New Gambling Deduction Rules

In the past, a taxpayer with gambling winnings could offset the recognized earnings by the amount of loss, not to exceed the amount of winnings. Professional gamblers are allowed to deduct expenses directly associated with their profession.

The TCJA amended IRC §165 meant to make clear that “losses from wagering transactions” to include all deductions allowed under the code section incurred while carrying out that transaction. In other words, Congress wanted to make clear that only expenses directly related to a professional gambler’s transactions are deductible, while non-direct costs, such as travel, are not. Recreational gamblers never could deduct any of those expenses.

The OBBBA (One Big Beautiful Bill) makes the TCJA changes permanent. It also adds a permanent rule that limits losses from gambling or wagering transactions. Congress intended to further limit losses to 90% of the total loss amount beginning after 12/31/2025. This new rule applies to both recreational and professional gamblers. (Reg. §1.165-10; §165(d); Pub. L. 119-21, Sec. 70114)

So, for example, consider a recreational gambler who receives a statement from their casino showing winnings of $10,000 and losses of $11,000. In the past, the losses were deductible to the extent of the winnings, so no income was recognized. Beginning in 2026, the taxpayer, under the new rules, will report no more than 90% of their losses, not to exceed their winnings, or, in this case, $100 ($10,000 – $9,900 ) as recognized income. This is true for both recreational and professional gamblers.

This new rule is causing concern for both taxpayers and gambling establishments because of the potential for increased income recognition. It is also concerning to them for the additional overhead of reporting.

However, if the taxpayer keeps contemporaneous notes, does not rely on casino annual reporting, and maintains a record of the day’s transactions, they can significantly reduce their tax liability. For instance, using the earlier example, under the new rules, a taxpayer would recognize $100 of income. That is based on the year’s aggregate reporting. But, with contemporaneous notes, the liability is much less. Why? There is a US Tax Court case, Shollenberger, TC Memo. 2009-306. In this case, the Court said that computing wins and losses for each separate wager was too burdensome, and “the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems his or her tokens and can definitely calculate the amount above or below basis realized.”

Using the following contemporaneous notes as an example:

Day	Won	Lost	Net
1	2500	2250	250
2	2000	2550	-550
3	3000	3400	-400
4	2500	2800	-300
Total	10000	11000	-1000

Now, the numbers look much different. That is because the winnings are $250, and the losses are $1,250. Applying the new rules, 90% of $1,250 is $1,125 loss deduction. Since the loss cannot exceed the winnings, then the reported income is $0.