How Phantom Taxable Income Can Be Created From
Gambling Winnings And Losses Under The Big Beautiful Bill Act
The One Big Beautiful Bill Act (OBBBA), signed into law by President Donald Trump on July 4, 2025, has introduced significant changes to the U.S. tax code, including a controversial provision affecting how gambling winnings and losses are taxed. This amendment, set to take effect in 2026, has sparked widespread concern among both professional and recreational gamblers, as well as industries reliant on gambling revenue, such as horse racing and casinos. Below, we explore the details of this change, its implications for gamblers, and the potential ripple effects on the gambling industry.
Under the current U.S. tax law, gambling winnings are considered taxable income, and gamblers are required to report all winnings to the Internal Revenue Service (IRS). For significant wins, gambling operators issue a W-2G form to both the taxpayer and the IRS, ensuring that large winnings are tracked. Gamblers can deduct their gambling losses, but only up to the amount of their winnings for the tax year, provided they itemize their deductions. This means that if a gambler wins $100,000 and loses $100,000 in the same year, their net taxable income from gambling is zero, assuming they itemize and substantiate their losses with proper records.
The OBBBA includes a provision that limits the deduction of gambling losses to 90% of a gambler’s annual losses, starting in 2026. This change marks a significant departure from the long-standing policy that allowed a 100% deduction of losses up to the amount of winnings.
Under the new provision, gamblers can only deduct 90% of their losses, even if their losses equal or exceed their winnings. For example:
Additionally, the provision applies to non-loss expenses incurred by professional gamblers, such as subscriptions to data services, further limiting their ability to offset winnings with business-related costs.
Professional gamblers, such as poker players, sports bettors, and daily fantasy sports (DFS) players, operate on razor-thin profit margins, often wagering large volumes to achieve modest gains. The new tax rule threatens their livelihoods by imposing taxes on income they haven’t actually earned. For instance, a professional gambler earning $200,000 annually might face taxes on $480,000 due to the 90% deduction cap, making it mathematically challenging to remain profitable.
The rule could force gamblers to pay more in taxes than their actual winnings, potentially driving professionals to unregulated offshore betting platforms that do not report to the IRS.
While recreational gamblers who do not itemize deductions are unaffected (as they cannot deduct losses under current law), those who do itemize—such as high rollers or those who win significant jackpots—will face increased tax burdens. For example, a recreational gambler who wins a $100,000 slot machine jackpot but loses $100,000 over the year will owe taxes on $10,000 of phantom income, despite breaking even. This could discourage casual betting, particularly for those who meticulously track losses to offset taxable winnings.
The gambling industry, which generated nearly $72 billion in U.S. commercial gaming revenue in 2024, relies heavily on high-volume bettors, often referred to as “sharps,” who help sportsbooks set accurate betting lines and fund large prize pools in DFS and poker tournaments. The new tax provision could drive these professionals out of the regulated U.S. market, leading to several consequences:
The Joint Committee on Taxation estimates that the provision will generate over $1 billion in federal revenue over eight years, equating to roughly $137.5 million annually. However, critics argue that this gain could be offset by losses in state tax revenue and jobs if professional gamblers exit the market or move offshore.
In response to the outcry, Rep. Dina Titus (D-NV), whose district includes Las Vegas, introduced the Fair Accounting for Income Realized from Betting Earnings Taxation (FAIR BET) Act on July 7, 2025. The bill, co-sponsored by Rep. Ro Khanna (D-CA) and Rep. Troy Nehls (R-TX), aims to restore the 100% deduction for gambling losses. Titus described the legislation as a “common-sense fix” to ensure gamblers are not taxed on money they haven’t won, emphasizing its importance for both recreational and professional gamblers.
The American Gaming Association (AGA), which initially supported the OBBBA, has endorsed the FAIR BET Act, committing to work with lawmakers to restore equitable tax treatment. DraftKings, a major sports betting operator, also expressed support for reversing the provision. However, the success of the FAIR BET Act remains uncertain, as the OBBBA was passed with entirely Republican votes, and some GOP senators have indicated that the gambling provision went unnoticed during negotiations.
With the new tax rule set to take effect in 2026, gamblers should prepare by:
The One Big Beautiful Bill Act’s gambling tax provision represents a significant shift in how gambling winnings and losses are treated under U.S. tax law. By capping loss deductions at 90%, the law introduces “phantom” taxable income, posing a threat to professional gamblers’ livelihoods and potentially disrupting the broader gambling industry. While the FAIR BET Act offers hope for a reversal, its outcome remains uncertain. Gamblers, both professional and recreational, should prepare for the changes by maintaining meticulous records and staying engaged with legislative developments. The provision’s impact underscores the challenges of passing complex, omnibus legislation with limited scrutiny, leaving stakeholders to navigate its unintended consequences.
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The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.