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WASHINGTON — The Internal Revenue Service on Monday issued final regulations implementing the “No Tax on Tips” provision of the “One Big Beautiful Bill Act,” establishing new tax deductions for certain workers who receive tips while excluding income tied to “pornographic activity.”
The regulation, titled “Occupations That Customarily and Regularly Receive Tips; Definition of Qualified Tips,” states: “Amounts received for prostitution services and pornographic activity are not included in the definition of ‘qualified tips.’”
Following the enactment of the legislation last year, the IRS developed rules to carry out the provision allowing taxpayers in occupations that “customarily and regularly” receive tips to deduct up to $25,000 annually in tip income. After a public comment period, the agency finalized both the list of eligible occupations and the criteria governing which tips qualify for the deduction.
The finalized “List of Occupations That Receive Tips” includes “digital content creators,” and the regulation offers additional clarification for that category. However, the rule specifies that tips connected to “pornographic activity” are not eligible for the deduction, without defining the term.
The IRS acknowledged that several commenters raised concerns about the exclusion and the lack of a clear definition.
“In addition to noting that certain pornography is legal, some commenters stated that pornography is protected First Amendment speech, that these businesses pay taxes, and that in fairness these businesses and their employees should have access to the deduction for qualified tips,” the regulation states. “One commenter suggested the prohibition be limited to activity that is unlawful under State or Federal law. Several commenters requested that the regulations define pornographic activity.”
A submission from the Free Speech Coalition argued that the exclusion of “pornographic activity” is the only categorical restriction in the rule not tied to unlawful conduct and noted that pornography is not formally defined as a category of speech under the law.
“This makes it impossible to determine whether a performance or work that generates tips is eligible for tax exemption,” the group wrote. “If content creators provide material or performances for which they can be tipped, how is it determined whether the content is ‘pornographic?’ If the material depicts genital stimulation, is it ‘pornography?’ If the material depicts no nudity, but the speaker is speaking about sex, is it ‘pornography?’ If the speaker is wearing translucent, or even transparent clothing, but speaks of investments and not sex, is it ‘pornography?’”
The group added that, without a precise definition, the rule creates “unconstitutional discretion” in determining which income qualifies for the deduction.
“Under the proposed rule, the regulations will create an environment where enforcement will inevitably be arbitrary; disputes regarding the categorization of income as having been generated by ‘pornographic activity’ will be constant; and litigation will be chronic,” the comment states. “Every taxpayer whose tip exclusion is rejected under this regulatory category will have a valid constitutional challenge to the rejection.”
The regulation notes that the Treasury Department and the IRS “will consider whether to provide additional guidance regarding these exclusions.” In the meantime, the agency stated that it “intends to interpret the occupations on the list in a fair and impartial manner consistent with their commonly understood meaning.”
The IRS said the exclusion for pornographic activity is “intended to address the potential for greater noncompliance and abuse with respect to these activities and services.”
The provision has drawn comparisons to broader federal policy discussions regarding access to financial services for certain industries. A 2025 executive order directed financial institutions not to restrict services based on lawful business activities, and subsequent reports and agency actions have addressed the use of “reputation risk” in regulatory oversight.
Federal agencies, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, have taken steps to eliminate “reputation risk” as a supervisory factor, while the Federal Trade Commission has cautioned payment processors against denying services based on lawful but higher-risk classifications.
It remains unclear how those policy positions may affect adult-oriented businesses and content creators under the new tax framework. Several agencies and financial institutions have not publicly addressed how the rule will be applied in practice.
The Free Speech Coalition also published an analysis of the regulation by Katherine Studley, a consultant who works with industry professionals on tax and business matters. The analysis attributes the exclusion to advocacy efforts by conservative and religious organizations.
“No acknowledgement that these are legal businesses operated by legal workers who have been paying their taxes,” Studley wrote. “The same businesses who are good enough to tax are apparently not entitled to the same tax relief as everyone else.”
Studley noted that the rule does not exclude individuals based on occupation alone and that eligibility may depend on the nature of the content associated with the tips.
“Adult creators are not banned as a category of person and the tip is tied to the content,” she wrote. “This is advantageous for creators operating across multiple platforms and producing mixed content.”
The “No Tax on Tips” provision is scheduled to remain in effect for four years and is set to expire on Dec. 31, 2028. Lawmakers may revisit or revise the measure before that date.
