Most people assume they only pay taxes when they make money.

That seems logical. If you profit, you pay tax. If you break even—or lose money—you shouldn’t owe anything.

Starting in 2026, however, the United States tax code creates a surprising exception.

Thanks to changes included in the One Big Beautiful Bill Act (OBBBA), some taxpayers may owe federal taxes even when they walk away with no actual profit. The new gambling loss rules under Section 165(d) limit how much of your gambling losses you can deduct, potentially creating taxable income that never existed in your bank account.

While these changes specifically target gambling activity, they highlight an important lesson that every investor should understand: 

The IRS does not always tax economic reality. The tax code often creates situations in which taxable income and actual cash flow differ significantly.

For real estate investors, business owners, and active traders, understanding this distinction is a critical part of effective tax planning.

Key Takeaways

• Beginning in 2026, taxpayers can generally deduct only 90% of gambling losses under revised Section 165(d) rules.
• Gamblers who break even may still owe taxes on “phantom income.”
• Higher adjusted gross income (AGI) can impact tax credits, deductions, and Medicare premiums.
• Professional and high-volume gamblers face the greatest exposure under the new rules.
• Real estate investors should view these changes as a reminder that a proactive tax strategy matters because taxable income does not always match actual profits.

Watch the full video to learn how these tax law changes fit into a broader tax strategy for real estate investors and other active investors.

What Are the New Rules for Gambling Losses in 2026?

For decades, taxpayers could generally offset gambling winnings with gambling losses if they maintained proper records and itemized deductions.

Beginning January 1, 2026, the One Big Beautiful Bill Act changed that rule.

Under the revised Section 165(d) rules, taxpayers can generally deduct only 90% of their gambling losses. This limitation creates taxable income even when a taxpayer breaks even.

How Did the One Big Beautiful Bill Act Change Section 165(d)?

The One Big Beautiful Bill Act amended Section 165(d) of the Internal Revenue Code.

Prior to 2026, gambling losses could generally offset gambling winnings dollar-for-dollar, up to the amount of winnings.

Starting in 2026, taxpayers can no longer deduct the full amount of their gambling losses. Instead, only 90% of those losses qualify as deductible losses.

Why Do I Owe Tax If I Made a Loss?

The answer comes down to how the IRS calculates taxable income.

The IRS does not necessarily tax your actual economic gain. Instead, it taxes income under specific rules in the tax code.

Under the new gambling loss rules, a taxpayer who wins $50,000 and loses $50,000 during the same year may still report taxable income.

Although the taxpayer broke even financially, the IRS allows only a deduction for 90% of the losses.

As a result, taxable income remains even though no actual profit exists.

How Do the 90% Gambling Loss Rules Work?

Let’s look at a simple example.

Suppose you:

• Win $50,000 during the year
• Lose $50,000 during the year
• Finish the year with a net profit of $0

Under the previous rules:

• Gambling winnings: $50,000
• Gambling losses: $50,000
• Taxable income: $0

Under the new rules:

• Gambling winnings: $50,000
• Deductible losses: $45,000
• Taxable income: $5,000

Even though your actual profit is zero, the IRS treats $5,000 as taxable income.

This is known as phantom income.

Who Will Be Affected Most by the New Gambling Loss Rules?

Professional Gamblers

Professional gamblers and high-volume bettors face the greatest impact because even a small reduction in deductible losses can create substantial taxable income.

Sports Bettors

Sports bettors who place frequent wagers throughout the year may discover that breaking even no longer means avoiding taxes.

Casual Gamblers Who Itemize

Even taxpayers who itemize deductions rather than take the standard deduction must now deal with the 90% limitation.

Can Higher Gambling Income Affect Other Tax Deductions and Credits?

Yes.

This may be one of the most expensive consequences of the new law.

The phantom income created by the new rules increases your adjusted gross income (AGI).

A higher AGI can:

• Reduce eligibility for certain tax credits
• Phase out deductions
• Increase Medicare premiums
• Increase overall tax liability

The impact often extends far beyond gambling activity itself.

Why Did Congress Change the Gambling Loss Deduction Rules?

When lawmakers drafted the One Big Beautiful Bill Act, they needed ways to help offset the cost of other tax provisions included in the legislation. Limiting gambling loss deductions became one of the revenue-generating measures used to help pay for those changes.

According to estimates from the Joint Committee on Taxation, the revised rules could generate more than $1 billion in additional federal revenue over the next decade.

This change also arrives as lawmakers continue to debate the future of several Tax Cuts and Jobs Act provisions and other tax policies that could affect investors and business owners during tax years 2025 and beyond.

Critics argue that the new rule creates taxable income that doesn’t reflect a taxpayer’s actual profit. Supporters view it as a necessary revenue source to help fund broader tax legislation.

Could the Fair Bet Act Reverse the New Gambling Loss Rules?

Possibly.

Several lawmakers have already expressed concerns about the impact these rules could have on legal gambling markets.

The Fair Bet Act seeks to restore the ability to deduct 100% of gambling losses.

While the proposal has gained attention, taxpayers should plan as though the current rules remain in effect until Congress passes a change.

What Can Gamblers Do to Reduce Their Tax Exposure in 2026?

Maintain Detailed Records

Keep gambling logs, receipts, betting statements, and win-loss records.

Proper documentation can help you satisfy IRS reporting requirements and support any gambling loss deductions you claim on your return. 

Understand Session Accounting

In certain situations, taxpayers may be able to net wins and losses within a gambling session.

Because session accounting rules can be complex, consult a qualified tax advisor before relying on this strategy.

Review Your Overall Tax Strategy

The more gambling activity you have, the more valuable proactive tax planning becomes.

Other Common Questions Taxpayers Are Asking

Do online sportsbooks report winnings to the IRS?

Yes. Many online sportsbooks and casinos report certain gambling winnings to the IRS and may issue tax forms when winnings exceed specific thresholds. Even if you do not receive a tax form, you are still responsible for reporting gambling income on your tax return.

Can gambling winnings affect Social Security or Medicare?

Potentially. While gambling winnings do not directly reduce Social Security benefits, they can increase your adjusted gross income (AGI). A higher AGI may cause more of your Social Security benefits to become taxable and could increase Medicare premium costs.

Are gambling losses carried forward to future tax years?

No. Unlike certain investment or business losses, gambling losses generally cannot be carried forward to future tax years. If you cannot use the deduction in the current year, you typically lose the benefit permanently.

Does this rule apply to casino gambling and sports betting?

Yes. The Section 165(d) rules generally apply to gambling activity, including casino games, sports betting, poker tournaments, horse racing, and other forms of wagering.

Can a professional gambler deduct business expenses?

In some situations, professional gamblers may deduct certain ordinary and necessary business expenses related to their gambling activity. However, the rules are complex, and taxpayers should consult a qualified tax professional regarding their specific circumstances.

Can I reduce my tax liability with tax-exempt or tax-advantaged accounts?

Depending on your situation, tax-advantaged and tax-exempt investment accounts may help reduce your overall tax liability. Real estate investors and business owners often incorporate these strategies into a broader tax planning approach.

What Can Real Estate Investors Learn From These New Tax Rules?

At first glance, these changes seem unrelated to real estate investing and business.

However, they illustrate a lesson every business owner and investor should understand: Taxable income and actual cash flow are often different.

Real estate investors regularly encounter:

• Depreciation recapture
• Debt forgiveness income
• Passive activity limitations
• Partnership allocations
• Phantom income events

This is why proactive tax planning for real estate investors matters so much. A well-designed plan can help investors identify available tax advantages, take advantage of eligible tax-exempt opportunities, and avoid unexpected tax consequences. 

How Can Investors Avoid Surprise Tax Bills in 2026?

The best defense against unexpected taxes is working with a tax professional to plan proactively and maximize your tax benefits.

Federal, state, and local tax laws change constantly, and many provisions create taxable income that may not align with actual profits or cash flow.

Whether you are a real estate investor, business owner, trader, or active investor, reviewing your tax strategy before year-end can help you identify opportunities, reduce taxable income, and avoid costly surprises.

If you want help building a comprehensive tax strategy, schedule a free 45-minute Strategy Session with an Anderson Advisor.