Adjusted gross gaming revenue, usually shortened to AGGR, is the sportsbook figure that states actually tax. It starts with total wagers, subtracts everything paid out to winning bettors, and then removes specific items regulators allow, most commonly promotional credits and the federal excise tax on wagers. What’s left is closer to what the operator really earned, and that’s the number the state tax rate is applied to.
The distinction matters because the headline numbers in sports betting, the handle and the gross win, aren’t what get taxed. Legal U.S. sportsbooks processed roughly $167 billion in wagers during 2025, but states don’t tax that. They tax AGGR, and the rules for calculating it vary enough from state to state that two operators with identical betting results can owe very different amounts.
How AGGR Differs From Gross Gaming Revenue
Gross gaming revenue is a simple subtraction: total wagers minus total payouts to winners. AGGR takes that number and reduces it further by deductions the state allows. Promotional credits and federal excise taxes are the two big ones. The idea is to keep the tax base tied to money the operator actually kept, rather than money it forwarded to the IRS or handed out as free bets.
Terminology varies. Some states use “adjusted gross sports wagering receipts,” others use “net gaming revenue,” but the concept is the same: strip the raw win down to something closer to real economic gain before taxing it.
The Calculation Step by Step
The starting point is the handle, meaning every dollar wagered during the reporting period, winning bets and losing bets alike. From that total, the operator subtracts all payouts to bettors who won. The remainder is the gross gaming revenue, sometimes called the house win.
The ratio of house win to handle is the hold percentage. U.S. sportsbooks averaged a hold rate around 9.3% in 2024, so for every $100 wagered, operators kept roughly $9.30 before any expenses. A sportsbook that takes $10 million in bets and pays out $9.07 million has a gross win of $930,000. That figure is the starting point for AGGR, not the finish line. Allowed deductions come off next.
Promotional Credits and Free Bets
Sportsbooks spend heavily on sign-up bonuses, risk-free bets, and loyalty rewards. When a bettor places a wager using a $50 free-bet credit instead of their own money, the tax question is whether the operator should owe on winnings tied to that credit. Many states let operators subtract promotional credits from gross revenue, which directly shrinks AGGR and the resulting tax bill.
This deduction has been the most contentious lever in sports betting tax policy. In the early years of legalization, Colorado, Pennsylvania, Michigan, and Virginia allowed unlimited promotional deductions. Operators could pour money into bonuses and dramatically reduce their taxable base, sometimes reporting little or no taxable revenue for stretches while still handling millions in bets.
Caps, Phase-Outs, and Outright Bans
States adjusted. Colorado capped untaxed promotional offerings at 2.5% of the monthly handle starting in 2023. New York took the strictest position of any state, prohibiting sportsbooks from deducting any promotional wagers from gross gaming revenue. Because New York also imposes a 51% tax rate, operators there face effective tax rates above 51% of net revenue the moment they offer a single free bet, since they’re paying tax on money they gave away.
Most states that legalized betting after 2021 have either capped deductions, phased them out over time, or banned them entirely. Where a state sits on that spectrum affects actual tax collections more than the headline rate does.
Federal Taxes That Come Out First
Before state tax enters the picture, sportsbooks owe federal obligations that most states let them deduct in the AGGR calculation.
Every legal wager triggers a federal excise tax equal to 0.25% of the amount wagered.1Office of the Law Revision Counsel. 26 USC 4401 – Imposition of Tax This applies to the full handle, not the house win. A sportsbook processing $100 million in bets owes $250,000 to the IRS regardless of how those bets settled. Most states let operators subtract the excise tax payment from gross revenue before applying the state rate, so operators aren’t taxed twice on the same dollars.
A separate annual occupational tax of $50 also applies to state-authorized operators.2Office of the Law Revision Counsel. 26 USC 4411 – Imposition of Tax It’s too small to move AGGR in any meaningful way, but it exists as a separate compliance item.
How States Apply Their Rate
Once AGGR is calculated, the state applies its statutory tax rate. Across the roughly 40 states plus Washington, D.C. that have legalized some form of sports betting, rates run from 6.75% to 51%.3Tax Foundation. Online Sports Betting Taxes by State, 2025 The middle of the pack sits between 10% and 20%.
Not every state applies a flat percentage to AGGR. Tennessee taxes the handle itself rather than revenue. Illinois adopted a graduated structure in 2024 that charges higher rates as an operator’s adjusted gross revenue climbs, from 20% at the low end to 40% at the top bracket. These structural differences mean identical betting results can produce very different tax bills depending on the license state.
Statutory Rate Versus Effective Rate
The rate in the statute is rarely the share of operator revenue the state actually collects. Promotional deductions are the main reason. A state with a 20% statutory rate that allows generous promotional deductions can collect less per dollar of real operator profit than a state at 15% with no deductions allowed.
A worked example shows the mechanics. A sportsbook with a $500,000 gross win deducts $200,000 in promotional credits and $25,000 in federal excise taxes. AGGR comes out to $275,000. At a 15% state rate, the tax owed is $41,250 rather than the $75,000 the state would collect on the full gross win. That gap is why early tax revenue projections built on statutory rates tend to overshoot actual collections during the early years of a new market.
When Revenue Goes Negative
Sportsbooks don’t win every month. A stretch of heavy payouts, particularly around events like the Super Bowl or March Madness, can push gross revenue below zero for a reporting period. Whether the operator can carry that loss forward to offset future months depends on the state. Some allow carry-forwards, so a losing month reduces the taxable base later. Others treat each period independently, and the operator absorbs the loss with no future offset. It’s one of the less visible choices in state policy, and it materially affects operator economics.
Why the Definition Matters
AGGR isn’t just an accounting figure. It’s the number that tells you whether a state’s sports betting market is generating meaningful public revenue or just moving a lot of money through the system. A state can report a huge handle in headlines, but if promotional deductions hollow out AGGR, actual tax collections can be modest. A state with a smaller market and tight rules on deductions can pull in more tax per dollar wagered than a larger market with generous ones. When judging whether legalized sports betting is delivering on its fiscal promises, the definition of AGGR and the rules governing its calculation carry more weight than the handle does.