Tax Center
The OBBBA 90% Gambling-Loss Limit: What the New §165(d) Rule Means for Bettors
By Owen Monagan ·
Starting with tax year 2026, the One Big Beautiful Bill Act (OBBBA) limits the deduction for gambling losses to 90% of those losses (still capped at your winnings), changing IRC §165(d). The result: the non-deductible 10% of losses is taxed as income, so a break-even bettor can owe tax on money they never actually kept. It is information, not tax advice; how prediction-market contracts fit this rule is unsettled, so confirm your situation with a professional.
This guide explains what the rule does, who it hurts, exactly when it starts, where it stands in Congress today, and the open question that matters most to prediction-market traders.
What did OBBBA change about gambling losses?
For decades, IRC §165(d) let you deduct gambling losses up to the amount of your gambling winnings — dollar for dollar, 100%. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, amended §165(d) to cap that deduction at 90% of losses, still limited to the extent of winnings.
So two things now bind your deduction:
- The 90% haircut — you can deduct at most 90% of what you lost.
- The winnings cap — that deduction still cannot exceed your total winnings (this part is old).
The Joint Committee on Taxation estimates the change raises roughly $1.1 billion over ten years (Tax Foundation). It applies to both amateur and professional gamblers, across casino games, sports betting, poker, the lottery, and horse racing.
When does the 90% limit take effect?
It is effective for tax years beginning after December 31, 2025 — that is, the 2026 tax year, which you file in early 2027. Your 2025 return is unaffected: the old 100% rule still applies to losses incurred in 2025.
In plain terms: nothing changes on the return you file this spring. The first returns that feel the 90% limit are the ones prepared in early 2027.
Why is this called "phantom income"?
Because the 10% of losses you can no longer deduct gets taxed as if it were profit you kept — even when you broke even or lost money. A high-volume, low-margin bettor can post a net loss for the year and still owe federal tax. Commentators have called this taxing "phantom" income — income that exists only on paper.
Here is the same set of trades under the old rule and the new one — a bettor who wins $100,000 and loses $100,000, a true break-even year:
| Line item | Old rule (through 2025) | New rule (2026 onward) |
|---|---|---|
| Gambling winnings | $100,000 | $100,000 |
| Gambling losses incurred | $100,000 | $100,000 |
| Deductible losses | $100,000 (100%) | $90,000 (90%) |
| Taxable "phantom" income | $0 | $10,000 |
| Federal tax owed (24% bracket, approx.) | $0 | ≈ $2,400 |
| Federal tax owed (37% bracket, approx.) | $0 | ≈ $3,700 |
Same trades, same $0 of real profit — but the new rule manufactures $10,000 of taxable income out of a break-even year. The effect scales with volume: the more you wager, the larger the non-deductible 10% sliver becomes. (Tax rates above are illustrative marginal-bracket estimates, not a calculation of your liability.)
Who does the 90% limit actually hurt?
The people it bites hardest are high-volume, thin-margin players, not casual bettors with a single big win:
- Break-even and slightly-losing bettors — they had no profit to tax, and now they do.
- Professional and high-frequency gamblers — large gross winnings and losses mean a large non-deductible slice. One analysis of a pro poker player's results showed the rule could nearly double their tax bill on the same net earnings (Tax Foundation).
- Anyone who itemizes wagering losses — gambling losses are an itemized deduction, so the haircut compounds the existing requirement to itemize to use them at all.
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Do prediction-market contracts fall under the 90% rule?
This is an unsettled question — and it is the one that matters most for Kalshi and Polymarket traders. The §165(d) limit applies to "losses from wagering transactions." Whether a prediction-market event contract is a "wagering transaction" at all is not definitively resolved.
Kalshi operates as an exchange designated by the Commodity Futures Trading Commission (CFTC). Because of that, some traders and commentators argue its contracts should be treated as regulated derivatives rather than as gambling — potentially as Section 1256 contracts. That distinction is significant here: §1256 contracts are taxed under their own regime and are not subject to the §165(d) gambling-loss limitation at all. Under a §1256 framework, losses generally offset capital gains (and a residual amount of ordinary income), rather than being haircut to 90% of their value.
Two honest caveats:
- We do not assert that §1256 applies to your trades. The IRS and the courts have not definitively settled how retail prediction-market event contracts are characterized. It is the most-discussed possibility, not a confirmed answer.
- The opposite outcome is possible too. A regulator or court could conclude some event contracts are wagering transactions, in which case the new 90% limit would apply. Different venues, products, and fact patterns could be treated differently.
The practical takeaway is not "prediction markets beat the rule." It is that the characterization is genuinely open, the stakes of that characterization just went up, and it is a question to settle with a tax professional — not an assumption to file on.
| Possible treatment | Subject to the new 90% §165(d) limit? | How losses can be used |
|---|---|---|
| Gambling / wagering transaction | Yes — losses deductible up to only 90% of losses, and only if you itemize | Capped at 90% of losses (and still no more than winnings); the non-deductible 10% of losses becomes phantom income |
| Section 1256 contracts (regulated derivatives) | No — §1256 has its own regime, outside §165(d) | Offset capital gains; a residual loss can offset up to $3,000 of ordinary income, remainder carried forward |
| Ordinary capital gain/loss | No — capital-loss rules govern, not §165(d) | Offset capital gains, then up to $3,000 of ordinary income per year, remainder carried forward |
Is the 90% rule going to be repealed?
Not so far. The change drew bipartisan pushback almost immediately. The FAIR BET Act (Fair Accounting for Income Realized from Betting Earnings Taxation Act), introduced to restore the full 100% deduction, has stalled in Congress as of mid-2026: it was blocked from a House floor vote, and an attempt to attach the fix to a must-pass defense bill failed (Gambling News). Key Senate Finance Committee members have signaled little appetite to revisit it (Kiplinger).
So as you plan for 2026, the safe assumption is that the 90% limit is the law for the year. If a repeal does pass later, it could change the math — but you should not count on it. Watch the status, and keep records either way.
What should prediction-market traders do now?
- Keep complete, reconciled records. Trade dates, contracts, entry and exit prices, fees, and net proceeds — per venue, per year. Whichever characterization ultimately applies, you can only claim what you can substantiate.
- Don't assume a treatment. The §1256-vs-wagering question is unsettled; the right answer depends on your facts and your venue. Decide it with a tax professional, not a forum post.
- Mind the itemize requirement. If wagering treatment applies, losses are an itemized deduction — the 90% haircut is on top of that.
- Track the legislation. The 90% limit is in force for 2026; a repeal is possible but not guaranteed.
For the bigger picture, see the Prediction Market Tax Center and our related guide on whether Kalshi winnings are taxable. If §1256 treatment is in play for your contracts, the relevant IRS form is Form 6781.
The bottom line
Starting with tax year 2026, the One Big Beautiful Bill Act (OBBBA) caps the gambling-loss deduction at 90% of losses under IRC §165(d), and a break-even bettor can owe tax on phantom income they never kept. Whether prediction-market event contracts are caught by this rule — or instead fall under a derivatives regime like Section 1256 that sits outside §165(d) — is an unsettled question, not a settled escape hatch. Keep complete records, watch whether Congress repeals the limit, and talk to a tax professional about which treatment fits your situation before you file.