INTRODUCTION

On July 4, 2025, Donald Trump signed his latest tax bill into law: the One Big Beautiful Bill Act (hereinafter “OBBBA”).[1] One of the primary goals of the OBBBA was to reduce the tax burden on working-class Americans.[2] Congress sought to achieve this by enacting taxpayer-friendly legislation, such as permanent reductions to the marginal income taxes rates and permanent increases to the standard deductions.[3] While the Congressional Budget Office projects the OBBBA to generate $1.1 billion over the next ten eight years, the bill as a whole is projected to increase the federal deficit by over $3 trillion over the next ten years.[4] To offset the lost revenue from these “tax cuts,” Congress modified numerous existing provisions of the Internal Revenue Code. One such modification, which became effective January 1, 2026, decreased the gambling loss deduction allowed by section 165(d) from 100% to 90%.[5]

This 10% change might seem innocuous to the average American (or the uninformed politician), but the new 90% deduction provision could lead to “bettors ow[ing] substantial taxes on money they never actually won.”[6] The American Bettor’s Voice has described this taxation of “phantom income” as “an existential threat to regulated sports betting” based on the significant possibility that the sport’s gambling industry’s most important players might choose to pursue alternative sources of income rather than pay such taxes.[7] Therefore, with the OBBBA officially in effect, Congress must act quickly to avoid the potentially catastrophic consequences of the changes to section 165(d).

THE COMMERICAL GAMING INDUSTRY

In 2018, the Supreme Court in Murphy v. NCAA struck down the Professional and Amateur Sports Protection Act (PASPA) – a federal law that effectively banned most American states from legalizing sports gambling.[8] Since then, at least thirty-eight states have legalized sports gambling.[9] Consequently, the commercial gaming industry, which encompasses activities such as traditional casinos and sports gambling, has exploded into a $72.04 billion industry.[10] The year 2024 marked the fourth straight year of record revenues for the commercial gaming industry.[11] This coincides with a record number of Americans (approximately fifty-seven percent) engaging in some form of gambling during that time.[12] As a result, the industry generated over $15.91 billion in gaming tax revenue for state and local governments, not including the billions of dollars that the industry generated in income, sales, corporate, payroll, and excise taxes across all levels of government.[13]

American sportsbooks produce significant government tax revenues because they are highly profitable. In addition to collecting revenue from bettors lost wagers, they generally charge bettors a small fee of around 10% (called “juice” or “vig”) just to place the wager.[14] Accordingly, the typical bettor must win at an average rate of 52.4% just to break even.[15] This is problematic for gamblers because a win rate of only 57% is considered to be “excellent” in the sports betting industry.[16]

Due to the difficulty of winning, very few sports bettors achieve long-term profitability. Those who are profitable typically incur substantial losses, operate on razor-thin margins, and only become profitable at high volume.[17] As a result, studies show that around 10% of the bettors are responsible for over 80% of the total industry’s handle.[18]

This small number of bettors, generally professional gamblers, large volume recreational bettors, and professional betting syndicates, support the entire American regulated sports gambling industry.[19] However, the industry’s reliance on a small number of highly concentrated customers makes it vulnerable to disruption if its core customer base were to pursue alternative sources of revenue. Unfortunately, the changes to section 165(d) threaten to do exactly that.

THE AMERICAN INCOME TAX SYSTEM

As the significance of gambling grows in the United States, so to do the tax implications. Due to the moral implications of gambling, it might not be readily apparent why gambling losses are deductible in the first place. Afterall, doesn’t the gambling loss deduction lead more Americans to gamble and perhaps even reward their behavior with special tax treatment? To answer this question, it is important to understand the purpose of the American income tax system.

Although the Internal Revenue Code allows the government to collect taxes on “all income from whatever source derived,”[20] the American income tax system does not seek to tax all revenue simply because it was earned. Rather, it “aims to measure how much better off an individual has become during the year.”[21] Congress has determined that the most “fair” way to do this is to tax net income, rather than gross income, which generally permits the taxpayer to “net out” the costs of income in the form of deductions.[22] Thus, when a taxpayer spends his own money in the pursuit of a business or profit seeking activity, the income tax system generally does not seek to tax him on the income of those funds. This is because – to the extent that the taxpayer incurred costs to generate the revenue – the taxpayer is no better off than he was before.[23] This concept is perhaps best captured in the general rule of section 162(a) which provides:

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.[24]

Therefore, in the eyes of Congress, permitting gamblers to deduct gambling losses is no different than allowing a widget manufacturer to deduct the costs of producing widgets, since both costs are deemed necessary to produce their respective gambling and widget revenues. While some may debate whether this is “fair” tax policy, deductions are a matter of legislative grace, so they are allowed (and disallowed) at Congress’s discretion.

I.R.C. SECTION 165(d)

Gambling losses became deductible following the Revenue Act of 1954, which was the first major tax overhaul to the income tax system since it was created in 1913.[25]  Pursuant to the act, Congress added the first iteration of section 165(d) to the Internal Revenue Code:

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.[26]

Thus, a taxpayer could deduct gambling losses to the extent of his gambling earnings, which would effectively offset some or all of his gambling income.

Historically, the definition of “losses from wagering transactions” in 165(d) was narrowly construed to mean direct gambling losses.[27] For example, if a gambler wagered $10,000 and won $8,000, he could deduct his $2,000 loss under section 165(d). But the gambler was not required to treat all expenses incurred while gambling as gambling losses. Thus, a professional gambler might still be able to deduct the “ordinary and necessary” expenses of his business, such as travel expenses and casino fees, through another provision like section 162.[28]

Section 165(d) remained unchanged for nearly seventy years until the Tax Cuts and Jobs Act (TCJA) of 2017 appended the following language:

For purposes of the preceding sentence, in the case of taxable years beginning after December 31, 2017, and before January 1, 2026, the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.

This provision expanded the definition of “losses from wagering transactions” to include costs incurred in a wagering transaction that might have been deductible under another provision. This effectively disallowed professional gamblers from deducting ordinary and necessary business expenses under section 162 by classifying all such expenses as section 165(d) gambling losses. The “expanded” definition was set to expire at the end of 2025, but the OBBBA removed the sunset provision to make the 2017 amendment permanent.

In addition to making the “expanded” definition permanent, OBBBA revised section 165(d) to limit the deduction to 90% of gambling losses in the taxable year. Effective January 1, 2026, section 165(d) reads:

(1) In general. For purposes of losses from wagering transactions, the amount allowed as a deduction for any taxable year—

(A) shall be equal to 90 percent of the amount of such losses during such taxable year, and

(B) shall be allowed only to the extent of the gains from such transactions during such taxable year.

(2) Special rule. For purposes of paragraph (1), the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter [26 USCS §§ 1 et seq.] incurred in carrying on any wagering transaction.[29]

Lastly, only taxpayers who itemize their deductions are entitled to the section 165(d) gambling loss deduction. This means that the provision is limited to a small number of taxpayers, since only about 14% of Americans are expected to itemize deductions in 2026.[30]

EXAMPLES

The implications of these changes are best understood with a simple hypothetical. Suppose a gambler won $201,000 and lost $200,000. Prior to the change, he would have been able to deduct 100% of his $200,000 losses. Thus, he would have only owed federal income taxes on his $1,000 profit. Under the OBBBA, the same taxpayer can only deduct 90% of his $200,000 losses for a total deduction of $180,000. Thus, he would owe taxes on $21,000 of income, despite only netting a profit of $1,000.

Moreover, suppose a gambler won 201,000 and lost $220,000. Since he would only be able to deduct $198,000 of his losses, his gambling activities would yield $3,000 worth of taxable income despite him losing $19,000 during the year.

Notably, these hypotheticals only consider the potential negative impact on direct gambling losses (i.e. lost wagers). The permanency of the “expanded” definition will cause further damage because, in the case of a professional gambler, his “gambling losses” will also include otherwise deductible ordinary and necessary business expenses.

FINANCIAL CONSEQUENCES

Prior to the OBBBA, these bettors were more willing to incur gambling losses because the losses were ultimately used to offset otherwise taxable gambling income via the section 165(d) deduction. However, the new “phantom income” provision could erase the small profit margins relied upon by high volume bettors and remove the viability of the sports gambling profession.

The margin compression forced on the key 10% of sports bettors could cause them to abandon the sports betting industry altogether or risk being “taxed out of business.”[31] Bettors could instead gamble on prediction markets which are governed by more favorable tax regulations and not subject to the potential “phantom income” taxation of section 165(d).[32] Alternatively, they could forego United States markets altogether and gamble on illegal offshore betting markets.[33] Offshore markets provide numerous distinct advantages over regulated markets, but perhaps the greatest is the ability for taxpayers to (illegally) avoid paying taxes on gambling income.[34] Thus, the more favorable tax outcomes presented by both alternatives make them a real threat to the stability of regulated markets. Concerningly, early data suggests that bettors have already begun migrating to these alternative platforms.[35] This data is evidenced by the recent rise in popularity of the prediction market-based gambling site Kalshi.

If the early trend of bettor migration continues, the economic consequences felt by the commercial gaming industry and gambling revenue states could be drastic. Conservative estimates indicate that the industry could lose over $1.5 billion in gross gaming revenue, but more extreme estimates suggest that this number could exceed $4 billion.[36] This would result in an annual tax loss between $267 and $716 million for the top 10 gambling revenue states.[37] Thus, the OBBBA will likely not only fail to deliver the desired $1.1 billion in tax revenue but unleash devastating unintended consequences on states that rely on the gaming industry for tax revenue, as well American workers within the industry.

RESPONSIBILITY

These potentially catastrophic effects have raised questions about who is responsible for the change and to what extent its potential effects were contemplated. However, neither of the answers to these questions are entirely clear.

The OBBBA originated in the House of Representatives, specifically in the House Ways and Means committee, where it was passed on May 14, 2025.[38] The new 90% provision was not contained in the original bill passed by the House.[39] Chairman of the House Ways and Means Committee, Rep. Jason Smith (R-MO), confirmed this, stating, “[the change] was definitely not something that we did in the House. I don’t understand why the Senate decided to do something like that.”[40]

Subsequently, the bill went to the Senate for review by the Senate Finance Committee. While it passed the Senate on July 1, 2025, the Senate’s version substantially altered the original bill, including the revision to section 165(d). [41] Yet numerous Senators have expressed confusion about the provision’s origins. Sen. Charles E. Grassley (R-IA), a member of the Finance Committee, stated “[i]f you’re asking me how it got in there, no I don’t know.”[42] Similarly, Sen. Ted Cruz (R-TX) said, “[n]one of us knew about it . . . I don’t know of anyone who was aware of the provision at the time it passed.”[43] Another Texas Senator, John Cornyn (R-TX), stated, “[w]hy do so many people care about the gamblers tax? . . . I’m kind of agnostic. I don’t, frankly, understand why it’s such a big deal.”[44]

These statements highlight the lack of deliberation, research, and transparency that went into the new provision. Not a single politician will openly take responsibility or even admit knowledge of its existence prior to its passage. On the contrary, both Sen. Ted Cruz and Rep. Jason Smith have publicly acknowledged that the change was a mistake that should be corrected.[45]

REMEDIES

Reversing the change will likely be difficult because it would require decreasing costs or increasing taxes somewhere else in the budget, as well as overcoming a sharp partisan divide in Congress.

One possible remedy is the Fair Accounting for Income Realized from Betting Earnings Taxation (Fair Bet) Act proposed by Rep. Dina Titus (D-NV). [46] The Fair Bet Act would reinstate taxpayers’ ability to deduct 100% of gambling losses but the bill appears unlikely to succeed[47] because it would require significant bi-partisan support to pass a Republican House, Senate, and Presidency.[48] Moreover, the bill was already rejected once when it was proposed as an amendment to the National Defense Authorization Act (NDAA) on September 9, 2025.[49]

Alternatively, Rep. Andy Barr (R-KY) proposed the Winnings and Gains Expense Restoration (Wager) Act on Jul 25, 2025. In addition, Sen. Catherine Cortez-Masto (D-NV), Sen. Ted Cruz (R-TX), and Sen. Jacky Rosen (D-NV) collectively proposed the Facilitating Useful Loss Limitations to Help Our Unique Service Economy (Full House) Act.[50] These bills would produce effectively the same result as the Fair Bet Act but ultimately might have a better chance to succeed due to greater bi-partisan support.[51] However, all “these proposals have stagnated as Congress prioritizes a host of other legislative priorities,” including remedying the effects of the recent government shutdown.[52]

CONCLUSION

The OBBBA, which became wholly effective January 1, 2026, could have significant negative economic consequences that far exceed the projected $3 billion deficit increase based on the possibility that the gambling loss deduction will cause key bettors to migrate from the sports gambling industry. The failure of a single member of Congress to endorse the new policy serves as a subtle, collective acknowledgement that Congress erred when it departed from nearly seventy years of precedent by changing section 165(d). Accordingly, Congress must immediately restore the 100% deductibility of gambling losses under section 165(d) by passing legislation such as the Fair Bet Act or the Wager Act. Failure to do so could result in the devastation of the United States regulated sports gambling market and erase billions in local, state, and federal tax revenues.

[1] Adam Robinson, The OBBB Gambling Tax Provision: An Existential Threat to Regulated Sports Betting, BETTORS VOICE (Sept. 2025), https://www.bettorsvoice.com/research-and-education.

[2] The One, Big, Beautiful Bill Delivers Biggest Wins for the Working Class, U.S. HOUSE COMM. ON WAYS & MEANS (last visited Jan. 8, 2026), https://waysandmeans.house.gov/theonebigbeautifulbill/fact-sheets/the-one-big-beautiful-bill-delivers-biggest-wins-for-the-working-class/.

[3] Nicholas Brown, Effects of Big, Beautiful Bill on Income Tax Rates, Deductions, N.C. STATE U. (July 6, 2025), https://farmlaw.ces.ncsu.edu/2025/07/effects-of-big-beautiful-bill-on-income-tax-rates-deductions/

[4] Alan Rappeport, Republican Tax Bill Is a Losing Deal for Gamblers, N.Y. TIMES (July 16, 2025), https://www.nytimes.com/2025/07/16/us/politics/republican-tax-bill-gambling-industry.html.

[5] Robinson, supra note 1.

[6] Id.

[7] Id.

[8] Murphy v. NCAA, 584 U.S. 453, 486 (2018).

[9] State of the States 2025, AM. GAMING ASS’N (May 13, 2025), https://www.americangaming.org/resources/state-of-the-states-2025/.

[10] Id.

[11] An unwelcome surprise—Gambling losses under the One Big Beautiful Bill Act, KPMG (2025), https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2025/an-unwelcome-surprise.pdf.

[12] American Attitudes Towards Gaming 2025, AM. GAMING ASS’N (Oct. 30, 2025), https://www.americangaming.org/resources/american-attitudes-towards-gaming/.

[13]  State of the States 2025, supra note 9.

[14] Jordan Anderson, What is the Break Even Win % for Sports Betting?, BETTING PROS (July 31, 2024), https://www.bettingpros.com/articles/what-is-the-break-even-win-for-sports-betting/.

[15] Id.

[16] Robinson, supra note 1.

[17] Id.

[18] Id.

[19] Id.

[20] I.R.C. § 165(d).

[21] Anne Alstott, Core Concepts: Income Taxation in Six Concepts 1 (2024).

[22] Id. at 119.

[23] Id. at 1.

[24] I.R.C. § 162(a).

[25] Internal Revenue Act of 1954, ENCYCLOPEDIA.COM, https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/internal-revenue-act-1954 (last visited Jan. 8, 2026).

[26] I.R.C. § 165(d).

[27] KPMG, supra note 11.

[28] Id.

[29] I.R.C. § 165(d) (emphasis added).

[30]  Alex Muresianu, Sam Cluggish & Rebecca Walker, One Big Beautiful Bill Act Makes the Individual Income Tax More Complex, TAX FOUNDATION (Sept. 9, 2025), https://taxfoundation.org/research/all/federal/obbba-income-tax-complexity-tax-breaks.

[31] Bart Jansen, Gamblers are ‘screaming from rooftops’ over obscure provision in Trump’s big bill, USA TODAY (July 10, 2025), https://www.usatoday.com/story/news/politics/2025/07/09/gamblers-tax-deductions-losses-trump-tax-bill/84518728007/.

[32] Robinson, supra note 1.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Id.

[38] LaHood Applauds House Ways and Means Committee’s One, Big, Beautiful Bill, OFF. OF DARIN LAHOOD (May 14, 2025) https://lahood.house.gov/2025/5/lahood-applauds-house-ways-and-means-committee-s-one-big-beautiful-bill.

[39] Barbara Sprunt & Miles Parks, Making a living as a poker player is hard. The ‘Big Beautiful Bill’ makes it harder, NPR (July 25, 2025), https://www.npr.org/2025/07/25/g-s1-78706/gambling-taxes-trump-congress.

[40] Sahil Kapur, Some Republicans push to undo gambling tax hike they passed in Trump’s megabill, NBC NEWS (July 25, 2025), https://www.nbcnews.com/politics/congress/republicans-gambling-tax-hike-trump-megabill-rcna220852.

[41] Senate Finance Committee Tax Title – Summary and Analysis, BROWNSTEIN (July 2, 2025), https://www.bhfs.com/insight/senate-finance-committee-tax-title-summary-and-analysis/.

[42] Rappeport, supra note 4.

[43] Sprunt & Parks, supra note 9.

[44] Kapur, supra note 40.

[45] See Sprunt & Parks, supra note; Kapur, supra note 40.

[46] Robinson, supra note 1.

[47] Id.

[48] National Thoroughbred Racing Association, Wager Act, a Gambling Losses Bill, Heads to Committee, BLOODHORSE (Oct. 1, 2025), https://www.bloodhorse.com/horse-racing/articles/287613/wager-act-a-gambling-losses-bill-heads-to-committee.

[49] Robinson, supra note 1.

[50] Adam Hoffer, Garrett Watson & Jacob Macumber-Rosin, The One Big Beautiful Bill Act Creates Unequal Tax Treatment for Gambling Losses, TAX FOUNDATION (Aug. 22, 2025), https://taxfoundation.org/blog/gambling-losses-tax-big-beautiful-bill/.

[51] Barr Introduces WAGER Act to Boost Equine Industry and Rural Economies, OFF. OF ANDY BARR (July 25, 2025), https://barr.house.gov/2025/7/barr-introduces-wager-act-to-boost-equine-industry-and-rural-economies.

[52] Ryan Butler, Gambling Tax Loss Restoration Bill Faces Another Roadblock in Government Shutdown, YAHOO! FINANCE (Oct. 2, 2025), https://finance.yahoo.com/news/gambling-tax-loss-restoration-bill-213400492.html.