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" - taxable income that doesn't represent any actual profit.

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 returns being filed right now), 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. For a break-even gambler with $50,000 in wins and $50,000 in losses, 90% of losses = $45,000. Since $45,000 is less than $50,000 in winnings, your deduction is $45,000 - leaving $5,000 in taxable phantom income.

At a 24% federal tax rate, that's $1,200 in federal tax on zero actual profit. Add NJ state tax (up to 10.75%), and the combined hit could exceed $1,700.

Scale this up to the volumes that regular gamblers, poker tournament players, and high-frequency sports bettors generate, and the numbers get serious fast.

Real Scenarios That Show the Impact

The weekend sports bettor. You place bets through DraftKings and FanDuel throughout the year. Total winnings: $15,000. Total losses: $15,000. You broke even. Under the 90% cap, your federal deduction is limited to $13,500 (90% of $15,000 in losses). Phantom income: $1,500. At 22% federal + NJ state tax, that's roughly $450 in taxes on zero profit.

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. Under the 90% cap, your federal deduction is $180,000 (90% of $200,000 in losses). Phantom income: $20,000. At the 32% federal bracket, that's $6,400 federally. Add NJ at 8.97%, and you're looking at roughly $8,200 combined - for breaking even.

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, you'd deduct $100,000 in losses against your $100,000 in winnings and owe nothing. 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 owe taxes.

This Only Matters If You Itemize - But the SALT Cap Changes That Calculation

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.

However, with the SALT cap now at $40,000 under the OBBBA, more NJ taxpayers are itemizing than in recent years. If your combined SALT, mortgage interest, and charitable contributions push you past the standard deduction threshold, you should be claiming gambling losses too. And if you are, the 90% cap now limits what you can claim.

The NJ Angle: A Silver Lining and a Complication

Here's important news for NJ gamblers: New Jersey still allows 100% netting of gambling wins and losses on the NJ-1040. 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.

A CPA who understands both systems can optimize the interplay to minimize your combined federal + NJ tax burden. Monaco CPA specializes in exactly this

How to Reduce Your Phantom Income Exposure

The 90% cap isn't going away soon. Here's how to manage it:

Track every session, every dollar. The more losses you can document, the higher your 90% allowable deduction. Undocumented losses are lost deductions. Download year-end statements from every sportsbook and casino loyalty account.

Evaluate whether itemizing saves you money. Run the numbers: if your SALT + mortgage interest + charitable contributions + gambling losses (at 90%) exceed the standard deduction, itemize. If not, the standard deduction may be better - but you lose the gambling loss deduction entirely.

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.

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. Unlike many tax strategies, gambling tax planning is most effective during the year, not after it ends. A mid-year review of your win/loss trajectory can identify phantom income risk while you can still act on it.

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 to restore the 100% deduction. The American Gaming Association has lobbied against the provision. Reports indicate the Trump administration has considered addressing it.

As of February 2026, the 90% cap remains in effect and applies to all gambling activity in the current tax year. Plan based on current law.

Frequently Asked Questions

Does NJ follow the 90% rule?

No. The 90% cap is a federal rule under Section 165(d) of the OBBBA. 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 minimizing phantom income - not eliminating gambling. Meticulous record-keeping, strategic timing, and mid-year tax planning are the most effective tools.

What about the 2025 return I'm filing right now?

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.

Key Takeaway

The OBBBA's 90% gambling loss cap creates "phantom income" for break-even and near-break-even gamblers starting in 2026. Even if you don't profit from gambling, you may owe federal tax. NJ still allows 100% netting - making a NJ-focused CPA especially valuable for minimizing your combined tax bill. If you gamble regularly, build a tracking system now and plan with a CPA before year-end. Learn about our gambling tax services

Related reading: How NJ Taxes Gambling Winnings | DraftKings & FanDuel NJ Tax Guide | Gambling tax services