A player who wins $100,000 while simultaneously losing $100,000 will be liable for federal tax on $10,000 they did not retain. Starting from the 2026 tax year, a 90% cap on gambling loss deductions introduces this complexity, particularly as venues competing with licensed sportsbooks may not be subject to this rule.
We interviewed John Isaac, Editor at online-gambling.com, who specializes in US gambling law and also covers gambling markets in India and the Netherlands. Isaac elaborated on the implications of a recent hearing, the current status of repeal efforts, and why operators might be more concerned about this tax gap than the players themselves.
TheGamblest: John, thank you for being here. First, what does the 90% cap mean for someone who breaks even?
John: The numbers tell the whole story. Previously, a player who itemized deductions could offset losses up to their total winnings. However, the One Big Beautiful Bill Act, enacted in July 2025, now limits that deduction to 90% starting in 2026.
For example, a player winning $100,000 and losing $100,000 will report all their winnings as income but can only deduct $90,000 of their losses. This leaves $10,000 liable for taxation, despite the player ending with no net gain or loss.
This is a tough concept for many to understand. The law does not track actual profit; it simply monitors transaction volume, which can disproportionately affect frequent players with significant amounts on both sides.
TheGamblest: The IRS held a public hearing regarding these regulations in July. Why didn’t that clarify anything?
John: The hearing focused on the procedural aspects rather than tackling the core issue. It discussed how the cap would be implemented and how slot and bingo winnings reporting thresholds would change. Every speaker opposed the cap, including Representative Dina Titus, the American Gaming Association, and tax professionals who prepare these returns.
However, it didn't matter; the cap is entrenched in the statute itself, leaving no room for removal by regulatory agencies. Only Congress can amend the law.
Additionally, state tax modifications are influencing operator revenues, complicating matters since players face varying state tax treatments on winnings alongside federal regulations.
TheGamblest: What is the current status of repeal efforts?
John: Progress is slower than supporters had anticipated. Soon after the law was enacted, Titus introduced the FAIR BET Act to restore the full deduction, which has bipartisan support but remains stuck in the Ways and Means Committee. A second bill, the FULL HOUSE Act, introduced by Max Miller and Steven Horsford, faced similar obstacles and has not yet been brought to a vote.
Efforts to move the repeal through procedural routes have also stalled. A unanimous consent request in the Senate was blocked in 2025, and the House Rules Committee opted not to attach repeal to the defense authorization bill in January. Titus has now filed a discharge petition to compel the bill's consideration, highlighting the limited options remaining.
Real opposition also exists. Senator James Lankford considers this a minor tax policy adjustment, a viewpoint that has persisted.
TheGamblest: You mentioned that the cap creates a gap between sportsbooks and prediction markets. How so?
John: It fundamentally relates to how gross and net income are treated. Prediction markets are constructed and regulated differently than sportsbooks, and this distinction extends into taxation. Gambling winnings are taxed on a gross basis, which amplifies the impact of the 90% cap. In contrast, event contracts traded on CFTC-regulated platforms are seen as financial instruments. If these were covered under section 1256 of the tax code, the holder would report their net result for the year, allowing for loss deductions and delineating between long and short-term gains.
It's important to clarify that this is not definitively established. The IRS has yet to provide any ruling or guidance on this matter, and many tax professionals perceive claiming section 1256 treatment as a risky position rather than a secure one. Some platforms don’t even provide a detailed transaction statement.
The core issue here lies in the uncertainty. A high-frequency bettor faces a clear penalty on one side, while the treatment of prediction markets remains ambiguous.
TheGamblest: How has this situation affected your editorial work?
John: It has altered our priorities. Tax-related topics, which used to be secondary on our state pages, have surged to the forefront due to heightened reader interest. We have moved queries about filing and record-keeping closer to the top of our content.
Additionally, our tone has shifted. We now stress that there are things we cannot definitively clarify. Whether the taxation of a prediction market position classifies as a capital gain or as gambling income ultimately depends on individual circumstances, and not addressing this would only mislead readers.
TheGamblest: You mentioned operators should be more concerned than the players. Why is that?
John: The risk is highly concentrated among the players that operators wish to retain. Recreational players who do not itemize deductions are minimally affected by the cap. However, high-volume or professional players could report substantial winnings alongside matching losses, leading to tax liabilities on amounts that don’t reflect actual earnings.
Moreover, these players are the most likely to switch to different markets, which is often underestimated. They scrutinize tax implications and make decisions based on them. Titus cited this concern when introducing her bill, warning that the cap could incentivize players to migrate to offshore and unregulated sites.
If this occurs, the anticipated revenue from the measure could leave the regulated market along with the players.
TheGamblest: What should operators and affiliates prioritize before the upcoming filing season?
John: First, they need to prioritize statement clarity. Players now genuinely require session-level data for accurate tax filings, and platforms that complicate the retrieval of this information will draw complaints come filing season.
Next, operators must avoid treating tax matters as a secondary issue in customer communications. The tax treatment of winnings influences the overall cost of playing, and it should be addressed alongside pricing and payment options rather than hidden in less-read help pages.
In addition, they should engage constructively with the comparison to prediction markets rather than shying away from it. Customers are already eager for information on these differences from financial media without connecting it to gaming, and operators failing to address this gap may appear uninformed.
TheGamblest: Lastly, how do you predict the situation will unfold in the next year?
John: I expect the cap will still be in place, as current developments suggest no changes. The first filing season under this cap will be the moment reality sets in for many players; the figures on a tax return are often more compelling than discussions during hearings.
The key question is whether the IRS will provide any guidance regarding prediction markets before that. If they give an unfavorable ruling, the gap may close, negating competitive issues. However, if the silence persists, licensed operators face another year of disadvantages that are not of their making.
My advice for players remains consistent: maintain thorough records and seek expert tax guidance prior to filing rather than waiting until after. Also, always stake what you can afford to lose, which is a principle that remains applicable regardless of legislative changes.
