As the 2026 tax year approaches, a significant change looms for bettors in the U.S. Those who win and lose the same amount, say $100,000, will end up paying federal taxes on $10,000 of income they never actually kept. This issue arises from a recent legislative cap on gambling loss deductions, set at 90%. Interestingly, the venues competing with licensed sportsbooks, including prediction markets, may not be obligated to adhere to this cap.
John Isaac, Editor at online-gambling.com, specializes in U.S. gambling law and has insights into the impact of the cap as well as the ongoing challenges surrounding its repeal.
In a recent interview, we discussed the mechanics of the new legislation and its implications for bettors. I began by asking John what the 90% cap means for someone who has broken even in their gambling endeavors.
John explained, “The arithmetic is the whole story. Until now, those who itemized their deductions could deduct losses up to the amount of their winnings, meaning a break-even year resulted in no federal tax obligation. However, with the One Big Beautiful Bill Act, enacted in July 2025, that deduction is now capped at 90% starting in 2026. For instance, if someone wins $100,000 and loses the same amount, all winnings are reported, but only $90,000 of the losses can offset that income. This leaves $10,000 that is taxed as income, even though the player is essentially at zero overall.”
He emphasized that the cap does not focus on profit, but rather on the volume of money wagered, penalizing frequent players who generate large wins and losses.
During the public hearing held by the IRS in July, which aimed to discuss proposed regulations related to the cap, there was no resolution. “The hearing addressed enforcement mechanisms and raised the reporting threshold for slot and bingo winnings, but did not change the core issue of the 90% cap,” John noted. Notably, every witness opposed the cap, including Representative Dina Titus and the American Gaming Association. However, because the 90% figure is embedded in the statute, only Congress has the power to repeal it, as the IRS lacks the authority.
When asked where the repeal efforts currently stand, John expressed that progress has been slower than some advocates anticipated. He said, “Shortly after the cap’s implementation, Titus proposed the FAIR BET Act to restore full deductions, and it received bipartisan support in the Ways and Means Committee. Another bill, the FULL HOUSE Act, was introduced by Max Miller and Steven Horsford, but neither has advanced to a floor vote. A unanimous consent request in the Senate was blocked in 2025, and attempts to attach repeal language to the defense authorization in January did not succeed. Despite Titus’s recent discharge petition to advance the bill, options appear limited.” He also mentioned that some legislators, like Senator James Lankford, view the cap as a minor change, which complicates repeal efforts.
Isaac pointed out a key difference in taxation between sportsbooks and prediction markets. “Gambling winnings are taxed on a gross basis, which makes the 90% cap impactful. In contrast, prediction markets, regulated by the CFTC, operate differently—event contracts may be treated as financial instruments, allowing for net reporting of results,” he explained. Despite this, there is currently no IRS guidance on the taxation of prediction market contracts, leaving uncertainty for bettors.
This uncertainty, he argues, puts high-volume bettors in precarious positions. “Players now face a known penalty on traditional betting and an unclear status on prediction markets.”
John’s editorial approach has also shifted due to these developments. “Tax issues, once a minor point on our pages, are now top of mind for readers. We’ve adjusted our content strategy to prioritize tax-related questions and provide clarity.” He added that authors must be transparent about the limitations of their knowledge regarding specific cases, especially concerning how prediction market positions are categorized for tax purposes.
He believes operators need to recognize the real impact of these tax changes on their clients, noting that more recreational bettors are barely affected, while professional players face substantial taxes on reported winnings despite having no actual profit. “These high-volume players can swiftly seek out alternatives if they feel overburdened by taxes,” he warned, echoing Titus’s concern that the cap might drive players to unregulated sites.
To prepare for the upcoming tax season, John advised operators and affiliates to enhance their communication about tax implications and ensure that players have access to detailed session-level data for accurate filing. “Operators must stop treating tax as an afterthought—it needs to be part of the broader discussion around pricing and payment methods.”
Looking ahead, John anticipates the cap will remain in place for at least another year, and as the first tax filing season approaches, the reality of the cap’s impact will resonate more clearly with bettors. He remarked, “Whether the IRS weighs in on prediction market taxation could also shift the competition. If the guidance is favorable, the landscape could change favorably for operators; otherwise, they face continued challenges.”
John's final advice to bettors is to maintain meticulous records and consult tax professionals, along with a reminder to only wager what they can afford to lose regardless of the evolving legislation.
