Quick Answer: The One Big Beautiful Bill Act (OBBBA) amended Section 165(d) of the Internal Revenue Code to cap gambling loss deductions at 90% of losses, effective January 1, 2026. A break-even gambler who deducts losses is therefore left with federal "phantom income" - additional taxable income with no matching profit - and may owe federal tax on it depending on brackets, other income, and the rest of the return. Read the premise carefully: the cap only bites on someone who deducts losses at all. A casual gambler gets no Section 165(d) offset without itemizing, so a standard-deduction taker is already taxed on gross winnings and the 90% cap changes nothing for that filer. The rule reaches everyone who does deduct - recreational itemizers on Schedule A and professionals on Schedule C. On the NJ-1040, documented same-year losses still offset winnings within the applicable gambling-income category, with a zero floor (no cross-category offset, no carryforward).
Federal law-status checkpoint (reviewed August 6, 2026): Public Law 119-21, Section 70114 currently limits the Section 165(d) wagering-loss amount to 90% of losses for tax years beginning after December 31, 2025, still capped by wagering gains. H.R. 4304 (FAIR BET Act), S. 2230 (FULL HOUSE Act), H.R. 6985, and other proposals would restore broader deductions, but none had been enacted as of this review. Prepare under current law unless a later public law applies, and verify again before filing a 2026 return.
What Changed and When
In This Article
- What Is Phantom Tax on Gambling and Why Does It Matter in 2026?
- How the 90% Cap Works Under Section 165(d)
- What Does the 90% Gambling Loss Cap Look Like in Real Dollar Scenarios?
- Does the 90% Gambling Loss Cap Only Matter If I Itemize?
- What Is the New Jersey Angle on the 90% Gambling Loss Cap?
- How Can I Reduce My Phantom Gambling Income Exposure?
- Is the 90% Cap Going to Be Repealed?
- Key Takeaway
- Frequently Asked Questions
- Ready to File With Confidence?
- Effective date: January 1, 2026 (applies to all gambling activity in tax year 2026, filed in 2027)
- What changed: Section 165(d) loss deduction reduced from 100% to 90% of losses
- Who it impacts: Anyone who itemizes and deducts gambling losses on Schedule A; professional gamblers on Schedule C
- What didn't change: 2025 returns still use the old 100% rule
- NJ impact: On the NJ-1040, documented same-year losses still offset winnings within the applicable gambling-income category (zero floor; no cross-category offset, no carryforward); the 90% cap is federal only
If you gamble in any form - sports betting, poker, slots, lottery, horse racing - and you roughly break even over the course of a year, you've historically owed zero federal tax on your gambling activity. Your losses fully offset your winnings, and your net gambling income was zero.
That's no longer the case.
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, introduced a provision that limits the deductibility of gambling losses to 90% of total losses incurred. The long-standing rule that losses cannot exceed winnings still applies - but now there's an additional cap that prevents you from deducting the last 10% of your losses.
The result is what the gaming industry and tax professionals are calling "phantom income" (sometimes called phantom tax) - taxable income that doesn't represent any actual profit.
What Is Phantom Tax on Gambling and Why Does It Matter in 2026?
Phantom tax -- sometimes called phantom income tax -- is tax that can arise on gambling activity even when you didn't actually profit. Starting in 2026, the OBBBA's 90% cap on gambling loss deductions leaves a break-even gambler who itemizes and deducts losses with taxable income that doesn't correspond to a profit. For example, if you win $50,000 and lose $50,000 and you itemize, you can only deduct $45,000 in losses, creating $5,000 of additional taxable income; whether that produces roughly $1,200 of additional federal tax depends on the bracket that income falls into (about 24% in this illustration) and on the rest of your return. Additional taxable income is the direct effect; additional tax due is a consequence that varies by taxpayer. A gambler who takes the standard deduction never had a loss offset to begin with, so the cap changes nothing for that filer.
How the 90% Cap Works Under Section 165(d)
The math is straightforward, but the consequences are significant.
Under the old rule (still in effect for your 2025 return), if you won $50,000 and lost $50,000, your deductible losses equaled your winnings. Net taxable gambling income: zero.
Under the current rule for 2026, your allowable loss deduction is the lesser of (a) 90% of your total losses or (b) your total winnings, and it is available only if you deduct losses at all - on Schedule A as an itemizing casual gambler, or on Schedule C as a professional. For a break-even gambler with $50,000 in wins and $50,000 in losses who itemizes, 90% of losses = $45,000. Since $45,000 is less than $50,000 in winnings, your deduction is $45,000 - leaving $5,000 of taxable phantom income.
If that $5,000 falls in the 24% bracket, it adds about $1,200 of federal tax with no actual profit behind it; the amount moves with your bracket and the rest of your return, so treat it as tax you may owe rather than a fixed bill. NJ residents get a break here: because NJ still allows same-year netting within the gambling-income category, NJ tax on the same activity can be zero. But the federal effect is real money for no actual gain.
Scale this up to the volumes that regular gamblers, poker tournament players, and high-frequency sports bettors generate, and the numbers get serious fast.
What Does the 90% Gambling Loss Cap Look Like in Real Dollar Scenarios?
The weekend sports bettor. You place bets through multiple sportsbooks throughout the year. Total winnings: $15,000. Total losses: $15,000. You broke even. Assuming you itemize and claim the losses, the 90% cap limits your federal deduction to $13,500 (90% of $15,000 in losses). Phantom income: $1,500. At a 22% marginal rate that is roughly $330 of additional federal tax on zero profit, though the actual amount depends on the rest of the return. NJ residents can owe zero NJ tax on this activity because of same-year category netting.
The poker tournament grinder. You enter tournaments throughout the year. Total cashes: $200,000. Total buy-ins and losses: $200,000. You're a break-even player - which is actually a reasonable outcome in tournament poker. Assuming you deduct the losses (Schedule A if you itemize as a casual player, Schedule C if you are a professional), the 90% cap sets your federal deduction at $180,000 (90% of $200,000 in losses). Phantom income: $20,000. At a 32% marginal rate that is roughly $6,400 of additional federal tax for breaking even, subject to the rest of your return. NJ residents can owe zero NJ tax on this activity because of same-year category netting, but the federal effect alone is significant.
The high-volume Atlantic City regular. You play slots and table games at Borgata several times a month. Your annual W-2G forms show $100,000 in reportable wins. Your actual losses for the year are $110,000 - you're a net loser. Under the old rule, an itemizer would deduct $100,000 in losses against $100,000 in winnings and net to zero. Under the 90% cap, 90% of your $110,000 in losses = $99,000. Since you can't deduct more than your $100,000 in winnings, your deduction is $99,000 (the lesser amount). Phantom income: $1,000. You lost $10,000 for the year and still have taxable gambling income on the federal return. If you take the standard deduction instead, none of the $110,000 in losses was deductible in the first place, and the full $100,000 of W-2G winnings is in income with no offset at all - a worse result that the 90% cap did not create.
Does the 90% Gambling Loss Cap Only Matter If I Itemize?
The gambling loss deduction is only available if you itemize deductions on Schedule A. If you take the standard deduction ($15,750 single / $31,500 MFJ for tax year 2025; $16,100 / $32,200 for tax year 2026), you can't deduct losses at all - meaning the 90% cap doesn't make things worse for you, but you're already paying tax on gross winnings with no offset.
The SALT cap is $40,400 for 2026 (indexed from $40,000 in 2025) under the OBBBA, which raises the amount of state and local tax a filer can count toward itemizing. Whether that changes the number of New Jersey taxpayers who itemize is an empirical question this article does not measure, and no itemization statistic is asserted here. What matters on your own return is the comparison: if your supported SALT, mortgage interest, and charitable contributions exceed your standard deduction, allowable gambling losses belong in that Schedule A computation - and if you do itemize and deduct them, the 90% cap limits what you can claim.
What Is the New Jersey Angle on the 90% Gambling Loss Cap?
Here's important news for NJ gamblers: on the NJ-1040, documented same-year losses still offset gambling winnings within the applicable gambling-income category, with a zero floor - no cross-category offset, no carryforward. The 90% cap is a federal rule only. NJ did not adopt it.
This means your NJ state tax may be lower than you expect even when the federal return creates phantom income. If you won $50,000 and lost $50,000, your NJ net gambling income is zero - while federally you have $5,000 in phantom income.
That said, NJ taxes gambling at ordinary income rates up to 10.75%, and NJ does not allow net gambling losses to offset other income. If you had net gambling winnings in NJ, they're taxed at your full marginal rate.
Federal and NJ gambling computations use different rules. An accepted return scope may report both from client-supplied records; Monaco CPA does not promise a lower combined tax result. Gambling return scope
How Can I Reduce My Phantom Gambling Income Exposure?
The 90% cap remains effective as of August 2026 - repeal proposals have been introduced but none has become law. Here's how to manage it under current law:
Track every session, every dollar. The more losses you can document, the higher your 90% allowable deduction. Undocumented losses are lost deductions. Download whatever year-end activity statements your sportsbooks and casino loyalty accounts make available, and keep your own contemporaneous session records - platforms differ in what they provide and in how they present it, so do not assume a usable statement exists for every account.
Compare itemized deductions with the standard deduction. Supported SALT, mortgage interest, charitable contributions, and allowable gambling losses enter the Schedule A computation. The return uses the applicable method under the rules; no savings result is promised.
Consider estimated tax payments. If you're a high-volume gambler, the phantom income could create an underpayment penalty if you don't adjust withholding or make quarterly estimated payments. See the NJ quarterly estimated taxes guide to project your quarterly obligations.
Consolidate your activity. Using fewer platforms makes year-end tax reconciliation simpler and reduces the chance of missing losses.
Plan with a CPA before December 31. Options that depend on documenting or timing current-year activity are only available while the year is still open. A mid-year review of your win/loss trajectory can identify phantom income exposure while you can still act on it; no ranking of planning approaches or result is implied.
Is the 90% Cap Going to Be Repealed?
There is bipartisan interest in reversing the provision. Representative Dina Titus of Nevada introduced the FAIR BET Act (H.R. 4304) to restore the 100% deduction, and the American Gaming Association has publicly opposed the cap. None of the proposals has become law as of August 2026 - the figures on this page reflect the enacted statute.
As of this article's July 15, 2026 review, the 90% cap remains in effect and applies to all gambling activity in the current tax year. No repeal legislation has been enacted. Plan based on current law.
Prediction-market boundary. Event-contract classification remains unsettled. A platform label does not establish whether Section 165(d) applies, and this article does not rank or recommend an alternative treatment. Preserve contract-level records and keep a records-first approach for prediction-market activity.
Key Takeaway
The OBBBA's 90% gambling loss cap creates "phantom income" for break-even and near-break-even gamblers who deduct their losses - itemizing casual gamblers and professionals - starting in 2026. Even if you don't profit from gambling, you may owe federal tax. A gambler who takes the standard deduction gets no loss offset at all and is already taxed on gross winnings, which the cap does not change. NJ still allows same-year netting under its separate rules. If you gamble regularly, maintain contemporaneous records and obtain fact-specific advice before filing. Learn about the gambling tax services
Related reading: How NJ Taxes Gambling Winnings | NJ Sportsbook Tax Guide | Gambling tax services
Frequently Asked Questions
Does NJ follow the 90% rule?
No. The 90% cap is a federal rule under IRC §165(d), as amended by OBBBA §70114. New Jersey still allows full netting of gambling wins and losses on the NJ-1040. Your NJ net gambling income may be zero even when your federal return shows phantom income.
Does the 90% cap apply to professional gamblers?
Yes. Professional gamblers who report on Schedule C are also subject to the 90% limitation. The cap applies to all taxpayers who deduct gambling losses, regardless of professional or recreational status.
Can I avoid phantom income by not gambling?
Yes, but for active gamblers the practical question is about limiting phantom income - not eliminating gambling. Contemporaneous record-keeping, attention to timing, and a mid-year review are the levers generally available under current law; their effect depends on your own facts, and no ranking or result is promised.
What about my 2025 return?
The 2025 tax year still uses the old 100% rule. If you had gambling losses in 2025, you can deduct them fully (up to the amount of winnings) if you itemize. This is the last year of full deductibility.
Are gambling losses tax deductible?
Yes, gambling losses are tax deductible for casual (nonprofessional) gamblers - but only up to the amount of your gambling winnings, and starting in 2026, the new 90% cap under the OBBBA further limits the deduction. You must itemize deductions on Schedule A to claim gambling losses; professional gamblers reporting a trade or business use Schedule C instead.
How to deduct gambling losses
To deduct gambling losses as a casual (nonprofessional) gambler, you must itemize deductions on Schedule A (Form 1040); professional gamblers reporting a trade or business use Schedule C instead. Report your total gambling winnings as income on Schedule 1, then claim losses as an itemized deduction. Keep detailed records: date, type of wager, venue or platform, amount won, and amount lost. Starting in 2026, the deduction is limited to 90% of your losses, and never more than your winnings, under the OBBBA.
Does the 90% cap apply to online sportsbook losses?
Yes. The 90% cap applies to all gambling losses regardless of the platform or type of wager. Losses from online sportsbooks and other wagering venues are subject to the same 90% limitation under the amended Section 165(d). Retain the year-end activity statements made available by each platform to document your total activity.
Can I qualify as a professional gambler to avoid the 90% cap?
No. Professional status does not remove Section 165(d). For post-2025 years, 'losses from wagering transactions' includes otherwise allowable wagering-trade-or-business deductions, and the deductible amount is limited to 90% of that combined loss amount and never more than wagering gains. Professional classification can affect Schedule C, self-employment tax, and other return consequences, but wagering-related costs do not become a separately uncapped deduction.
Ready to File With Confidence?
Tax rules change frequently. Use the contact form to request a written scope; submitting it does not promise a call, engagement, or outcome. Greg Monaco is a NJ-licensed CPA and the firm's sole practitioner.
