The 2026 Gambling Tax Trap, Explained

What actually changed

For decades, the tax math on gambling was at least internally fair. You reported your gross gambling income, every payout the sportsbook or casino paid you across the year, and if you itemized, you could deduct your gambling losses up to that same amount. A person who broke even paid no tax on gambling, because the losses fully offset the income.

That changed on July 4, 2025, when the One Big Beautiful Bill Act was signed into law. Tucked inside it was a rewrite of Section 165(d) of the Internal Revenue Code. Beginning with tax years after December 31, 2025, itemizers can deduct only 90% of their gambling losses, still capped at the amount of gambling income they report (Womble Bond Dickinson client alert; Forbes).

Ten percent does not sound like much. The problem is where the cut lands.

Why "phantom income" is worse than it sounds

The IRS does not tax you on your net result for the year. It taxes the gross income you report, then lets you subtract losses as an itemized deduction. When that deduction is trimmed to 90%, the 10% that no longer counts becomes taxable, even if you actually lost money overall.

Here is the plainest version, using round numbers from a worked example by CPAs at Albin, Randall and Bennett:

• You report $10,000 of gambling income for the year.
• You lost $10,000 chasing it. You are flat. Nothing stayed in your pocket.
• Under the new cap, you can deduct only 90% of that $10,000, so $9,000.
• $10,000 of income minus $9,000 of deductible loss leaves $1,000 of taxable "phantom income."

Now scale it. Gambling income is reported gross, not net. A person deep in a sports-betting or slots cycle can run enormous throughput without ever coming out ahead. Cycle a bankroll through the app enough times and $500,000 of reported gambling income against $500,000 of losses is not exotic. Under the cap, that is $50,000 of phantom income, taxed at your marginal rate, on a year you finished at zero or below. The heavier the gambling, the larger the tax on money that was never really yours. That is the cruel arithmetic here: the cap punishes volume, and volume is exactly what a gambling disorder produces.

The fight in Congress, and where it stands

The gambling industry and a bipartisan group of lawmakers saw the problem immediately. On July 7, 2025, Rep. Dina Titus (D-NV), joined by Rep. Ro Khanna (D-CA), introduced the FAIR BET Act (H.R. 4304), short for Fair Accounting for Income Realized from Betting Earnings Taxation. The bill is about as simple as legislation gets: it strikes the 90% language from Section 165(d) and restores the full 100% deduction (ESPN; Congress.gov bill text).

Titus framed the change as taxing people on money they never actually netted, and the argument has drawn support across party lines. But support has not translated into a law. The bill sat in the House Ways and Means Committee without a vote, and the House Rules Committee declined to attach it as an amendment to the 2026 National Defense Authorization Act, leaving the cap in place for the 2026 tax year (CDC Gaming Reports).

The Senate path has been just as rocky. An effort to fast-track a repeal by unanimous consent was blocked when Sen. Todd Young (R-IN) objected, and Sen. James Lankford (R-OK) has publicly defended the cap, calling it a minor change in tax policy (iGaming Today). A companion measure in the House, the FULL HOUSE Act, would make the same fix, but as of mid-2026 nothing has passed either chamber.

So the honest status is this: the cap is real, it is in effect for income earned in 2026, and the repeal is uncertain. If you gamble or recently stopped, you cannot count on Congress erasing this before you file.

What this means if you're in recovery

Read past the tax jargon and there is a genuine recovery hazard here, and it is not the paperwork.

First, the tax bill is a relapse trigger dressed as a math problem. The most dangerous thought a recovering gambler can have is "I need one good run to cover this." That is the exact cognitive distortion that defines gambling disorder (DSM-5 312.31; ICD-10 F63.0): treating more gambling as the solution to a problem gambling created. A surprise four- or five-figure tax bill on money you already lost is a powerful invitation to chase, and chasing is how relapses start. We wrote a whole piece on why that reflex is a trap in chasing losses. If the tax bill is pulling that thought forward for you, name it as a craving, not a plan.

Second, the gross-income number is a mirror. Filing taxes is one of the few times you are forced to look at your total gambling volume for the year, not the edited version your memory keeps. The reported income figure, the one the sportsbook and the IRS both already have, is often far larger than people expect, because it counts every payout before your stakes came back out. Seeing that number in black and white can be painful. It can also be clarifying. A lot of people underestimate how much moved through their hands until a tax document makes it undeniable. If that number shocks you, that is information worth acting on, and our guide on financial recovery after gambling is a good next step.

Third, do not try to out-spreadsheet this alone. The instinct to open a fresh tab, log every bet, and engineer the tax down can quietly become its own compulsion, and it keeps you circling the gambling instead of leaving it. A qualified tax professional or enrolled agent can tell you what you actually owe and whether estimated payments make sense. Your job is the recovery, not the accounting. We explain why the spreadsheet reflex backfires in why spreadsheets don't fix gambling debt.

What to do now, practically

You do not need Congress to settle this before you protect yourself. A few concrete moves:

• Get the real number from a professional. Ask a CPA or enrolled agent to estimate your 2026 liability under the new cap so a bill does not ambush you next spring. Knowing the figure removes the panic that fuels chasing.
• Treat any thought that starts with "if I could just hit one big..." as a craving, and use your plan for it. Recovery holds up better with a specific next action than with willpower alone. If you don't have one yet, our guide on how to quit gambling is a place to start.
• Wall off the apps regardless of the tax outcome. The cap does not change the core truth: the fastest way to shrink next year's phantom-income problem is to stop generating gambling income at all.
• If you have already slipped, that is not proof you are back to zero. It is information about a gap in your defenses. Close the gap and keep going. The first hours matter most, and we walk through them in the first 24 hours after a gambling relapse.

If a tax bill, or the urge behind it, is pulling at you right now, you don't have to sort it out alone. Start with Cope Compass: join, build a personalized recovery plan, and download the app so support is in your pocket the second the urge shows up. And if you want to talk to someone right now, the National Problem Gambling Helpline is free, confidential, and available 24/7 at 1-800-MY-RESET (1-800-697-3738).

Sources

• Congress.gov: H.R. 4304, FAIR BET Act, full bill text: primary text amending Section 165(d) to restore the 100% deduction; sponsor Rep. Dina Titus.
• ESPN: Congress introduces FAIR BET to combat new betting tax rules: July 7, 2025 introduction, Titus and Khanna, purpose of the bill.
• CDC Gaming Reports: House Rules Committee blocks FAIR BET Act: the NDAA amendment block and the cap remaining in effect for 2026.
• iGaming Today: Lankford pushes back on gambling loss deduction fix: Senate opposition, Todd Young unanimous-consent objection, and the phantom-income rule.
• Forbes: Gambling Tax Alert, New Law Cuts Loss Deductions: OBBBA signing, the 90% cap, and the effect on bettors.
• Womble Bond Dickinson: Client Alert on OBBBA gambling loss deductions: Section 165(d) amendment and the December 31, 2025 effective date.
• Albin, Randall and Bennett: 2026 gambling loss deduction cap explainer: worked $10,000 break-even example producing $1,000 of phantom income.
• Kiplinger: New cap on gambling loss deductions: plain-language explanation of the phantom-income mechanism (accessed via search summary; page blocks automated fetch).