarily provide clarity and reduce ambiguity rather than impose new burdens, aligning with the Paperwork Reduction Act’s goal of minimizing compliance costs. The IRS invites public comment on these estimates, particularly regarding the long-term trade-offs between reduced reporting requirements and diminished IRS oversight.

Foreign Insurance Companies: Updated Asset/Liability Percentages and Yields

The IRS has updated domestic asset/liability percentages and domestic investment yields for foreign life and property/liability insurance companies under Section 842(b), which governs the computation of minimum effectively connected net investment income (ECNII) for taxable years beginning after December 31, 2024. These percentages and yields are critical for foreign insurers with U.S. operations, as they determine the minimum taxable income derived from U.S.-sourced investments.

Under Section 842(b), foreign insurance companies must calculate their ECNII by applying the prescribed domestic asset/liability percentages and domestic investment yields to their U.S. assets. The IRS issued Rev. Proc. 2026-19 to provide these updated figures for 2025, based on tax return data from the 2023 taxable year. The new percentages and yields are as follows:

• Foreign life insurance companies: 128.2% (domestic asset/liability percentage) and 2.1% (domestic investment yield).
• Foreign property and liability insurance companies: 202.4% (domestic asset/liability percentage) and 2.2% (domestic investment yield).

The revenue procedure also instructs foreign insurance companies on how to compute their estimated tax payments and installment payments for taxable years beginning after December 31, 2024. Specifically, companies must use the updated percentages and yields to determine their minimum ECNII for estimated tax purposes. However, if an installment payment is due less than 20 days after the publication of Rev. Proc. 2026-19, companies may use the figures from Rev. Proc. 2025-20 for that installment.

The updated rules take effect for taxable years beginning after December 31, 2024, meaning they apply to the 2025 tax year and beyond. Foreign insurance companies should review their U.S. asset holdings and adjust their tax computations accordingly to ensure compliance with the new requirements.

Applicability Dates: When Do the New Rules Take Effect?

The IRS’s proposed regulations carry staggered effective dates, creating distinct compliance timelines for different provisions. For wagering loss deductions under § 1.165-10, the rules apply to taxable years beginning after December 31, 2025—meaning they first impact the 2026 tax year for calendar-year taxpayers. This delay reflects the complexity of gambling loss substantiation and the IRS’s intent to allow stakeholders time to adapt systems for tracking wagered amounts.

For information reporting and backup withholding provisions—spanning §§ 1.6041-1, 1.6041-2, 1.6041-7, 1.6041-10, 1.6041A-1, 31.3406(b)(3)-1, and 31.3406(g)-2—the IRS adopts a payment-based effective date of January 1, 2026. This means the $2,000 reporting threshold and aligned backup withholding rules apply to payments made on or after that date, regardless of the tax year in which the underlying transaction occurred. Payors must therefore update their 1099 reporting systems and TIN validation processes before the 2026 filing season.

A critical transition rule addresses installment payments due less than 20 days after the publication of Rev. Proc. 2026-19. In such cases, companies may rely on the figures from Rev. Proc. 2025-20 for that specific installment, avoiding a compliance gap during the transition. This provision ensures that payment processors, gig platforms, and businesses with staggered payment schedules are not penalized for administrative delays in system updates.

For stakeholders, these dates dictate immediate action:

• Payors should prioritize system upgrades for 1099 reporting by Q4 2025 to handle the $2,000 threshold and backup withholding changes.
• Casinos and sportsbooks must prepare for the § 1.165-10 wagering loss rules by documenting bets in a manner compliant with the new substantiation standards.
• Foreign insurance companies should align their U.S. asset tracking with the § 842(b) ECNII calculations, which remain effective for taxable years beginning after December 31, 2024, as previously noted.

The phased approach balances IRS enforcement priorities with industry readiness, but the January 1, 2026, deadline for reporting rules leaves little margin for error in system overhauls. Taxpayers and payors are advised to test compliance workflows well in advance of the effective dates to mitigate exposure to backup withholding penalties or underreporting errors.

Comment Period and Public Hearing: How to Weigh In

The IRS invites stakeholders to provide feedback on the proposed regulations during a formal comment period ending June 16, 2026. This process ensures the final rules reflect practical realities faced by businesses, taxpayers, and tax professionals while maintaining statutory compliance. The agency particularly seeks input on the economic impact of the new thresholds and the clarity of the proposed changes, as these factors will shape enforcement priorities and industry readiness.

The deadline for comments is June 16, 2026, with late submissions ineligible for consideration. The IRS strongly encourages electronic comments via the Federal eRulemaking Portal (regulations.gov), using the identifier IRS REG-113229-25 to ensure proper routing. The portal provides step-by-step instructions for submission and hosts a plain language summary of the proposed regulations, as required by 5 U.S.C. 553(b)(4). Written comments may also be mailed to CC:PA:01:PR (REG-113229-25), IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, provided they are postmarked by the deadline.

Stakeholders wishing to present oral testimony must submit a separate request to the Federal eRulemaking Portal by the same deadline. The IRS will schedule a public hearing if sufficient demand exists, typically within 30 days of the comment period’s close. All comments must include a summary written in clear, non-technical terms to facilitate review by the public and Treasury Department officials.

The IRS emphasizes that public input is critical to refining these regulations, particularly regarding the $2,000 reporting threshold under § 6041 and the 90% limitation on wagering loss deductions under § 165(d). Feedback on the phased implementation timeline—critical for businesses overhauling compliance systems—will also inform potential adjustments. Comments submitted through the portal become part of the public record and cannot be edited or withdrawn after posting. For technical questions about the proposed regulations, contact William Prater at (202) 317-6845. For submission or hearing logistics, email publichearings@irs.gov or call (202) 317-6901.

What’s Next? Finalizing the Regulations and Preparing for Compliance

The IRS will now review public comments submitted through June 16, 2026, and may hold a public hearing before finalizing the regulations. These comments—including feedback on the phased implementation timeline for the $2,000 reporting threshold—will shape the final rules, which may differ from the proposed regulations. Payors and taxpayers should begin preparing now for the new requirements, as the changes will apply to payments made after December 31, 2025.

Businesses should update their accounting systems to track payments and aggregate amounts for backup withholding under § 3406, which will align with the new $2,000 threshold. Taxpayers claiming gambling loss deductions under § 165(d) must review their strategies in light of the 90% limitation on losses relative to winnings. Industries with unique reporting obligations—such as gambling operations, gig economy platforms, and small businesses with contractor payments—should consult tax professionals to assess the implications.

The IRS’s final regulations will reflect the input received, but stakeholders should monitor updates closely as adjustments may occur in response to inflation adjustments or legislative changes. Proactive compliance now will mitigate risks of penalties or enforcement actions once the rules take effect.