A recent Kiplinger article notes that the IRS is targeting gambling winnings with new tax rules starting in 2026—but the policy’s future may already be uncertain.
Beginning next year, gambling winnings will be subject to stricter federal taxation under the 2025 GOP/Trump tax and spending legislation. Lottery prizes, slot machine jackpots, and sports betting proceeds could be subject to double taxation under a critical change to the rules on deducting losses.
The Current vs. New Rules
Under previous IRS regulations, taxpayers could deduct gambling losses up to the full amount of their winnings, effectively offsetting gains dollar-for-dollar. Starting in 2026, loss deductions will be capped at 90% of winnings, meaning 10% of all gambling income becomes taxable even when offset by equivalent losses.
Potential Policy Reversal
Just weeks before the provision takes effect, President Donald Trump reportedly indicated he would “think about” eliminating income taxes on gambling winnings. This statement introduces significant uncertainty about whether this tax increase will actually be implemented or remain in place long-term.
Trump’s Gambling Tax Reversal: Is the 2026 Change Already Doomed?
In early December, President Trump told reporters he would “think about” eliminating federal taxes on gambling winnings—a statement that contradicts his July tax legislation, which takes effect January 1, 2026.
The Controversial Change
The new GOP law limits gambling loss deductions to 90% of winnings (previously 100%), creating what the American Gaming Association calls “phantom income” taxation.
Example: Win $100 and spend $100 on lottery tickets? You’ll owe $10 in federal taxes despite breaking even.
The AGA argues this provision “uniquely penalizes” gambling by forcing taxpayers to pay taxes on losses—treatment no other business or investment activity receives. Trump’s recent comments suggest this widely criticized policy may not survive long.
New Gambling Tax Rule to Generate $1.1B in “Phantom Income”
Looking ahead to 2026, a new IRS rule is set to create “phantom income” for many Americans. Historically, gamblers could deduct 100% of their losses (up to the amount of their winnings), but new legislation reduces that deduction to just 90%.
This means a taxpayer who breaks even for the year will still be taxed on 10% of their winnings—income they never actually “kept.” According to the Joint Committee on Taxation, this change is projected to raise $1.1 billion over ten years. Although professional gamblers are the primary target, the rule applies to anyone who itemizes their gambling losses on their tax return.
IRS Audit Triggers and Gambling Taxes
In recent years, the IRS has increased its scrutiny of gambling income. During the Biden administration, enforcement efforts expanded to focus on taxpayers with annual income of $100,000 or more, with particular attention given to sports betting and online gambling activities.
While overall audit rates—especially for high-income taxpayers—have declined under the Trump administration, the IRS continues to treat nearly all forms of recreational and professional gambling winnings as fully taxable income.
As a result, the following types of gambling income may draw IRS attention:
- Lottery and raffle winnings, including state lotteries, scratch-off tickets, and charitable drawings
- Sports betting, whether online, in person, or informal office pools (e.g., NFL playoffs or Super Bowl pools)
- Online gambling, including casino games, poker, and fantasy sports
- Horse racing, dog racing, and other wagering events
- Sweepstakes, contests, and game show prizes
Regardless of whether an individual is a casual or professional gambler, all gambling winnings are subject to federal income tax. Gambling losses may be deducted on Schedule A of Form 1040, up to 90% of gambling winnings for tax year 2026 (and 100% for tax year 2025).
To support any claimed loss deductions, taxpayers must maintain thorough documentation, including wagering tickets, receipts, statements, and other relevant records.
