If you watched the Super Bowl, you may have seen a sports wagering advertisement. Widespread legalization of sports wagering began on May 14, 2018 when the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act. As of 2025, 39 states, including Washington, D.C., have some form of legalized sports wagering, with more states coming by the year. Internal Revenue Code Section 61(a) states gross income means “all income from whatever source derived.” By that definition, winnings from wagering are included in taxable income. On the flip side, §165(d) governs the deductibility of wagering losses. Prior to the One Big Beautiful Bill Act (OB3), taxpayers were able to offset 100% of their wagering winnings with 100% of their wagering losses. Beginning in 2026, the OB3 now only allows both professional and recreational gamblers to deduct 90% of their wagering losses, and still only to the extent of their wagering winnings.
Insight from Forvis Mazars: Regardless of Form W-2G being issued reporting wagering winnings to a taxpayer, all winnings are includable in taxable income whether reported on the form or not.
Clarifying Examples
Beginning with the 2026 tax year, the federal tax treatment for deducting wagering losses changed in a drastic way. Now, only 90% of losses are deductible despite all wagering winnings being includable in taxable income under §61. Note that even if wagering losses do not exceed wagering winnings, the 90% cap still applies. This proves most detrimental to a recreational or professional gambler who is “breakeven” as seen in the example below. It is also important to note that both before and after the OB3, wagering losses are deducted as an itemized deduction, meaning this is a “below-the-line” deduction after federal adjusted gross income (AGI) is computed. Note that taxpayers who otherwise would not be itemizing would need to forgo the standard deduction to offset any wagering winnings with wagering losses. In 2026, the standard deduction is $32,200 for married filing jointly taxpayers. Further, OB3 amended §68 to limit the benefit from itemized deductions for those in the top 37% tax bracket. For taxpayers in the top bracket, their wagering deduction may be even further limited for tax years beginning in 2026.
Example:
In 2026, a taxpayer engages in sports wagering and has the following annual results:
- Gross wagering winnings: $100,000
- Gross wagering losses: $100,000
Under prior law, the taxpayer could deduct the full $100,000, resulting in zero net wagering income. Under the 2026 rule, the taxpayer’s allowable losses are limited to 90%, resulting in a net $10,000 of taxable wagering income even though the taxpayer broke even. Note there would be a further limitation if the taxpayer were in the top tax bracket due to revised §68 mentioned previously.
Insight from Forvis Mazars: As noted, wagering losses are an itemized deduction. Therefore, taxpayers should be prudent during state compliance to ensure their respective state allows for a deduction for wagering losses whether that is included in a state-specific itemized deduction or a state modification for those states that start with your federal AGI.
Conclusion
The OB3’s modification to §165(d) will have significant impacts on the taxation of wagering activities in 2026 by imposing a 90% cap on deductible wagering losses. This cap will increase the amount of taxable income that breakeven and profitable gamblers will have in 2026. Taxpayers should also note that as of now there is currently no formal IRS guidance addressing the tax treatment of prediction market platforms, but taxpayers and tax practitioners hope to see guidance in the near future.
How Forvis Mazars Can Help
If you have any questions or need any assistance, please reach out to a professional at Forvis Mazars.