Governor Polis Signs Colorado Bill Ending Free Bet Tax Deductions

A Game-Changing Signature

Colorado’s Governor Jared Polis signed House Bill 1311 (HB 1311), tightening the screws on tax deductions for free bets. The bill, aimed at pumping up state revenue, phases out operators’ ability to deduct promotional free bets from their taxable income, a move expected to add $13 million to the Water Plan Implementation Cash Fund by fiscal year 2026-27.

HB 1311 rewrites how sports betting operators calculate their “net sports betting proceeds” for tax purposes. Currently, operators can deduct 2.25% of the value of non-cash promotional bets, like free bets or bonus credits, placed by players. The bill rolls out a phased reduction:

• From July 1, 2025, to December 31, 2025, deductions are capped at 2% of the total monthly handle.

• From January 1, 2026, to June 30, 2026, the cap drops to 1.75%.

• From July 1, 2026, operators can’t deduct any free bets, period.

The bill also allocates $17,135 from the sports betting fund for 2025-26 to support the state’s GenTax system ($13,906), tax business group staffing ($1,024), and executive director services ($2,205). This ensures the Department of Revenue can handle the new rules smoothly.

Why It Matters

The deduction cut is a big deal for operators, who rely on free bets to attract players in Colorado’s market. Free bets lower taxable income, softening the blow of the state’s 10% sports betting tax.

Phasing out these deductions means operators will owe taxes on a larger share of their revenue, potentially crimping budgets for promos like FanDuel’s odds boosts or DraftKings’ parlay bonuses.

By 2026-27, the state expects an extra $13 million for water projects, building on the 2024 voter decision to remove the $29 million tax cap, which had limited betting’s fiscal impact.

For Colorado, the bill strengthens its position as a betting powerhouse. The state’s legal market, launched in 2020, has grown steadily, with a $5.8 billion handle in 2024. HB 1311 ensures more of that cash flows to public coffers, supporting initiatives like water conservation.