The Big Beautiful Bill's Ruinous Tax Impact On The Gambling Industry

Forbes

5 days ago

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Trump's One Big Beautiful Bill Act has been officially signed into law. Along with numerous law changes that I identified in a prior Forbes article, one specific provision looms large for the sports gambling industry. Starting in 2026, professional and amateur gamblers alike will only be able to deduct 90% of their losses, resulting in many gamblers, whether they win, lose, or break even, owing taxes on their gambling activities. This article discusses that provision and what gamblers need to consider as they engage in these activities after the One Big Beautiful Bill Act's provisions become effective in 2026.
The current tax law governing gambling is fairly simple. All bets that result in a win are considered income, and the taxpayer will owe taxes on that win. For example, if someone goes to a blackjack table, bets $100, and wins, that $100 is considered income, and the taxpayer owes taxes on the $20 earned in the same way as someone who goes to work as a barista and earns $100.
However, what is less clear is what happens when the taxpayer wins $100 one day, and has income on that day, but then loses $100 the next day, effectively resulting in the taxpayer having no gain or loss once netted together. The IRS discusses in Topic number 419 that Taxpayers can deduct, as a miscellaneous itemized deduction, any gambling losses to the extent of their wins. This means that taxpayers do not take the standard deduction, increase their income by $100, and increase their deductions by $100, resulting in no tax consequences. Taxpayers who take the standard deduction receive no deductions.
When gambling was primarily conducted in casinos using cash-based transactions, tax laws were more difficult to enforce. For example, when the same person who earned $100 playing blackjack wins $100 and walks out of the casino, there is no clear paper trail connecting them to the $100 win. It is the taxpayer's responsibility to accurately file their taxes and comply with all applicable state, local, and federal laws. However, unlike the barista, there are no tax forms associated with winning $100, and it is possible (if not probable) that the $100 gambling winnings from that session went unreported.
In 2018, much of this changed as the Supreme Court ruled that states can regulate their own sports betting rules . Sports betting apps like DraftKings, FanDuel, and Underdog have swarmed the market as states slowly roll out legalized gambling environments within their borders.
As I previously discussed in a Poole Thought Leadership article, one key area that has received little attention as this initiative has been rolled out is the tax liability for individuals. In particular, there is now a clear paper trail of the gambling activities for each taxpayer. Every bet is recorded, and taxing authorities have the potential to use that record to help enforce the gambling tax laws. In fact, for big winners, gambling operators will now issue a W-2G, which reports taxable income from gambling, to both the taxpayer and the IRS, thereby limiting the ability for taxpayers to evade taxes on this income. While some individuals who do not receive a W-2G may still not pay taxes on this income, the taxing authority certainly has more grounds to stand on when prosecuting these tax evaders, as the IRS can attempt to obtain gambling records from the app providers. A Catastrophic Gambling Wrinkle From The Big Beautiful Bill
As discussed by Forbes , a key provision in the One Big Beautiful Bill Act that is receiving less attention is that starting in 2026, taxpayers will only be able to deduct 90% of their losses as a miscellaneous itemized deduction. As reported by ESPN , this means that even if a taxpayer breaks even or incurs a small loss, they will still owe taxes.
To provide an example, consider a taxpayer who makes two sports bets, one of which wins $1,000 and one of which loses $1,000. In 2025, if the taxpayer itemizes their taxes, they will increase their income by $1,000 and then increase their itemized deductions by $1,000, resulting in no impact on their taxable income. However, starting in 2026, the taxpayer's deductions will be capped at 90%, meaning that the taxpayers can only deduct $900. The effect means that the taxpayer will record $100 of income from two bets, even though the taxpayer did not actually win any money. The actual tax liability will vary depending on the taxpayer's taxable income. At the lowest end of the tax spectrum, the taxpayer will owe $10 in taxes, and at the highest end, the taxpayer will owe $37 in taxes.
Even worse, the taxpayer would have to incur large losses (11% more than their wins) to prevent themselves from owing taxes. Using the above example, even if the losing bet was $1,100, the taxpayer would still be liable for taxes on these gambling activities. This liability is because the winning bet of $1,000 and the deduction from the losing bet of $1,100 is only $990.
On the other end, gambling winners now face a large tax increase. For instance, if the winning bet remains $1,000 and the losing bet is $600, the gambler previously reported $400 of income. However, the miscellaneous itemized deduction will now be capped at 90% of the loss starting in 2026, meaning that the deduction will only be $540. This smaller deduction lowers the gambler's net income from this transaction by 15% from $400 to $340. The Big Beautiful Bill's Ripple Effects For The Gambling Industry
Many expect this new provision to gut the gambling industry. Professional poker player Phil Galfond took to X to discuss how a gambler who earns $200,000 in a year might have $3 million in winnings and $2.8 million in losses. In 2025, this professional reports that a typical gambler with an income of $200,000 would have winnings of around $3 million (meaning losses of $2.8 million). However, in 2026, the $2.8 million in losses is limited to $2.52 million, resulting in a $280,000 loss for the same taxpayer. Simply put, many who previously relied on gambling as a profession may no longer be able to do so, as the house edge on a bet, combined with tax liabilities, will make it difficult to turn a profit from these activities.
These rules will also prove to be very expensive for non-professional gamblers. In addition to the higher tax liability that these gamblers will also face, there is an extra layer of taxation that can be much less ignored. For instance, in 2025, if a taxpayer makes some bets and breaks even, even if the taxpayer does not report the activities, they might be able to argue that they plausibly followed the tax laws, since no money was earned. The taxpayer is still required to report these activities on their tax return. However, if income was correctly reported, it is much less likely to draw scrutiny. Starting in 2026, this is no longer the case, as a breakeven taxpayer will have taxable income, meaning they are no longer paying their taxes correctly.
States will need to prepare for the impact on income tax reporting from gambling activities within their borders. Some states, such as North Carolina, already have differing rules on how the state defines and allows tax deductions for gambling. For states that conform their rules to the federal standard defining income and deductions, they will need to be prepared to determine and assess tax liabilities from gambling and pursue taxpayers who underreport income at a significantly higher rate starting in 2026.
Lastly, policymakers may wish to revisit the threshold for the gambling operators to report gambling earnings. The current requirement is that taxpayers are issued a W-2G if winnings exceed $600, and it is 300 times the amount of the wager. For example, if a taxpayer places $2 on a 10-team parlay that pays out $601, the taxpayer will receive a W-2G tax form showing their winnings (the IRS also receives this form). However, if that same bet only generates $599, no tax form will be issued, and it becomes the taxpayer's responsibility to report the income.
These issues become extrapolated when considering that most bets made on apps like DraftKings, FanDuel, and Underdog do not pay out anywhere close to 300 times the wager. The resulting pressures are that taxpayers must voluntarily report this income, which puts tremendous pressure on them to track their records and honestly report their income. Perhaps, the weak reporting thresholder puts even more pressure on the taxing authority to devote considerable resources to investigating and identifying underreported gambling income. In the era of declining tax enforcement budgets, this strain may be difficult to overcome.