If you’ve gotten used to reporting gambling winnings and then “washing them out” with gambling losses on your tax return, 2026 is where that muscle memory can betray you. A federal law change effective for tax years beginning after December 31, 2025 rewrote the wagering-loss rule in IRC §165(d) so the deductible amount is now generally 90% of your wagering losses, and it’s still capped at your wagering gains (winnings). Translation: even a break-even gambling year can create taxable “phantom income” that you’re not accustomed to seeing.
What Stayed the Same (Yes, the IRS Still Wants the Whole Number)
- All gambling winnings are taxable and must be reported, including winnings that don’t show up on a Form W-2G.
- Gambling losses are only deductible if you itemize (Schedule A), and you still need records.
- Losses still can’t exceed gambling income reported (the “up to your winnings” ceiling is still alive).
So yes, the IRS continues its long-running hobby of making you report the gross winnings first, then allowing deductions only if you follow the rules precisely.
What Changed for 2026: The New 90% Haircut
New rule (2026 and forward): for “losses from wagering transactions,” the deduction allowed is:
- 90% of your wagering losses, and
- only to the extent of your wagering gains (your winnings).
The IRS even bakes this right into the Form W-2G (Rev. Jan 2026) instructions, telling taxpayers they can deduct 90% of gambling losses as an itemized deduction, but not more than winnings.
The simple formula (assuming you itemize)
Deductible losses (2026) = min( 90% × losses , winnings )
That extra 10% of losses is the part that tends to become taxable when your wins and losses are close.
Why This Creates “Phantom Income” (AKA “I Broke Even… Why Do I Owe?”)
Here are clean examples using the 2026 rule. Assumes you itemize and have documentation.
| 2026 Winnings | 2026 Losses | Deductible Losses (90% rule, capped by winnings) | Taxable Gambling Income (Winnings – Deduction) |
|---|---|---|---|
| $15,000 | $15,000 | $13,500 | $1,500 |
| $15,000 | $10,000 | $9,000 | $6,000 |
| $15,000 | $20,000 | $15,000 (cap applies) | $0 |
The headline: If you’re a net winner (or break-even), you can owe tax on more than your “real” net winnings because 10% of losses is nondeductible under the new statute.
Recordkeeping Matters More Now (Because the Deduction Got Worse, Not Easier)
To deduct losses, the IRS expects:
- An accurate diary/log of wins and losses (date, location, type of gambling, amounts), and
- Backup support like receipts, tickets, statements, and similar records.
Also, if gambling income is a regular thing for you, the IRS specifically notes you may need estimated tax payments on that additional income.
Practical Planning Moves for 2026 (To Reduce Ugly Surprises)
- Run a mid-year checkup: If winnings and losses are tracking close, the 90% rule is exactly where “phantom income” likes to spawn.
- Don’t assume “break-even” means “tax-neutral” anymore: In 2026, break-even can still be taxable.
- Consider withholding or estimates: Especially if you routinely have significant winnings, to avoid underpayment issues.
- Document like an auditor is bored: Because if the IRS disallows the losses, you’re left holding the full winnings as taxable income.
(State taxes can add their own plot twists, and they’re not always the fun kind.)
Quick Note for Frequent Gamblers and “Business Gamblers”
The updated §165(d) definition says “losses from wagering transactions” include any deduction otherwise allowable that is incurred in carrying on wagering transactions, so the limitation is written broadly.
Wrap-Up and Review Invite
If you have consistent gambling winnings and losses each year, 2026 is a good year to review your tracking, documentation, and tax payment strategy before we file, because the new 90% limitation can turn a “no harm, no foul” year into an unexpected tax bill even when you feel like you basically broke even.