Gamblers get Reduced Loss Deductions – and Phantom Income
Phantom Income Because only 90% of Gambling Losses are Deductible.
What is “Phantom Income”? It refers to Taxable Income that you have to report, even though you did not receive cash for that income. Starting in 2026, gamblers will encounter this issue due to new tax laws that reduce the amount of loss deductions they can claim.
Currently, gambling winnings and losses can completely offset each other. For example, if you have $100,000 in winnings and $100,000 in losses, you do not have any taxable income. However, beginning in 2026, you will only be able to deduct 90% of your gambling losses against your winnings.
In the same scenario, if you win $100,000 and only have a $90,000 deductible loss, you will still appear to have $10,000 of taxable income, despite the actual loss of $100,000. This situation results in what is known as “Phantom Income.”
Basic Gambling Income Tax Rules
A. Amateur Gambler
Until 2026, amateur gamblers may claim the gambling loss deduction only:
i. If they itemize deductions on Schedule A of their 1040;
ii. The deductions are limited to the amount of winnings. If you itemize deductions, not if you claim the standard deduction;
iii. Non-direct gambling expenses (hotels, airfare, meals) are not deductible;
iv. Excess losses can not be carried to the following year.
B. Gambling Professionals
Gambling professionals’ activities are classified as a trade or business. Winnings and losses should be reported on Schedule C. Reasonable non-direct gambling expenses, such as hotels, airfare, and meals, can be deducted if they are ordinary and necessary to generate income.
The IRS Audits Gamblers
During audits, the IRS frequently questions deductions for gambling losses. To strengthen your claims, it’s essential to maintain a diary or similar records. In addition to the casino’s annual reports, keeping copies of every receipt can be beneficial. Periodically scanning these documents will help you stay organized and up to date. For instance, maintaining a record of lottery ticket purchases—documenting dates, winnings, and losses—will be valuable if you face an IRS audit. Keeping these records up to date will help demonstrate that they are genuine and not created retroactively.
High Stakes Amateurs and Professionals are Stuck
Frequent gamblers and those who play for high stakes will be particularly affected, as their winnings and losses can be substantial. Professional gamblers often experience “phantom income,” making them easy targets for scrutiny from the IRS. It would not be surprising if casinos and the organized gaming industry engage in intense lobbying efforts in Congress to reverse this new tax law
