In 2025, Americans wagered a record $165 billion on legal sports betting, primarily through sportsbook mobile apps. These figures exclude the increasingly popular prediction market space. Sports betting markets generate significant federal tax revenues, as well as for state and local tribal levels.

Last year, sportsbooks generated $16 billion in revenue, with approximately $3.7 billion of it paid in taxes. However, gamblers are also subject to taxes on their winnings. Until 2026, taxpayers could offset their gambling winnings by deducting their gambling losses to the extent of their wagering winnings, i.e., no less than $0. However, the One Big Beautiful Bill Act (the “OBBBA”) passed in 2025 introduced a change to this long-standing tax policy.

Under the OBBBA, beginning with the 2026 tax year, Americans are allowed to deduct only 90% of their gambling losses to the extent of their wagering winnings. With the increasing popularity of recreational gambling across the country, Americans will soon be introduced to a new form of income for the first time: phantom income.

Hypothetical Gambler

To illustrate how changes to gambling loss deductions under the OBBBA will impact taxpayers, we will use our hypothetical sports better, Brad Parlay.  Brad is an unmarried individual earning a $100,000 salary from his full-time employment. In 2025, Brad had $20,000 of gambling winnings and $25,000 of gambling losses.

Under the pre-OBBBA law, Brad could deduct his gambling losses to the extent of his gambling winnings, or $20,000, and reduce his net gambling income to $0.

Example 1: The 90% Limit

Assume Brad’s gambling winnings and losses remain the same in 2026. Under the new OBBBA rules, Brad can deduct a maximum of 90% of his gambling losses to the extent of his gambling winnings, or $18,000. This results in $2,000 of additional taxable income that Brad must report on his 2026 tax return.  In reality, not only does Brad have $5,000 less in his bank account due to his sports betting losses, but he must now pay taxes on $2,000 of income that he never actually received.

Given Brad’s salary from his full-time employment, this additional $2,000 of gambling income is subject to taxes at his highest marginal tax bracket of 22%. The cost of this $2,000 of non-existent, or phantom, income to Brad is an additional $440 of federal income taxes on his 2026 tax return.

Example 2: The Itemized Deduction Rule

To make matters worse, the OBBBA left in place the itemized deduction rule for claiming gambling losses. This rule requires taxpayers to itemize their deductions on their tax return to claim any gambling loss deductions. Taxpayers that take the standard deduction cannot deduct any amount of their gambling losses, but must still claim all of their gambling winnings as taxable income.

After the passage of the Tax Cut and Jobs Act in 2017, which nearly doubled the standard deduction amount, the percentage of American taxpayers who itemize their deductions has dropped from roughly 30% to just 10%.

Assume that Brad decides to cut down on his sports betting in 2026. At the end of the year, Brad has $5,000 of gambling winnings and $7,500 of gambling losses. Regardless of whether Brad chooses to take the standard deduction or itemize deductions, his $5,000 of gambling winnings must be reported as Other Income on his tax return.

The 2026 standard deduction for a single taxpayer is $16,100, while Brad only has $4,500 (90% of $5,000) of eligible gambling losses that he could deduct if he chose to itemize deductions. Since the standard deduction exceeds the amount of Brad’s eligible gambling losses, it does not make sense for him to itemize deductions on his 2026 tax return. As a result, Brad is unable to deduct any of his gambling losses and will be subject to taxes on $88,900 of income ($100,000 salary plus $5,000 gambling winnings less $16,100 standard deduction).

Despite having $2,500 less in his bank account due to his sports betting losses, Brad must still pay taxes on his $5,000 of gambling winnings, resulting in an additional $1,100 of federal income taxes on his 2026 tax return.

Example 3: Broader Impact of Gambling Income on Amount of Income Subject to Taxes

Going back to Example 1, Brad’s 2026 taxable income is equal to $102,000 ($100,000 salary plus $20,000 gambling winnings less $18,000 itemized deductions), resulting in a total federal income tax liability of $17,151.88 on his 2026 tax return. In comparison, if Brad had not placed any sports betting during the year, his 2026 taxable income would be equal to $83,900 ($100,000 salary less $16,100 standard deduction), resulting in a total federal income tax liability of $13,169.88 on his 2026 tax return.

Brad’s sports betting in 2026 has caused his federal income tax liability to increase by $3,982.  After taking into consideration his $5,000 of net gambling losses during the year, the actual cost of Brad’s sports betting is $8,982 less in his bank account.

Online and retail sportsbooks are currently legalized across 35 U.S. states. This number is expected to rise even further in the coming years as more states realize the potential to boost their legislative budgets from tax revenues generated from legalized sports betting.  At the same time, Americans must also be wary of the various tax consequences they face from participating in this new pastime that is gaining popularity across the country.

The information provided in this article is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy of the content, the details presented may not apply to every situation or jurisdiction. For advice specific to your individual circumstances, we recommend consulting with a qualified attorney.