Federal law-status checkpoint (as of October 1, 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. On September 16, 2026 the House Ways and Means Committee ordered H.R. 10357 reported; its Title VII would remove the 90% limitation for tax years beginning after December 31, 2025, so wagering losses would again be allowed up to wagering gains. It is not law, and current law still applies. H.R. 4304 (FAIR BET Act), S. 2230 (FULL HOUSE Act), H.R. 6985, and other proposals would also restore broader deductions, but none had been enacted as of that date. 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?
- How Do Itemization and Professional Status Affect the 90% Cap?
- What Is the New Jersey Angle on the 90% Gambling Loss Cap?
- Records and Filing Inputs Under Current Law
- What Law Applies to the 90% Cap?
- Key Takeaway
- Frequently Asked Questions
- Contact and Information
- Effective date: Tax years beginning after December 31, 2025
- What changed: Otherwise-allowable Section 165(d) wagering losses and covered expenses are subject to a 90% limitation as well as the wagering-gain ceiling
- Who it impacts: Taxpayers claiming covered wagering losses, including itemizing casual gamblers and taxpayers whose activity qualifies as a wagering trade or business
- Prior-year boundary: For tax years beginning before January 1, 2026, the prior Section 165(d) wagering-gain ceiling applies without the new 90% limitation
- NJ impact: On the same taxpayer's NJ-1040 for the same tax year, supported winnings and losses owned by that taxpayer are reconciled under the adopted reporting units within the applicable gambling-income category (zero floor; no cross-category offset, no carryforward); the 90% cap is federal only
Historically, a break-even gambler who actually deducted losses - an itemizing casual gambler on Schedule A or a professional gambler on Schedule C - could offset winnings up to the permitted loss amount and reach zero net federal gambling income. A casual gambler taking the standard deduction had no Schedule A loss offset and was already taxed on gross winnings.
That's no longer the case.
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, amended Section 165(d) so the amount otherwise allowable for covered wagering losses and expenses equals 90% of that combined amount and never exceeds wagering gains. Depending on the stated gains, losses, and covered expenses, the amendment can leave part of the otherwise-allowable amount undeducted.
This guide uses "phantom income" as shorthand for taxable income left after the limitation even when the stated wagering activity did not produce a net economic profit; it is not a statutory or official tax category.
What Is Phantom Tax on Gambling and Why Does It Matter in 2026?
This guide uses phantom tax, sometimes called phantom income tax, as shorthand for tax that can arise in the stated gambling illustration even when the activity did not produce a net economic profit. For tax years beginning after 2025, the OBBBA's 90% limitation can leave a break-even gambler who itemizes and deducts otherwise-allowable losses with taxable income that does not correspond to a profit. For example, if you win $50,000 and lose $50,000 and you itemize, the stated deduction is $45,000, 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 casual gambler who takes the standard deduction never had a Schedule A loss offset, so the 90% limitation does not change that filer's deduction.
How the 90% Cap Works Under Section 165(d)
The calculation below applies the statutory cap to the stated facts.
For the 2025 tax year, assume a casual gambler itemizes and substantiates $50,000 of otherwise-allowable losses against $50,000 of winnings. Under the prior Section 165(d) gain ceiling, the stated loss deduction equals the winnings, leaving zero after the wagering-loss deduction; the complete return determines taxable income and tax.
For tax years beginning after 2025, the covered deduction is the lesser of (a) 90% of the combined otherwise-allowable wagering losses and expenses or (b) wagering gains. A casual gambler claims allowable losses on Schedule A only if itemizing; a taxpayer whose activity qualifies as a wagering trade or business applies the applicable Schedule C rules. For the stated break-even casual-gambler example with $50,000 in wins and $50,000 in substantiated otherwise-allowable losses, 90% of losses is $45,000, which is less than $50,000 in winnings and leaves $5,000 after the loss deduction.
If that $5,000 falls in the 24% bracket, isolated multiplication gives about $1,200 of additional federal tax; brackets, other income, deductions, credits, and the complete return determine the actual result. New Jersey separately computes supported same-year winnings and losses within the applicable gambling-income category, so the federal and state category amounts can differ without establishing either return's total tax due.
As the stated wagering amounts increase, the 90% limitation can increase the amount left after the otherwise-allowable loss deduction. The complete return, classification, substantiation, filing status, itemization, brackets, and other income determine the resulting tax.
What Does the 90% Gambling Loss Cap Look Like in Real Dollar Scenarios?
Unless a scenario says otherwise, its New Jersey illustration assumes that the same taxpayer owns the winnings and losses, the amounts are reported on the same return for the same tax year, the records support the adopted reporting units, and all amounts fall within the same applicable NJ gambling-income category. Each example isolates that category; the complete NJ return determines state liability.
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 illustration. Assume the player's records establish $200,000 of wagering gains (cashes less the buy-ins for the tournaments that cashed) and $200,000 of separate otherwise-allowable losses, with no buy-in counted twice. For a taxpayer otherwise entitled to deduct those losses (on Schedule A if itemizing as a casual player, or under the applicable Schedule C rules for a qualifying professional), the 90% cap sets the stated federal deduction at $180,000 and leaves $20,000 after the loss deduction. At an assumed 32% marginal rate, isolated multiplication gives $6,400; classification, substantiation, the complete return, and the separate NJ same-year category computation determine the actual federal and state results. The example does not state how common break-even tournament play is.
Atlantic City activity illustration. Assume Forms W-2G show $100,000 in Box 1 amounts and, after reconciling those forms to all activity and the adopted reporting units, contemporaneous records establish $100,000 of wagering gains and $110,000 of otherwise-allowable losses for the year. Under the pre-2026 rule, an itemizer's loss deduction in this illustration was limited to the $100,000 of winnings. Under the post-2025 rule, 90% of $110,000 is $99,000, which is less than the $100,000 wagering-gain ceiling, leaving $1,000 after the loss deduction. A casual gambler taking the standard deduction receives no Schedule A loss offset; classification, substantiation, itemization, and the complete return determine the actual result.
How Do Itemization and Professional Status Affect the 90% Cap?
A casual or nonprofessional gambler generally claims otherwise-allowable wagering losses only as a Schedule A itemized deduction. A casual gambler taking the standard deduction ($15,750 single / $31,500 MFJ for tax year 2025; $16,100 / $32,200 for tax year 2026) receives no Schedule A loss offset. A taxpayer whose gambling activity qualifies as a trade or business instead applies the Schedule C rules, but Section 165(d)'s gain ceiling and post-2025 90% limitation still govern the covered wagering losses and expenses.
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.
For TY2026, the $40,400 maximum begins to phase down when MAGI exceeds $505,000 and cannot fall below $10,000; married-filing-separately returns instead use a $20,200 maximum, a $252,500 phase-down threshold, and a $5,000 floor. The statutory phase-down formula controls.
What Is the New Jersey Angle on the 90% Gambling Loss Cap?
On the same taxpayer's NJ-1040 for the same tax year, with ownership and the adopted reporting units established, documented same-year losses still offset winnings within the applicable gambling-income category, with a zero floor, no cross-category offset, and no carryforward. The federal 90% limitation does not by itself change that separate NJ computation.
Under the stated assumptions for the $50,000-winnings and $50,000-losses example, the supported NJ gambling-income category may be zero while the federal computation leaves $5,000 after the otherwise-allowable loss deduction. That category result is not the taxpayer's total NJ liability.
New Jersey applies its graduated rates, up to 10.75%, to the supported gambling-category amount and does not allow a net category loss to offset another NJ income category. Filing status, ownership, the category computation, other income, deductions, credits, and the complete NJ return determine the state liability.
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
Records and Filing Inputs Under Current Law
The 90% limitation remains current law; see the dated law-status checkpoint above. The following are records and filing inputs under current law:
Reporting-unit support. Contemporaneous records can substantiate otherwise-allowable wagering losses and expenses, subject to the wagering-gain ceiling, post-2025 90% limitation, classification, and itemization or trade-or-business rules. Available account statements may supplement contemporaneous records, but platform scope and presentation vary and no statement establishes a deduction by itself.
Itemized-deduction computation. Applicable allowable SALT, mortgage interest, charitable contributions, and gambling losses enter the Schedule A computation subject to their respective limits. The return uses the applicable method under the rules; no savings result is promised.
Estimated-payment inputs. Federal and NJ estimated-payment needs depend on the complete returns, withholding, applicable safe harbors, annualization, actual payment dates, and exceptions. Wagering volume or the 90% limitation alone does not establish an underpayment addition. See the NJ quarterly estimated taxes guide for the state computation framework.
Activity-source reconciliation. Platform statements, Forms W-2G and other information returns, deposits, withdrawals, and contemporaneous wagering records can be reconciled to the adopted reporting units without double counting. This guide does not recommend consolidating or selecting platforms or predict that a particular workflow will prevent missing records.
Current-year records and timing. The enacted law applies to the year's supported wagering gains and losses. A records review can identify missing support or estimated-tax inputs, but neither a timing transaction nor a review is recommended here and no result is promised.
What Law Applies to the 90% Cap?
The enacted limitation remains the governing rule unless later legislation changes it. Introduced or pending proposals do not change a return's treatment unless enacted and effective for the relevant tax year.
As of October 1, 2026, the 90% cap remains in effect for tax years beginning after December 31, 2025, and no repeal legislation has been enacted; the House Ways and Means Committee ordered H.R. 10357 reported on September 16, 2026, but it is not law. Returns apply the law effective for the relevant tax year; this statement is not a wagering or transaction recommendation.
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
For tax years beginning after 2025, the OBBBA's 90% limitation can leave an amount after the covered wagering-loss deduction even when the stated activity breaks even. An itemizing casual gambler applies Schedule A; a taxpayer whose wagering activity qualifies as a trade or business applies the applicable Schedule C rules; a casual gambler taking the standard deduction receives no Schedule A loss offset. New Jersey separately reconciles supported same-year winnings and losses owned by the same taxpayer within the applicable gambling-income category under its own rules. Contemporaneous records, classification, and the complete federal and state returns determine the results. 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. On the same taxpayer's NJ-1040 for the same tax year, supported winnings and losses owned by that taxpayer are reconciled under the adopted reporting units within the applicable gambling-income category, with a zero floor, no cross-category offset, and no carryforward. The category may be zero even when the federal computation leaves an amount after the covered deduction; the complete NJ return determines total state liability.
Does the 90% cap apply to professional gamblers?
A taxpayer whose wagering activity qualifies as a trade or business does not avoid Section 165(d). For post-2025 years, the wagering-gain ceiling and 90% limitation apply to the covered otherwise-allowable losses and expenses under the applicable Schedule C rules.
Can I avoid phantom income by not gambling?
Not gambling would eliminate future wagering activity, but this tax guide does not recommend whether or when to wager. For activity that occurred, contemporaneous records and the law effective for the tax year determine the reporting computation; a records review does not eliminate the statutory limitation or promise a result.
What about my 2025 return?
For tax years beginning before January 1, 2026, the amended 90% limitation does not apply. A casual gambler may claim otherwise-allowable substantiated wagering losses up to wagering gains only if itemizing; a taxpayer whose activity qualifies as a wagering trade or business applies the applicable trade-or-business treatment and the prior Section 165(d) gain ceiling.
Are gambling losses tax deductible?
A casual or nonprofessional gambler may claim otherwise-allowable substantiated wagering losses only up to wagering gains and only as a Schedule A itemized deduction. For tax years beginning after 2025, the OBBBA's 90% limitation further restricts the covered deduction. A taxpayer whose activity qualifies as a wagering trade or business instead applies the applicable Schedule C rules, subject to Section 165(d).
How to deduct gambling losses
A casual or nonprofessional gambler generally reports gross gambling winnings through the applicable Schedule 1 line and claims otherwise-allowable wagering losses only as a Schedule A itemized deduction. A taxpayer whose gambling activity qualifies as a trade or business instead applies the Schedule C rules. In either case, retain contemporaneous records of the adopted reporting units, and for tax years beginning after 2025 apply Section 165(d)'s wagering-gain ceiling and 90% limitation to the covered losses and expenses.
Does the 90% cap apply to online sportsbook losses?
The platform label does not determine the result. If an activity is treated as wagering and its losses are otherwise allowable, the post-2025 Section 165(d) wagering-gain ceiling and 90% limitation apply. A platform statement may support part of the reconciliation, but its scope and presentation vary and it does not establish classification, reporting units, or a deduction by itself.
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.
Contact and Information
Tax rules change frequently. Use the contact form to request a written scope; sending the form creates no engagement or promise of an outcome. Greg Monaco is a NJ-licensed CPA and the firm's sole practitioner.
