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Legislation Creates Unequal Tax Treatment for Gambling Losses

By Contributor
Accounting and Tax Planning

Out of Luck

By Adam Hoffer, Garrett Watson,
and Jacob Macumber-Rosin

 

In a surprising tax code alteration that has frustrated Americans who enjoy gambling, a provision in the One Big Beautiful Bill Act (OBBBA) limits gambling losses that can be used to offset gambling winnings to 90% of their value. This provision, which previously allowed for 100% deductibility of losses against winnings, introduces a steep tax penalty for professional gamblers and certain casual bettors.

The OBBBA provision limiting the deduction of gambling losses might cause individuals to owe taxes on imaginary income, incentivizing gamblers succeeding on thin margins to exit the U.S. or participate in illicit markets.

While the Joint Committee on Taxation estimated that the deduction limit would generate $1.1 billion in tax revenue over eight years, behavioral responses and tax avoidance could quickly reverse that effect. If only a fraction of professional gamers take their bets outside of legal U.S. markets, the effect will be a net loss to tax collections and an increase in illegal activity.

“The OBBBA provision limiting the deduction of gambling losses might cause individuals to owe taxes on imaginary income, incentivizing gamblers succeeding on thin margins to exit the U.S. or participate in illicit markets.”

Consider Daniel Negreanu, perhaps the most famous poker player in the world. Thanks to his vlog and public tracking of poker payouts, we can estimate his tax burden under various tax designs. He successfully nets profitable payouts from his poker playing most years, though he notably lost $2.2 million in 2023.

In the 2025 World Series of Poker (WSOP), Negreanu won (cashed) $1,478,240. His buy-ins for the 2025 WSOP totaled $1,297,143, for net winnings of $181,097. Under pre-OBBBA policy, he would pay income tax on that $181,097, and, assuming his income is taxed at 37% (the highest income tax bracket), his income tax liability would be $67,006, resulting in take-home pay of $114,091.

When his post-OBBBA losses are limited to 90%, however, his tax liability jumps to $115,000, and his take-home pay is cut nearly in half to $66,097.

The new limit for loss deductions in the OBBBA would result in any gambler who breaks even now taking a net loss after paying taxes on money they never made. For example, the tax liability for a player who breaks even on $1 million of wagers would increase from $0 to $37,000. A player who nets $50,000 in winnings from $1 million in wagers — a profitable gambling season — would end up owing $55,500 in taxes to the IRS, resulting in negative take-home pay and an effective tax rate of more than 100%. This would create a unique precedent of taxing unrealized income.

Standard accounting practices allow for full deductibility of most business expenses, but it is worth noting that some limitations apply to things like meals and entertainment expenses and excessive corporate officer compensation. These limitations are fundamentally different from the proposed 90% wagering loss limitation, though. Traditional deductibility limits are largely designed to discourage abusive corporate behavior among large companies. In contrast, the new wagering loss cap primarily affects individual taxpayers who are engaged in a legal, heavily regulated activity.

 

Broad Impact

The impact of the new loss deduction limitation will likely be felt by individuals beyond Las Vegas. Seven states (Michigan, Pennsylvania, New Jersey, West Virginia, Delaware, Connecticut, and Rhode Island) have legalized online gambling, while popular land-based commercial or tribal casinos can be found in nearly every state, including Massachusetts. State tax revenues from online gaming, nearly $3 billion in 2024, will also be affected if gamblers change behavior.

Unpacking why this change was made may help explain why legislation to reverse this provision has bipartisan support, including some members of Congress who voted in support of the broader OBBBA.

In the Senate, the Byrd Rule requires that all measures in a reconciliation bill have a significant budgetary impact. In the 2017 Tax Cuts and Jobs Act (TCJA), Congress amended Sec. 165 of the Internal Revenue Code so that professional gamblers could no longer deduct non-wagering business expenses (e.g., hotel rooms, meals, and transportation) from their gambling winnings. This change aligned the tax treatment of professional gamblers with that of casual gamblers.

With that TCJA provision scheduled to expire in 2026, Senate tax writers were forced to make an adjustment to Sec. 165 in the 2025 reconciliation bill to generate a sufficient budgetary impact. Lowering the deductibility threshold to 90% satisfied the Byrd Rule. The original House-passed reconciliation bill, which did not have to comply with the Byrd Rule, did not include this provision.

If the change to gambling deductibility was primarily procedurally driven — and easy to overlook in legislation as substantial as the OBBBA — a reversal of this provision could make for better fiscal policy. In the House, lawmakers are co-sponsoring the bipartisan Fair Accounting for Income Realized from Betting Earnings Taxation (FAIR BET) Act, introduced by U.S. Rep. Dina Titus and co-sponsored by U.S. Rep. Guy Reschenthaler. U.S. Rep. Andy Barr separately introduced the Winnings and Gains Expense Restoration (WAGER) Act.

In the other chamber, U.S. Sens. Catherine Cortez-Masto, Ted Cruz, and Jacky Rosen introduced the Facilitating Useful Loss Limitations to Help Our Unique Service Economy (FULL HOUSE) Act.

When Congress back in session and Americans eagerly placing bets on their favorite football teams, congressional efforts to restore full gambling deductions will likely be an early priority. And rightfully so: full deductibility of gambling losses is a sound tax policy that would make the treatment of gambling winnings and expenses more neutral.

 

 

 

What the Tax Code Says About Your Losses

By Contributor
Banking and Financial Services

Scammed in a Crypto Scheme?

By Sean Wandrei

 

Have you received a text lately from strangers who think they know you or want to be your friend? I have been receiving those for a while now. I thought I was popular, and these people wanted to be my friend. Maybe a few of them want to be, but many of these texts are from people looking to find their next target.

‘Pig butchering’ has become increasingly prevalent in recent years. That’s the term for a scam that deceives individuals into giving up money under false pretenses. The scammer fattens the victim, the ‘pig,’ by slowly guiding them into making increasingly large investments before disappearing with the victim’s money. These schemes can be presented as an opportunity to help someone out, find love, or take advantage of an incredible investment opportunity. With the boom in the cryptocurrency market, many of these schemes involve investments in crypto.

The scammer gradually builds trust with the victim over time. Once the trust is built, the scammer tells the victim about a great investment opportunity where they made a lot of money from investments, or how they need money for other reasons. The scammer may show the victim evidence of investment gains.

Sean Wandrei

Sean Wandrei

“The key difference between these two situations is the victim’s intent — if the individual engaged in the transaction with the expectations of earning income or capital gains, then the loss suffered can be treated as an investment loss rather than a personal expense.”

Eventually, the victim is guided to a website or app to invest in crypto. The app could look like a platform such as Coinbase. The platform is set up by the scammer, and eventually the victim’s crypto is transferred off the platform and gone forever. Or the crypto never existed — the money the victim sent simply went into the scammer’s account.

 

Deducting Losses from the Scam

Internal Revenue Code (IRC) Section 165 provides the taxpayer with an opportunity to deduct losses incurred from various transactions, subject to specific rules and limitations. The deductibility of losses suffered from fraudulent schemes depends significantly on the nature of the transaction and the taxpayer’s motive at the time of the transaction. Two distinct scenarios arise in the context of pig-butchering schemes: losses incurred from transactions driven by personal motives (helping someone out or looking for love) and losses incurred from a transaction entered into for a profit (investing in crypto).

When a loss is incurred because an individual gives money to help someone out or in the pursuit of a romantic relationship, the transaction is typically characterized as a personal expense. These losses could be seen as a theft loss arising from non-business, personal transactions. Under IRC 165(c)(3), theft losses generally are not deductible due to the Tax Cuts and Jobs Act, which limited the deductibility of personal casualty and theft losses to those incurred in a federally declared disaster area.

In this context, the taxpayer’s motive was not profit-driven, but rather a personal connection or desire to help, which means this loss would be a theft loss and not deductible. The rationale is that the tax code does not provide relief for personal financial mistakes or misguided generosity when they lead to fraud.

Contrast this with the scenario where the pig-butchering scheme is one where the victim believes that they are investing in an asset such as crypto. In this case, the victim’s primary motive is to earn a profit by investing in crypto. Under IRC 165(c)(2), losses incurred from transactions entered into for profit, which are not connected to a trade or business, are deductible.

The key difference between these two situations is the victim’s intent — if the individual engaged in the transaction with the expectations of earning income or capital gains, then the loss suffered can be treated as an investment loss rather than a personal expense. The IRS treats crypto as property, so a case can be made that the victim was investing in property with a profit motive of investment income.

If the victim is going to deduct the loss under IRC 165(c)(2), he or she must adhere to substantiation requirements. Detailed records of the transaction, evidence of the profit motive, and clear documentation of the loss are necessary to support any deduction claimed on the tax return.

For example, consider a taxpayer who entered into a crypto scheme that ultimately turns out to be a pig-butchering scheme. If the taxpayer entered the transaction with a clear profit motive, expecting to realize gains from a booming cryptocurrency market, the loss from the scheme can be characterized as an investment loss. This categorization aligns with the general principle that taxpayers are allowed to deduct losses on investments when those losses result from a transaction entered into for profit.

 

Bottom Line

There is little case law on this subject, as it is relatively new. To deduct these losses, a taxpayer must maintain clear documentation of all interactions with the scammer, deposit dates, and evidence of profit motive.

Falling victim to these scams can have major financial consequences for the victim and his or her family. The monetary loss could be alleviated by deducting the loss and reducing the taxpayer’s tax liability. As mentioned above, there is limited tax precedent on this subject, so taxpayers should contact a tax professional to ensure the claim is legally sound and in full compliance with current laws.

 

Sean Wandrei, CPA, MST is a senior lecturer in the Department of Accounting at Isenberg School of Management at UMass Amherst.