New Law Reduces Tax Odds for Gamblers

Do you enjoy spending time at the casino or betting on sports? If so, you need to know about a new tax law provision scheduled to go into effect in 2026. The One Big Beautiful Bill Act (OBBBA) more tightly limits the deduction for gambling losses.

Dealing out the Tax Cards

There are a few basic tax rules for gambling losses that are important to understand:

1. If you're an amateur gambler, you may claim the gambling loss deduction only if you itemize deductions, not if you claim the standard deduction. If you qualify as a gambling professional, your gambling activities are treated as a business, and your losses (and winnings) are reported on Schedule C.
2. The amount of your gambling loss deduction is limited to the amount of your winnings for the year.
3. Any excess gambling losses can't be carried forward. They simply vanish — forever.

To illustrate, suppose you win $10,000 gambling in 2025. If you incur $7,500 in losses from all your gambling activities during the year, you can deduct the entire $7,500. However, if your losses total $12,500, your deduction is limited to $10,000. There's no tax benefit from the extra $2,500 in losses.

No Bluffing the IRS

The IRS often challenges gambling loss deductions. You should keep a diary or similar records to back up your claims in case the IRS challenges your gambling loss deductions. If you don't maintain adequate records, you could lose some or all of your loss deductions. The requirements may vary based on the activity as spelled out by the IRS in Publication 529, "Miscellaneous Deductions." Here are some specific types of proof you should keep for popular wagering games:

• ‍Bingo. A record of the number of games played, the cost of cards purchased and the amounts collected on winning cards.‍
• Keno. Copies of the keno tickets that the gambling establishment validated, copies of the casino credit records and copies of the casino check-cashing records.‍
• Racing. Records of the number of races, amounts of wagers, and amounts won and lost. Examples of covered activities include horse, harness and dog races.    ‍
• Slot machines. A record of the machine number and all winnings, sorted by date and time of play.‍
• Table games. The table number where you played, along with the casino credit card data indicating where credit was issued. Examples of covered activities include blackjack, craps and roulette games.‍
• Lotteries. A record of ticket purchases, dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winnings statements.

These records may be supported by other means (for instance, unredeemed ticket stubs from the racetrack). However, the supporting documents must be legitimate.

Note that winnings and losses from sports betting and fantasy sports contests are also subject to these rules. Keep a log of your taxable income and losses and corroborate the records with the Forms W-2G you receive at tax return time.

New Law Doubles Down

Under the OBBBA, beginning in 2026, only 90% of gambling losses will be deductible. The rule that gambling loss deductions can't exceed gambling winnings remains in place.

For instance, let's say you incur $10,000 in gambling losses and have $7,500 in winnings during a tax year. If the year is 2025, you can deduct only $7,500 of your losses. But if the year is 2026, your deduction will be further limited to $6,750 (90% of $7,500).

This tax law provision is expected to have a particularly significant impact on high rollers. Those who gamble extensively on the professional circuit face the prospect of having to pay tax on large amounts of "phantom income" they never actually receive.

For example, suppose you win $250,000 from various poker tournaments in 2026, but you also lose $250,000. Even though you effectively break even for the year, you can deduct only $225,000 (90% of $250,000). That means you'll owe tax on $25,000 of gambling income even though you haven't earned a dime.

Stay Tuned

The gambling industry has quickly mustered support for repealing this unexpected tax law provision. Legislation has already been introduced in Congress to roll back the 90% limit before it ever takes effect. These measures have some bipartisan support in Congress, although a recent effort to fast-track a repeal was effectively blocked. Work with your Porte Brown tax advisor to stay compliant with current rules and monitor any new legislative developments.