For years, the federal rule for gambling losses was simple to state: losses were deductible up to the amount of your winnings. Starting with 2026 tax years, that is no longer the whole story. A year in which you finish even may still leave you with taxable gambling income.
Here is what changed, who it affects, and the planning steps that may help.
What changed
The 2025 federal tax law (Public Law 119-21, §70114) rewrote IRC §165(d). For taxable years beginning after December 31, 2025, the deduction for losses from wagering transactions:
- Equals 90 percent of those losses for the year, and
- Is still allowed only to the extent of your gains from wagering for the year
The law also keeps a special rule that matters most to people in the business of gambling. For purposes of the limit, “losses from wagering transactions” includes any deduction otherwise allowable that is incurred in carrying on a wagering transaction. For professionals, that pulls travel, lodging, and other business expenses into the same 90 percent limit.
Bills to restore the full deduction have been introduced in Congress, and one advanced through the House Ways and Means Committee in September 2026. As of this writing, none has been enacted. Unless that changes, the 90 percent rule applies to 2026 returns.
The break-even problem
The new limit can create what many players call phantom income: tax on money you did not keep.
Illustrative example only. A recreational player has $50,000 of gambling winnings and $50,000 of gambling losses in 2026. Economically, the year is a wash.
- Winnings reported: $50,000
- Losses allowed: 90 percent of $50,000, or $45,000 (within the $50,000 gains limit)
- Net gambling income subject to tax: $5,000
Illustrative example only. A professional has $200,000 of winnings, $180,000 of wagering losses, and $20,000 of travel and other business expenses. All $200,000 of losses and expenses counts toward the limit, so $180,000 is allowed. The professional reports $20,000 of income from a year that broke even.
These figures are simplified and leave out the rest of the return. Your actual result depends on your full picture.
Professional or recreational?
The 90 percent limit applies either way, but your status still changes how gambling shows up on your return.
The leading case is Commissioner v. Groetzinger, 480 U.S. 23 (1987). The Supreme Court held that gambling is a trade or business when it is pursued full time, in good faith, and with regularity, for the production of income for a livelihood, and is not a mere hobby. The answer turns on your facts, and the Court noted that business status may bring self-employment tax with it.
- Professionals report gambling as a business. Expenses may be deductible, but they count as wagering losses under the limit, so a losing year generally cannot create a loss to use against other income.
- Recreational players report all winnings as income. According to the IRS, losses are deductible only if you itemize on Schedule A, and only up to the gambling income you report. If you take the standard deduction, losses may give no benefit at all.
Records still carry the weight
The new limit does not make good records less valuable. Losses you cannot support may not count at all, while losses you can support count at 90 percent.
The IRS guidance on gambling records, Rev. Proc. 77-29, 1977-2 C.B. 538, calls for an accurate diary or similar record, supplemented by verifiable documentation. The diary should show at least:
- The date and type of each wager or wagering activity
- The name and address or location of the establishment
- The names of other people present with you, if any
- The amounts won or lost
Supporting documents can include Forms W-2G, wagering tickets, canceled checks, bank withdrawal records, and payout statements. A log assembled at tax time from bank statements is usually much weaker than one kept as you play.
Planning steps for 2026
- Run a projection before year-end. Use your actual 2026 results to see how the 90 percent limit affects your tax.
- Revisit estimated payments. Phantom income may increase what you owe, and adjusting payments may help limit underpayment penalties (IRC §6654).
- Confirm and document your status. If you treat gambling as a business, keep the records that show how you operate it.
- Compare itemizing with the standard deduction. For recreational players, this choice decides whether losses count at all.
- Keep the log current. Daily entries are easier to keep and easier to support.
- Check your state return. According to the Franchise Tax Board, California conforms to the federal tax code as of a specific date and does not always adopt federal changes, so your California result may not match the federal one.
- Watch Congress. If the rule changes, the plan should change with it.
How TreeStar can help
We model the 90 percent limit with your actual numbers, review whether professional status fits your facts, and help you keep records that hold up. Our tax planning work brings it together before year-end, while there is still time to adjust.
This article is general information, not advice for your situation. Rules change; confirm current law before acting.
