Are Gambling Losses Tax Deductible?

Gambling losses are deductible (with strings attached)

According to IRS Topic No. 419, gambling losses are deductible, but only up to the amount of your gambling winnings. You cannot use gambling losses to offset your salary, business income, or any other type of income. That means if you won $8,000 and lost $12,000 this year, you can only deduct $8,000 in losses, not the full $12,000. That extra $4,000 in losses simply disappears. You can't carry it forward to next year or use it anywhere else on your return.

The 90% limit

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law by President Trump. Buried within this legislation is a provision that impacts gamblers: beginning January 1, 2026, you can only deduct up to 90% of your qualified gambling losses, capped at the amount of your winnings. So the new formula works like this:

Deductible Loss = the lesser of (your total losses × 90%) OR (your winnings × 90%)

Under the new law, even if you break even or lose money gambling, you may still owe taxes on "phantom income" (money you never actually kept). Even the Chairman of the House Ways and Means Committee called the provision a "mistake".

You can only deduct losses if you itemize

You can only claim gambling losses as an itemized deduction on Schedule A. If you take the standard deduction, which most Americans do, you can't deduct your gambling losses, even if you have documentation.

That means unless your total itemized deductions (mortgage interest, state taxes, charitable contributions, and gambling losses) exceed those thresholds, you're better off taking the standard deduction, and your gambling losses won't reduce your tax bill at all.

So if you think you can just gamble and write off the loss - it's not that simple!

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Keep a gambling log

Casino win/loss statements are helpful but are generally not sufficient on their own to survive an audit. Whether you win or lose, the IRS requires you to maintain detailed records of your gambling activity. Items you should be tracking include:

• Date and type of each wagering activity
• Name and address of the gambling establishment
• Amount won or lost per session
• Names of other people present, if applicable

Supporting documents to retain:

• W-2G forms
• Betting app transaction histories (FanDuel, Kalshi, DraftKings, etc.)
• ATM receipts from casinos
• Casino credit and check-cashing records
• Poker tournament receipts and buy-in documentation

Understanding your W-2G

Casinos, sportsbooks, and other gaming operators are required to report certain winnings to the IRS using Form W-2G. Starting in 2026, under the OBBBA, the reporting threshold has increased from $600 to $2,000 for most types of gambling.

Keeper pro tip: Just because you don't receive a W-2G doesn't mean you can skip reporting. The IRS requires you to report all gambling winnings regardless of whether you got a form. Federal tax withholding of 24% may be applied automatically when net winnings exceed $5,000 with odds of 300:1 or more. If you've had taxes withheld, you'll need to file to determine whether you're owed a refund or owe additional tax.

How are prediction markets like Kalshi and Polymarket taxed?

Sports betting apps like FanDuel and DraftKings follow fairly well-established gambling tax rules. But a growing category of platforms (prediction markets like Kalshi, Polymarket, and Robinhood's event contracts), are sitting in a legal and tax no-man's-land, and millions of users don't realize it.

Are prediction markets bets or financial contracts?

Prediction markets let you trade on the outcome of real-world events: elections, interest rate decisions, sports championships, even geopolitical events. Financially, the experience feels a lot like gambling, but legally and regulatorily, the platforms themselves argue they're something entirely different.

Kalshi is regulated by the Commodity Futures Trading Commission (CFTC) as a registered Designated Contract Market, the same category as futures exchanges. The platform argues this makes it a financial instrument provider, not a gambling operator.

Polymarket operates differently: it's a decentralized, offshore platform built on the Polygon blockchain where positions are denominated in USDC, a USD-pegged stablecoin.

This distinction matters a great deal for taxes. As of early 2026, the IRS has issued zero formal guidance on how prediction market contracts should be classified or reported, so you're basically in uncharted territory.

Three possible tax treatments to know about

1. Ordinary Income

In this case, you'd report all net gains as "Other Income" on Schedule 1, Line 8z. Losses are not separately deductible. They offset your gains before you report them. This is the approach most CPAs recommend for the average Kalshi or Polymarket trader right now, because it's least likely to trigger an IRS challenge. However, there's an unfortunate downside: you pay ordinary income tax rates (up to 37%) on your net profit.

2. Gambling Income/Loss Treatment

With this method, you'd report gross wins as income, deduct gross losses on Schedule A (if you itemize), which is subject to the winnings cap and the new 90% limit starting in 2026. This is defensible if your activity closely resembles wagering. However, it introduces the phantom income problem: you could owe taxes on a break-even year, and you lose the ability to net wins and losses directly.

3. Section 1256 Contracts

‍Kalshi's CFTC registration opens the theoretical possibility that its event contracts qualify as Section 1256 contracts, which is a category of financial instruments taxed under a favorable 60/40 split, where 60% of gains are treated as long-term capital gains and 40% as short-term, regardless of how long you held the position. This could save thousands. However, this classification is legally untested for event contracts, and the IRS has historically taken a narrow view of what qualifies.

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State taxes

Beyond federal taxes, nine states, including New Jersey, New York, Nevada, Massachusetts, and Illinois, have issued cease-and-desist orders to Kalshi over whether its event contracts violate state gambling laws. Federal courts have issued conflicting rulings. If you're in one of these states, your state tax treatment of prediction market income is especially unsettled.

Keeper pro tip: If you've traded on Kalshi or Polymarket, report your gains honestly. For most people, treating net profits as ordinary income and documenting everything carefully is the safest path until the IRS issues clear guidance. If you had significant volume (say, over $10,000 in activity), consult a Keeper CPA before you file.

Are you a casual or regular gambler?

Most people who gamble are considered casual (or recreational) gamblers in the eyes of the IRS. But if gambling is genuinely your primary income source and you approach it with the regularity and profit intent of a business, you may qualify as a professional gambler. Tax treatments then differ.

Casual gamblers:

• Report winnings on Schedule 1, Form 1040
• Deduct losses on Schedule A (only if itemizing, capped at winnings, or 90% of winnings starting 2026)
• Cannot deduct travel, meals, or other gambling-related expenses separately

Professional gamblers:

• Report winnings and deduct losses and business expenses on Schedule C
• Can deduct ordinary and necessary business expenses (travel to tournaments, entry fees, research tools) beyond just wagering losses
• Pay self-employment tax (15.3%) on net gambling income
• Must make quarterly estimated tax payments

What is phantom income and how is it taxed?

Let's start with an example. Say you go to the casino 10 times and you win $2,000 on five visits and lose $2,200 on the other five. Net result: you're down $200 for the year.

• You must report $10,000 in total winnings as taxable income
• You can deduct up to 90% of $10,000 in losses = $9,000 (as long as you itemize)
• Result: $1,000 in taxable gambling income (even though you lost money overall)

That's phantom income. You can owe taxes on gambling income even when you've lost money overall.

Gambling tax checklist

• Start a gambling log.
• Don't assume you'll itemize. Run the numbers yourself or work with a CPA to help you determine if itemizing your deductions will exceed the standard deduction.
• Download your app statements from your gambling platform of choice.
• Plan for the 90% cap if you gamble regularly.
• Check your state's rules separately.
• Consider quarterly estimated payments if you have significant winnings.

FAQs

Do Kalshi or Polymarket losses count as gambling losses?

‍Possibly, but it depends on how you classify the income in the first place. If you report prediction market gains as gambling income, your losses follow gambling loss rules (capped at winnings, deductible only if you itemize, and subject to the 90% limit starting in 2026). If you report it as ordinary income, you can net wins and losses directly without itemizing, which is often simpler and more favorable for casual traders.

Can I deduct lottery ticket losses?

‍Yes, lottery tickets count as gambling, and the cost of losing tickets is deductible as a gambling loss, but only up to the amount of any gambling winnings you report, and only if you itemize.

What if I use an app like FanDuel or DraftKings?

‍The same rules apply. Sportsbooks will issue W-2G forms when applicable thresholds are met (now $2,000 starting in 2026). Your net transaction history from the app can serve as supporting documentation for your gambling log.

Can I carry forward unused gambling losses?

‍No. Gambling losses that exceed your winnings in a given year cannot be carried forward. They are lost permanently.

Disclaimer: This article is for informational purposes and reflects federal tax law as of early 2026. Tax laws are subject to change. Consult a qualified CPA or tax advisor for guidance specific to your situation.