2026 Gambling Tax Rules: Everything That Changed on January 1

Starting January 1, 2026, you can lose money gambling and still owe the IRS. The One Big Beautiful Bill Act—signed into law July 4, 2025—capped gambling loss deductions at 90% of winnings, creating what tax professionals call “phantom income” that exists only on paper but carries a very real tax bill. The same legislation raised the W-2G reporting threshold from $1,200 to $2,000, offering modest relief for slot players. But for anyone who gambles seriously, the math just got significantly worse.

The 90% Rule: How “Phantom Income” Works

Before 2026, gamblers who itemized deductions could deduct 100% of their losses against winnings. Win $100,000 and lose $100,000? Zero taxable gambling income. Losses could only offset winnings—never other income—and excess losses simply vanished with no carryforward. But the math was at least fair: break-even gamblers paid no gambling tax.

Under the new rule, gamblers can only deduct 90% of their losses. That same break-even scenario—$100,000 won, $100,000 lost—now produces $10,000 in taxable “phantom income.” At the 24% bracket, that’s a $2,400 tax bill on money you never kept. At the top 37% rate, it’s $3,700.

The losing year scenario is particularly brutal: you can only deduct up to 90% of your winnings ($45,000), leaving $5,000 in taxable phantom income—even though you’re down $25,000 overall.

The Daniel Negreanu Example

The Tax Foundation used poker legend Daniel Negreanu’s 2025 WSOP results to illustrate the real-world impact. Negreanu entered 45 events, cashed 15 times, and reached five final tables. His numbers tell the story of how the 90% cap punishes high-volume professionals.

Total cashes: $1,478,240. Total buy-ins: $1,297,143. Net profit: $181,097. Under the old rules at the 37% bracket, his tax liability was approximately $67,000—leaving $114,000 take-home. Under the new 90% cap, his deductible losses drop to $1,167,429, inflating his taxable income to $310,811. His tax bill nearly doubles to roughly $115,000, slashing his take-home to just $66,000.

“Taxing people who lose money—like, you’re taxing zero income. We don’t mind paying taxes but, like, on actual money. Nobody thinks it’s fair to pay taxes when you lose money.”
— Daniel Negreanu, via NPR (July 2025)

Who This Affects Most

The 90% cap disproportionately punishes high-volume, low-margin gambling—exactly the profile of professional play. Tournament poker players, sports betting syndicates moving millions annually on 2–5% margins, and horse racing bettors with high churn face the steepest losses. Serious recreational bettors with $50,000+ in annual action will also feel the hit.

Critically, the rule only affects taxpayers who itemize deductions. Casual gamblers taking the standard deduction already can’t deduct losses—so nothing changes for them. But for anyone who gambles at volume and itemizes, break-even years now come with a tax bill. Sen. Ted Cruz, who voted for the bill, later admitted “virtually nobody in the Senate, when we were voting on it, had seen” the gambling provision.

The Good News: W-2G Threshold Increase

The same legislation delivered one genuinely positive change: the W-2G reporting threshold for slot machine jackpots rose from $1,200 to $2,000. The old threshold had been unchanged since 1977—48 years during which $1,200 lost roughly 80% of its purchasing power to inflation. In today’s dollars, the original threshold would be approximately $6,400.

The practical impact: fewer machine lockups (casinos must halt play for W-2G processing), less paperwork for players and operators, and fewer small jackpots triggering IRS attention. Keno reporting also rose from $1,500 to $2,000, and the threshold will adjust annually for inflation starting in 2027.

The American Gaming Association, which had lobbied for a $5,000 threshold, characterized the change as “long-overdue modernization.” AGA President Bill Miller noted that “the antiquated slot tax threshold creates unnecessary burdens for consumers, casino operators and the IRS.”

The catch: all gambling income remains taxable regardless of whether a W-2G is issued. The threshold change is administrative—it doesn’t reduce your tax obligation, just your paperwork. And for serious gamblers, the W-2G relief is dwarfed by the phantom income liability from the 90% cap.

FAIR BET Act: What Happened and What’s Next

Congress hasn’t ignored the backlash. Three separate bills aim to restore the full 100% deduction:

The FAIR BET Act is elegantly simple—a one-line bill that strikes “90 percent” and inserts “100 percent.” But the GOP-controlled House Rules Committee blocked it as an amendment to the National Defense Authorization Act in September 2025. In December, Rep. Titus wrote to Ways and Means Chairman Jason Smith requesting an expedited hearing, but the committee adjourned without taking it up.

Smith himself has acknowledged the provision is problematic, calling it a “mistake” and expressing “bipartisan interest in fixing this.” The WAGER Act, led by Republican Rep. Andy Barr, is seen as having the best chance of passage due to its GOP sponsorship. But none of these bills have received a committee vote, and the 90% cap remains active law.

Industry heavyweights—DraftKings, FanDuel, MGM Resorts, Caesars Entertainment—are actively lobbying for repeal. Critics warn the tax could push gamblers toward offshore or unregulated markets, potentially reducing rather than increasing revenue.

The Prediction Market Gray Zone

Here’s the angle most coverage misses: professional gamblers facing the 90% cap are looking at prediction markets as a potential alternative—not because the odds are better, but because the tax treatment might be.

Platforms like Kalshi and Polymarket are regulated by the CFTC as event contract exchanges—financial instruments, not gambling. Kalshi issues Form 1099-B (like stock brokerages), not W-2G. This distinction matters enormously: CFTC-regulated contracts currently maintain 100% loss deductibility and aren’t subject to the 90% gambling cap.

The IRS has issued no specific guidance on how to treat prediction market gains and losses. This ambiguity creates both opportunity and risk. Some aggressive tax strategies argue for Section 1256 treatment (the 60/40 split between long-term and short-term capital gains rates), which would be far more favorable than gambling income treatment.

The risk: the IRS could eventually rule that prediction market trading IS gambling—especially for sports-related contracts. Several states are already fighting this classification battle in court. If that happens, traders could face back taxes, penalties for misclassification, and the 90% cap applied retroactively. Anyone using this strategy should work with a tax professional and understand they’re operating in genuinely unsettled territory.

Record-Keeping Requirements

With the 90% cap, rigorous documentation of both wins and losses matters more than ever. Without proper records, you could lose your deduction entirely. The IRS specifically flags gambling deductions for scrutiny—as the Tom Goldstein case demonstrates. The prominent Supreme Court lawyer currently faces trial in Maryland federal court on charges of hiding over $50 million in poker winnings and evading $5.3 million in taxes.

Best practices: keep a contemporaneous gambling diary, save all W-2G forms, download annual win/loss statements from every platform, and retain bank records showing gambling transactions. The IRS is increasing gambling-related audits—don’t make yourself a target.

What You Should Do Now

For everyone: don’t stop reporting income to avoid the tax—the IRS is increasing gambling audits. Offshore or unregulated platforms don’t solve the tax problem. And watch for legislative updates—the 90% cap has bipartisan opposition and may yet be repealed.

Related tools: Crypto Tax Calculator · Expected Value Calculator · Bankroll Calculator

---

Sources

• H.R. 1 — One Big Beautiful Bill Act — U.S. Congress
• H.R. 4304 — FAIR BET Act — U.S. Congress
• The One Big Beautiful Bill Act Creates Unequal Tax Treatment for Gambling Losses — Tax Foundation
• Sens. Cruz, Cortez Masto Lead Bipartisan FULL HOUSE Act — Sen. Ted Cruz
• IRS Confirms $2K Slot Jackpot Threshold Set to Begin in 2026 — CPA Practice Advisor
• Maryland Attorney and Poker Player Charged With Tax Crimes — U.S. Department of Justice