New Gambling Tax Rule Effective 2026 Creates 'Phantom Income,' Despite Congressional Efforts to Undo It

The new federal gambling tax rule, which took effect at the beginning of 2026, has begun to generate "phantom income" for many bettors, effectively taxing individuals who break even or incur net losses on their wagers. Despite concerted efforts from lawmakers in both chambers of Congress to repeal or modify the provision, these attempts have consistently fallen short, leaving the new tax regime firmly in place.

Under the updated Internal Revenue Service (IRS) guidelines, individuals can now only deduct up to 90% of their gambling losses against their winnings. This represents a significant shift from the previous rules, which allowed for 100% deductibility, meaning losses could fully offset winnings. The practical consequence of this change is that a bettor who earns $100,000 in winnings but incurs an equivalent $100,000 in losses over the year will still be taxed on $10,000 of income. This $10,000 is considered "phantom income" because it never actually stayed in the bettor's pocket, yet it is treated as taxable earnings. The "phantom figure" will always be 10% of the losses claimed, meaning higher volumes of wagering and losses can lead to larger taxable amounts, even when a bettor's net financial position remains at zero or negative.

This provision was quietly introduced by the Senate Finance Committee during the final negotiations of H.R. 1, known as the "One Big Beautiful Bill Act." According to estimates from the Joint Committee on Taxation, this change is projected to generate approximately $1.1 billion in federal revenue over the next decade. While seemingly a minor tweak, the impact is substantial for high-volume and professional gamblers, who frequently engage in transactions that result in large gross winnings and losses, even if their net outcome is small. For small and mid-sized business owners who might also engage in significant gambling activity, or those whose businesses operate within the gaming industry, this rule introduces a new layer of complexity and potential unexpected tax liabilities, requiring careful financial planning and record-keeping.

The legislative battle to reverse this tax change has been ongoing since its inception. In January 2026, the "FULL HOUSE Act" was introduced with bipartisan support from Ways and Means lawmakers, specifically designed to restore full deductibility of gambling losses. Following this, Senators Cruz and Miller filed a companion bill in March 2026, mirroring the House effort to reinstate the prior 100% offset rule. Representative Dina Titus of Nevada has emerged as one of the loudest voices advocating for repeal, citing the unfairness of taxing non-existent income. Her amendment to address the issue failed on January 23, 2026, and House Republicans subsequently blocked another attempt by her in February 2026. Congressman Troy E. Nehls (R-TX-22) has also publicly denounced the provision, penning an op-ed in the Washington Examiner that described it as a "sneaky new gambling tax" that "punishes you for losing." Nehls has expressed hope that Congress could "right this wrong" by addressing it in "Reconciliation 3.0" and supports the FAIR BET Act.

The widespread concern prompted the IRS to hold an open session on the rule on July 17, 2026. The speaker list for this hearing was extensive, including Representative Titus, various tax professionals such as Gary Kondler, representatives from the gaming industry, and both amateur and professional gamblers. The unified message from all speakers was a clear demand to restore the 100% deductibility of losses against winnings, highlighting the perceived inequity of the current 90% limit. Despite these strong appeals and legislative attempts, the rule remains unchanged, indicating the significant hurdle Congress faces in overturning revenue-generating provisions once they are enacted.

For many small and mid-sized business owners, navigating the complexities of the U.S. tax code is already a significant challenge. This new gambling tax rule adds another layer of intricacy, particularly for those who might have substantial gambling activity, either personally or through business interests related to the gaming sector. We've seen clients struggle with accurately tracking and reporting these figures, often discovering unexpected tax liabilities at year-end. The concept of "phantom income" can be particularly frustrating, as it taxes money that was never truly realized as profit. Our view is that this provision places an undue burden on individuals who are simply trying to manage their finances responsibly, and it underscores the critical importance of meticulous record-keeping and proactive tax planning. This is precisely the kind of situation where expert guidance in tax preparation and compliance becomes indispensable. C&S Finance Group LLC helps clients understand and navigate these complex regulatory changes to ensure they remain compliant and minimize their tax burden. Business owners and individuals seeking clarity on how this rule impacts their financial situation should contact C&S Finance Group LLC at csfinancegroup.com to get started.

As the 2026 tax season progresses, the full financial implications of this new gambling tax rule will become clearer for a broader segment of the population. Observers will be watching to see if further legislative efforts, particularly those tied to future reconciliation bills, gain traction in Congress. The ongoing debate highlights the delicate balance between federal revenue generation and the perceived fairness of the tax code for American taxpayers.