Let’s start by reviewing how gambling losses have traditionally been handled. Under prior tax law, gambling losses could only be deducted up to the amount of your gambling winnings reported on your tax return. For example, if you won $3,000 but lost $4,000, you could deduct a maximum of $3,000—the total winnings. Additionally, to claim these losses, you had to itemize deductions, meaning your total deductible expenses needed to exceed the standard deduction.
Starting in 2026, gamblers will only be able to deduct 90% of their losses against their winnings, and only up to the amount of their winnings. For instance, if you won $3,000 but lost $4,000, 90% of your losses is $3,600; however, since your winnings are $3,000, your deductible losses will be capped at $3,000. Alternatively, if your winnings were $4,000 and losses were $4,000, you would only be able to deduct $3,600 in losses.
What Is Phantom Income?
Phantom income refers to income that appears on tax documents but does not correspond to actual cash received. In this context, it means the portion of losses disallowed under the new 90% limit that cannot offset your winnings, potentially increasing your taxable income.
Additional Considerations
- Taxpayers must continue to itemize deductions to claim gambling losses. Those taking the standard deduction cannot deduct gambling losses.
- Accurate recordkeeping of both winnings and losses remains critical. Maintain tickets, receipts, and statements to substantiate your claims.
- The overall framework for reporting gambling income remains unchanged; only the deductible loss calculation is modified under the One Big Beautiful Bill Act.
What This Means for Taxpayers
This adjustment may result in some taxpayers recognizing more taxable income from gambling activities due to the reduced deductible loss percentage. Understanding these changes is important for accurate tax reporting and planning.
If you have questions about how the updated rules apply to your tax situation or need assistance with recordkeeping and deductions, consult a qualified tax professional.
