The Phantom Income Tax
Effective 2026, the Big Beautiful Bill Act fundamentally alters gambling taxation by capping deductible losses at 90%. This creates "phantom income"—a tax on money you never actually profited.
A Fundamental Shift in Taxable Income
Current Law (Until 2026)
You can deduct gambling losses up to the full amount (100%) of your gambling winnings. This ensures you are only taxed on your net profit.
- Recreational: Losses are an itemized deduction on Schedule A.
- Professional: Losses are a business expense on Schedule C.
New Law (From 2026)
You can only use 90% of your total losses when calculating your deduction. This cap applies universally to all gamblers.
This means even if you break even for the year, you will have taxable income, as 10% of your winnings will be untouchable by your loss deduction.
Interactive Impact Calculator
This tool demonstrates how the 90% cap creates "phantom income." Select a scenario from the report or enter your own numbers to see how your taxable income would change under the new rule. This is the core mechanism that threatens the viability of professional gambling.
The chart visualizes the difference in taxable income. The red bar represents the "phantom income" created by the new law.
Key Risks & Filing Obligations
Who Is Most Affected?
- ●Professional Gamblers: The tax on phantom income can exceed their actual net profit, making their business model untenable.
- ●High-Volume Sports Bettors: Players who rely on churning large amounts with small margins will face enormous tax bills on non-existent profits.
- ●Casino High Rollers: Will be taxed on a percentage of their gross action, even in years where they have a significant net loss.
Critical Compliance Risks
- ●Double Taxation: In states that don't allow gambling loss deductions (e.g., IL, NC), you could pay state tax on gross winnings plus federal tax on phantom income.
- ●FBAR Penalties: Moving to offshore sites to avoid this tax triggers FBAR reporting. Failure to file can result in penalties far exceeding any tax owed.
- ●Poor Record-Keeping: Without a perfect, contemporaneous log of every wager, the IRS can disallow all your losses.
Filing Path: Schedule A (Hobby) vs. Schedule C (Pro)
Recreational (Hobby)
Gross Winnings
(on Schedule 1)
↓
Limited Loss Deduction
(on Schedule A)
Requires Itemizing
Professional (Business)
Gross Receipts
(on Schedule C)
↓
Limited Loss Deduction
(as Expense on Schedule C)
Reduces Gross Income
The 90% loss cap is applied to your total annual losses *before* the deduction is entered on either schedule.
Legislative Context & Industry Ramifications
Why Did This Happen?
This provision was not based on targeted tax policy. It was added late in the legislative process as a "pay-for" to raise revenue (est. $1.1B over 10 years) and offset other spending in the massive BBB Act. The lack of debate or public hearings caught the industry by surprise.
The "Black Market Shift"
The primary economic risk is that this punitive tax will drive high-volume players from the legal, regulated U.S. market to illegal bookies and unregulated offshore sites. This could ultimately lead to a net loss in tax revenue and undermine years of progress in legalizing and regulating sports betting.
The Political Response
In response, Rep. Dina Titus (D-NV) announced the FAIR BET Act to repeal the 90% cap and restore the full loss deduction, setting the stage for a political battle to reverse the provision before it takes effect.
