Iowa will change how it collects income tax on sports betting winnings beginning in 2026, shifting part of the tax obligation from annual filing to the payout stage for certain qualifying wins. The update follows the passage of Senate File 605, which Governor Kim Reynolds signed into law in 2025. The new requirements take effect on January 1, 2026.

Under the law, sportsbooks operating in Iowa must withhold state income tax from sports wagering winnings when federal income tax withholding already applies. State guidance links Iowa’s withholding obligation directly to federal thresholds, creating a single trigger point for when taxes are deducted at payout rather than paid later through annual returns.

Federal Thresholds Drive The New Withholding Rule

Federal tax rules remain the basis for determining when withholding applies. Under the Internal Revenue Code, sports wagering winnings must be reported on a Form W-2G when they exceed $600 and are at least 300 times the amount wagered. Federal income tax withholding applies at a rate of 24% when winnings exceed $5,000 and meet the same 300-times threshold.

Iowa’s new law mirrors that structure. When a sports betting payout meets the federal withholding criteria, sportsbooks must also withhold Iowa income tax from the same payout. When federal withholding does not apply, state withholding does not apply either, even though reporting requirements may still exist in certain situations.

State guidance explains that some sports betting winnings may still require reporting without withholding, depending on the size of the payout and wager. The new law changes when taxes are collected, not whether sports betting winnings are taxable income.

State Withholding Rate Drops As Collection Timing Shifts

Alongside the new withholding requirement, Iowa is reducing the state income tax rate applied to sports betting winnings. Beginning in 2026, the rate will drop from 6.75% to 3.8%.

When withholding applies, sportsbooks will deduct the 3.8% state tax from qualifying payouts and remit those funds directly to the Iowa Department of Revenue. As a result, some bettors will receive winnings net of both federal and state withholding rather than settling the full state amount later when filing their income tax return.

Taxpayers who are required to file an Iowa individual income tax return must still report all gambling winnings, including sports wagering, received during the year. State officials note that the amount withheld at payout may not reflect the final tax owed, as individual circumstances such as total income and deductions can affect liability.

New Compliance Duties For Sportsbooks

The law also introduces new compliance obligations for sportsbooks. Operators already required to withhold federal income tax on qualifying sports betting winnings must now withhold Iowa income tax as well when the federal trigger is met. If Iowa withholding is required, the sportsbook must register as a withholding agent with the state, calculate the correct amount, remit the funds, and complete the associated reporting.

By tying state withholding to federal rules administered by the Internal Revenue Service, Iowa provides sportsbooks with a standardized framework for determining when withholding applies. State officials say this approach simplifies compliance while improving the collection of taxes on larger sports betting wins.

For bettors, the change means that certain high-value sports betting payouts will no longer be paid in full at the time of withdrawal starting in 2026. Officials emphasized that this does not introduce a new tax on sports wagering; it changes when part of the tax is collected.