Income and Assets · Income

Gambling income and allowable deductions

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

Two things changed for 2026, and together they make this the most altered topic in the individual income chapter. The deduction for wagering losses is now capped at a percentage of those losses as well as by the year’s winnings, so a gambler who breaks even exactly still has taxable income. And the reporting threshold that decides when a Form W-2G issues has been replaced by a single indexed figure, which is higher than three of the four thresholds it displaced. Almost every worked example in circulation is wrong on one or both.

The rule

Winnings are gross income in full. Gambling winnings are compensation for nothing and fall within the general definition of gross income (IRC § 61(a)); the Service states the position plainly — winnings are fully taxable and must be reported, including winnings not reported on a Form W-2G, and including the fair market value of non-cash prizes (Topic no. 419). There is no netting of a bad session against a good one before the income arises.

The loss deduction now has two ceilings, not one. For losses from wagering transactions the amount allowed as a deduction for any taxable year shall be equal to 90 percent of the amount of such losses during the year (IRC § 165(d)(1)(A)) and shall be allowed only to the extent of the gains from such transactions during the year (IRC § 165(d)(1)(B)). Both limits apply; the deduction is the lesser of the two results. Pub. L. 119-21 § 70114(b) applies this to taxable years beginning after 31 December 2025.

Expenses count as losses, and that is now permanent. For the purposes of the limitation, “losses from wagering transactions” includes any deduction otherwise allowable under chapter 1 incurred in carrying on any wagering transaction (IRC § 165(d)(2)). This rule was introduced with an expiry date of 1 January 2026; the rewrite removed the expiry. So a professional gambler’s travel, entry fees and data subscriptions are inside the cap rather than deductible against it.

Gambling losses are not miscellaneous itemized deductions. Miscellaneous itemized deductions exclude the deduction under § 165(a) for losses described in § 165(d) (IRC § 67(b)(3)), so the permanent suspension in § 67(h) does not reach them. They are an itemized deduction, claimed on Schedule A, available only to a taxpayer who itemizes (Topic no. 419).

Reporting turns on one threshold now. Every person engaged in a trade or business making payments of fixed or determinable gains, profits and income at or above the threshold in a calendar year must file an information return (IRC § 6041(a)), and the amount is adjusted for inflation for calendar years after 2026 (IRC § 6041(h)). Pub. L. 119-21 § 70433(f) applies this to payments made after 31 December 2025. The Form W-2G instructions confirm the consequence directly: for calendar years after 2025 the minimum threshold for reporting on the Form W-2G is adjusted yearly for inflation, and they no longer print separate figures for bingo, keno, slot machines and other wagering — every category now refers to “the applicable reporting threshold”. The current amount is in the table below.

Withholding is a separate question with its own trigger. Regular gambling withholding applies to proceeds above a dollar figure where those proceeds are also at least 300 times the amount wagered, with distinct rules for State-conducted lotteries, sweepstakes, wagering pools and pari-mutuel pools (IRC § 3402(q)(3)(A)–(C)), proceeds being measured net of the wager (IRC § 3402(q)(4)(A)). Regular gambling withholding does not apply at all to bingo, keno or slot machine winnings; backup withholding can (Form W-2G instructions).

Current figures

Item	2026
Wagering loss deduction	90 percent of wagering losses for the year, and then only to the extent of gains from wagering transactions — both limits applying for the first time to taxable years beginning after 31 December 2025^TY2026
Expenses treated as losses	losses from wagering transactions include any deduction otherwise allowable that is incurred in carrying on a wagering transaction — a rule that ran only from 2018 to 2025 and is now permanent^TY2026
Form W-2G reporting threshold	$2,000 of winnings for calendar year 2026, replacing the former fixed figures for bingo, keno, slot machines and other wagering, and adjusted for inflation for calendar years after 2026^TY2026
Withholding trigger	proceeds of more than $5,000 from a wagering transaction where the proceeds are at least 300 times the amount wagered, with separate rules for State-conducted lotteries, sweepstakes, wagering pools and pari-mutuel pools^TY2026
Withholding rates	regular gambling withholding at 24 percent, 31.58 percent for certain noncash payments, with backup withholding also at 24 percent^TY2026

How it works in practice

Start by separating three questions that clients and a good deal of published material run together: what is income, what was reported, and what is deductible. A taxpayer with no Form W-2G at all may still have substantial gambling income, and after the threshold change that will be true far more often than it used to be.

Then apply the two ceilings in the right order. Take the year’s losses, take 90 percent of them, and compare that with the year’s winnings; the deduction is the smaller. The arithmetic matters most in the case that used to be neutral: a client who wins and loses the same amount used to report nothing net and now reports a tenth of the winnings as taxable. Say this at intake rather than in April.

The itemizing question sits on top of both. Losses are an itemized deduction, so a client who takes the standard deduction gets nothing for them however carefully recorded — the winnings are income regardless. That combination is the single most expensive misunderstanding in this topic, and the threshold change makes it commoner, because more winnings now go unreported by the payer while remaining fully taxable.

Records are the practical work. The Service requires an accurate diary or similar record of winnings and losses, backed by receipts, tickets or statements (Topic no. 419). Sessions rather than individual wagers are the workable unit for a recreational player, and casino player-card statements are a starting point rather than a substitute — they capture carded play only.

Breaking even is no longer breaking even

Marisol won $60,000 and lost $60,000 over the year at sports books, and itemizes. In 2025 she would have reported $60,000 of income and deducted $60,000, with nothing left.

For 2026 the arithmetic changes. IRC § 165(d)(1)(A) allows 90 percent of her losses, which is $54,000, and § 165(d)(1)(B) allows the deduction only to the extent of gains, which would permit $60,000. The deduction is the lesser: $54,000.

She therefore has $6,000 of taxable income from an activity on which she made nothing. The exposure scales with volume rather than with success, so a high-turnover break-even bettor is worse hit than an occasional winner — which is the opposite of what a client expects a tax change to do.

The win that no longer generates a form

Deshawn hit $1,400 on a slot machine in March and $900 at a poker table in July. He receives no Form W-2G for either and assumes neither is reportable.

He is wrong on the tax and — for 2026 — right about the forms. Under IRC § 6041(a) as amended the reporting threshold is $2,000 for the calendar year, and the Form W-2G instructions confirm that the former separate figures for bingo, keno and slot machines no longer apply. Both amounts are below it, so no form issues.

The $2,300 is nonetheless gross income and must be reported. The change has quietly widened the gap between what the Service is told and what the taxpayer owes, which raises the value of the client’s own records rather than lowering it.

The professional whose expenses moved inside the cap

Ilya plays poker professionally, treating it as a trade or business. He has $210,000 of winnings, $180,000 of losing buy-ins, and $26,000 of travel, entry fees and data subscriptions.

All of it is caught by one limitation. IRC § 165(d)(2) provides that losses from wagering transactions include any deduction otherwise allowable incurred in carrying on a wagering transaction, so his $26,000 of expenses joins the $180,000 of buy-ins, giving $206,000 of “losses”. The 90 percent ceiling in § 165(d)(1)(A) reduces that to $185,400, which is below his $210,000 of gains, so the deduction is $185,400 and he has $24,600 of net income.

Two points he will not expect. His expenses no longer sit outside the wagering limitation as they did before 2018, and the rule that put them inside it — once due to expire at the end of 2025 — was made permanent by the same amendment that added the percentage cap.

Traps

The deduction is the lesser of two ceilings, not the winnings figure alone (IRC § 165(d)(1)(A), (B)). Break-even now produces taxable income.
The percentage is on losses, not on winnings. Ninety percent of a bigger loss figure can still be cut down by the gains limit.
Expenses of carrying on wagering count as losses (IRC § 165(d)(2)), and that is now permanent — a professional cannot deduct them around the cap.
Losses are still not miscellaneous itemized deductions (IRC § 67(b)(3)), so the § 67(h) suspension does not touch them. They survive, subject to the new cap.
A taxpayer who does not itemize deducts nothing, while the winnings remain fully taxable.
No Form W-2G does not mean no income. The threshold governs the payer’s filing duty only.
The old category thresholds are gone. For 2026 there is one figure under IRC § 6041(a), indexed from 2027 by § 6041(h), and the Form W-2G instructions no longer print per-game amounts.
Reporting and withholding are different tests. IRC § 3402(q)(3) uses a higher dollar figure and a 300-times-the-wager ratio, with proceeds measured net of the wager (IRC § 3402(q)(4)(A)).
Regular gambling withholding never applies to bingo, keno or slot machines, though backup withholding can.
Non-cash prizes are income at fair market value (Topic no. 419) — a car or a trip is not a windfall outside the return.

How this has changed

The percentage cap is entirely new. Pub. L. 119-21 § 70114(a) struck the old § 165(d) and replaced it. The prior text read simply that losses from wagering transactions “shall be allowed only to the extent of the gains from such transactions”, with the expenses rule limited to taxable years beginning after 31 December 2017 and before 1 January 2026. The new text adds the 90 percent limb and drops the expiry on the expenses limb. Section 70114(b) applies both to taxable years beginning after 31 December 2025, so 2026 is the first year.

The reporting threshold changed in a way that is easy to miss because it did not happen in a gambling provision at all. Pub. L. 119-21 § 70433(a) raised the IRC § 6041(a) figure more than threefold, and § 70433(e) retitled the subsection “Payments exceeding threshold” and moved it from a taxable-year to a calendar-year measure; § 70433(f) applies it to payments made after 31 December 2025. New § 6041(h) indexes the figure for calendar years after 2026. The Form W-2G instructions (Rev. January 2026) carry the consequence through, and the old per-category figures no longer appear anywhere in them.

The published guidance has not fully caught up. IRS Topic no. 419, reviewed 11 June 2026, still states that the amount of losses deducted “can’t be more than the amount of gambling income you reported on your return” — which was the whole rule until this year and is now only one of the two ceilings. The page is not wrong about what it says; it is incomplete for a 2026 return, and a taxpayer relying on it would overstate the deduction by a tenth of their losses.

Exam focus

The examinable point is the two-ceiling computation. Expect facts giving winnings and losses and a question asking for the deduction; take the percentage of losses first, then apply the gains limit, and answer with the smaller.

Know that break-even produces taxable income, and be able to say why — the percentage attaches to losses, so it bites even when gains and losses match exactly.

Know that expenses of carrying on a wagering transaction are inside the limitation, and that the rule putting them there is now permanent.

Distinguish reporting from withholding. Reporting runs on the IRC § 6041(a) threshold; withholding runs on § 3402(q)‘s proceeds-and-ratio test. And know that losses escape the miscellaneous itemized suspension through IRC § 67(b)(3) but are still available only to a taxpayer who itemizes.

Check yourself

1. A taxpayer who itemizes has $40,000 of gambling winnings and $50,000 of gambling losses in 2026. What is the deduction?

Answer: $40,000. IRC § 165(d)(1)(A) limits the deduction to 90 percent of losses, which is $45,000, and § 165(d)(1)(B) limits it to gains, which is $40,000. The deduction is the lesser of the two, so the gains limit governs here and the percentage cap does not bite. Net taxable gambling income is nil.

2. Same taxpayer, but winnings and losses are each $50,000. What is the deduction, and why does the answer differ?

Answer: $45,000, leaving $5,000 of taxable income. Ninety percent of $50,000 is $45,000, which is below the $50,000 gains limit, so the percentage cap governs. The difference from the first question is that the percentage attaches to losses — once losses no longer exceed gains by more than a ninth, the percentage cap becomes the binding one.

3. A recreational gambler wins $1,600 on a slot machine in 2026 and receives no Form W-2G. Is the amount taxable?

Answer: yes, in full. The IRC § 6041(a) reporting threshold for the calendar year is above that amount, so the payer had no filing obligation, and the Form W-2G instructions confirm the former separate figure for slot machines no longer applies. The threshold governs the payer’s duty, not the character of the receipt, and the winnings are gross income under IRC § 61(a).

4. A professional gambler argues that entry fees are business expenses under IRC § 162 and so fall outside the wagering limitation. Is that right?

Answer: no. IRC § 165(d)(2) provides that “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction. Entry fees incurred in carrying on the activity are therefore inside the limitation and are subject to both ceilings. The rule applied only from 2018 to 2025 as originally enacted; Pub. L. 119-21 § 70114(a) removed the expiry.

Change log

2026-08-19Initial draft. Records the rewrite of IRC § 165(d) by Pub. L. 119-21 § 70114 capping the wagering loss deduction at 90 percent of losses from 2026, and the replacement of the fixed Form W-2G reporting thresholds with the single indexed IRC § 6041(a) figure.