The Department of the Treasury and the Internal Revenue Service (IRS) have issued a Notice of Proposed Rulemaking (REG-113229-25) to amend 26 CFR Parts 1 and 31. The primary purpose of these proposed regulations is to reflect recent changes to statutory law enacted under the One, Big, Beautiful Bill Act (OBBBA), Public Law 119-21, which was signed into law on July 4, 2025.

Specifically, OBBBA sections 70114 and 70433 substantively amended Internal Revenue Code (IRC) §§ 165(d), 6041, 6041A, and 3406. Prior to these statutory changes, the baseline threshold for information reporting under sections 6041 and 6041A was fixed at $600, a level that had been in place since 1954 and was unadjusted for inflation. OBBBA raised this base threshold to $2,000 for payments made after December 31, 2025, and introduced an inflation adjustment for calendar years after 2026 under the newly added IRC § 6041(h). Furthermore, OBBBA altered the calculation of allowable wagering losses under IRC § 165(d).

The Treasury states the explicit reason for releasing these updates is to "ensure that the regulations reflect current law, thereby preventing confusion by individuals and entities who are impacted by the updates to the relevant statutory provisions". The preamble warns that failing to update the outdated regulations "could create confusion and uncertainty for taxpayers impacted by the statutory changes," leading to a scenario where practitioners might mistakenly "apply the lower, outdated thresholds in the regulations despite the new, higher thresholds in the statutes".

Modifications to the Deductibility of Wagering Losses

Historically, under IRC § 165(d) and the prior iteration of Treas. Reg. § 1.165-10, deductions for losses from wagering transactions were limited strictly to the extent of the gains from such transactions. Following the passage of OBBBA, the proposed regulations amend the rule to severely limit this deduction further.

Proposed Treas. Reg. § 1.165-10(a) outlines the new general rule, stating: "For purposes of losses from wagering transactions, a deduction is allowed under section 165(d) of the Internal Revenue Code for 90 percent of the amount of such losses during the taxable year, but only to the extent of the gains from wagering transactions during that year".

The Treasury has also applied this 90 percent cap to spouses filing jointly. Proposed Treas. Reg. § 1.165-10(b) codifies that "90 percent of the combined losses of the spouses from wagering transactions during the taxable year are allowed as a deduction under section 165(d) only to the extent of the combined gains of the spouses from wagering transactions during that year".

Updates to Information Reporting Thresholds

To harmonize the regulatory framework with the $2,000 threshold established by OBBBA, the proposed regulations systematically replace all references to the legacy $600 threshold across various reporting provisions.

Proposed Treas. Reg. § 1.6041-1(a)(1)(i)(A) and (B) modify the general requirement for returns of information, applying the new threshold to "Salaries, wages, commissions, fees, and other forms of compensation for services rendered" as well as to "Interest (including original issue discount), rents, royalties, annuities, pensions, and other gains, profits, and income" by requiring reporting only when such payments "equal or exceed the dollar threshold in effect for the calendar year under section 6041(a) and (h)".

To clarify what this threshold is in practice, Proposed Treas. Reg. § 1.6041-1(a)(3) expressly defines the dollar amount: "For payments made after December 31, 2025, and before January 1, 2027, the dollar threshold in effect for the calendar year under section 6041(a) is $2,000. For payments made after December 31, 2026, the dollar threshold in effect for the calendar year under section 6041(a) is $2,000 plus the inflation adjustment provided in section 6041(h)".

The updates extend to employee reporting as well. Proposed Treas. Reg. § 1.6041-2(a)(1) updates the rules for reporting payments to employees on Form W-2, requiring reporting if the total payments and wages "equals or exceeds the dollar threshold in effect for the calendar year under section 6041(a) and (h)". The regulation provides a helpful example for the 2026 tax year, noting that "when the threshold in effect under section 6041(a) is $2,000, if a payment of $2,500 is made to an employee and $1,500 thereof represents wages subject to withholding... and the remaining $1,000 represents compensation not subject to withholding, such wages and compensation must both be reported on Form W-2". Similar threshold replacement language is applied to trust distributions reported on Forms 1096 and 1099 under Proposed Treas. Reg. § 1.6041-2(b)(1)(ii).

Healthcare carrier reporting under Proposed Treas. Reg. § 1.6041-7(b)(1) is likewise amended. Carriers using magnetic media for separate departments may do so as long as the aggregate returns contain all required information for payments to medical providers "that equal or exceed the dollar threshold in effect for the calendar year under section 6041(a) and (h)".

For remuneration for services and direct sales, Proposed Treas. Reg. § 1.6041A-1(d)(4)(ii) updates the operational examples regarding third-party payment networks. The examples now utilize a $2,500 payment figure to reflect an amount that exceeds the new baseline threshold, illustrating instances where service recipients are shielded from duplicate reporting because the merchant acquiring bank or third-party settlement organization is responsible for filing the return under section 6050W.

Modifications to Specific Wagering Winnings

One of the most notable administrative cleanups involves the disparate reporting thresholds previously applied to specific types of gambling winnings. Under the prior regulations published in 2016, Form W-2G reporting was triggered at $1,200 for bingo and slot machine play, and $1,500 for keno. Because the new statutory baseline of $2,000 exceeds these specific administrative carve-outs, the Treasury is elevating these thresholds to match the general IRC § 6041(a) base.

Proposed Treas. Reg. § 1.6041-10(b)(1)(i) strikes the specific dollar amounts and redefines reportable gambling winnings:

Bingo: "...winnings that equal or exceed the dollar threshold in effect for the calendar year under section 6041(a) and (h) from one bingo game, without reduction for the amount wagered".
Keno: "...winnings that equal or exceed the dollar threshold in effect for the calendar year under section 6041(a) and (h) from one keno game reduced by the amount wagered on the same keno game".
Slot Machines: "...winnings that equal or exceed the dollar threshold in effect for the calendar year under section 6041(a) and (h) from one slot machine play, without reduction for the amount wagered".

The examples provided in Proposed Treas. Reg. § 1.6041-10(g)(5) have been updated accordingly, assuming a base threshold of $2,000 to illustrate the aggregate reporting method for multiple slot machine or keno wins during a specific "information reporting period".

Updates to Backup Withholding Regulations

Under IRC § 3406, backup withholding is generally required on reportable payments if the payee fails to furnish a proper Taxpayer Identification Number (TIN) or other conditions are met. Proposed Treas. Reg. § 31.3406(b)(3)-1(b)(3)(i) conforms the withholding trigger to the new statutory amounts, dictating that a payment is a reportable payment "only if the aggregate amount of the current payment and all previous payments to the payee during the calendar year equals or exceeds the dollar threshold in effect for the calendar year under section 6041(a) and (h)".

Furthermore, regarding gambling winnings subject to withholding exceptions, Proposed Treas. Reg. § 31.3406(g)-2(d)(2) dictates that a non-bingo/keno/slot gambling winning is a reportable winning "only if the amount paid with respect to the wager equals or exceeds the dollar amount in effect for the calendar year under section 6041(a) and (h) and if the proceeds are at least 300 times as large as the amount wagered".

Effective Dates

The effective dates for these sweeping changes are bifurcated between the rules governing the deductibility of wagering losses and those concerning information reporting.

The amendment to the calculation of wagering losses under Proposed Treas. Reg. § 1.165-10 applies to "taxable years beginning after December 31, 2025".

Conversely, all proposed amendments to the information reporting and backup withholding rules—specifically Proposed Treas. Reg. §§ 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—are slated to apply to "payments made on or after January 1, 2026".

Reliance on Proposed Regulations

When the Treasury Department issues proposed regulations, tax practitioners immediately look for reliance clauses within the preamble indicating whether taxpayers may rely on the proposed rules before they are finalized. Based on a thorough review of the provided text of REG-113229-25, there is no provision explicitly stating that these proposed regulations may be relied upon by taxpayers or practitioners until final revisions are published. Consequently, until final regulations are published or further administrative guidance is issued granting reliance, these regulations technically hold only the weight of proposed rules.

Prepared with assistance from NotebookLM.