OB3 Act: Gamblers, Beware
Casual and professional gamblers may be adversely affected by a new provision
The House of Representatives passed the One Big Beautiful Bill Act on July 3, 2025, and sent it to President Trump for signature. This is one in a series of articles on tax provisions in the One Big Beautiful Bill Act.
I am doing a two-hour webinar for Compass Tax Educators on the provisions affecting tax year 2025 (there are many!) on July 11, 2025, at 2:00 pm ET / 11:00 am PT.
The One Big Beautiful Bill Act (OB3 Act) includes two provisions affecting gamblers in §70114 of the law. One is a permanent extension of a Tax Cuts and Jobs Act (TCJA) provision, and the other mysteriously appeared in the Senate version of the bill.
Wagering Losses Defined
The OB3 Act makes permanent a TCJA provision requiring wagering losses to include any otherwise allowable deductions incurred in carrying on any wagering transaction.
This provision targets professional gamblers. Their §162 ordinary and necessary business expenses are treated as wagering losses and can only be deducted to the extent of wagering gains. This negates the Mayo Tax Court case, 136 T.C. 81 (2011).
New Limitation on Wagering Losses
The OB3 Act reworks the wagering loss limitation rule starting in tax year 2026. The wagering loss deduction allowed during the tax year is:
90% of the wagering losses during the tax year, and
Allowed only to the extent of wagering gains during the tax year.
There are questions about the order in which these limitations should be applied. In my opinion, the statutory language is clear in that the 90% limitation is applied first, followed by the wagering gains limitation. If Congress intended for losses only to be allowed to the extent of 90% of wagering gains, it could have simply added “90% of” to the existing language, rather than inserting a whole new clause.
As a reminder, wagering losses were already disfavored before these changes, as wagering losses are an itemized deduction on Schedule A (not reducing adjusted gross income (AGI)), while wagering gains are included in AGI.
The House Always Wins
Assuming a taxpayer can get a full tax benefit from wagering losses as an itemized deduction, this provision will create phantom taxable income for some casual and professional gamblers, but not all.
Most people have net wagering losses for the tax year. Generally, if an individual’s wagering losses (including business expenses for a professional gambler) exceed their wagering gains, the impact is minimal to zero from this new limitation.
However, if an individual’s wagering gains equal or exceed their wagering losses (including business expenses for a professional gambler), there is a negative impact. Professional gamblers are hit the hardest since their §162 ordinary and necessary business expenses are treated as wagering losses; they lose 10% of their normally deductible business expenses simply because of their profession.
Casual Gambler Examples
In 2026, Winning Wanda had a good gambling year. She had $32,000 in wagering gains and $20,000 in wagering losses from gambling sessions. Wanda includes $32,000 in gross income and can deduct only $18,000 of losses on Schedule A (90% of $20,000; the wagering gain limitation is not applicable).
In 2026, Loser Larry had a bad gambling year. He had $20,000 in wagering gains and $32,000 in wagering losses from gambling sessions. Larry includes $20,000 in gross income and can deduct $20,000 of losses on Schedule A (90% of $32,000 is $28,800; the losses are limited further to $20,000 due to the wagering gain limitation).
Professional Gambler Examples
In 2026, Lucky Linda had $3 million in wagering gains and $2.4 million in wagering losses (including §162 business expenses) from professional gambling sessions. Linda reports her professional gambling activity on Schedule C. Linda can only deduct $2.16 million in losses on Schedule C, increasing her Schedule C net income from $600,000 to $840,000 — a bad outcome with significant phantom taxable income.
In 2026, Mediocre Michael had $200,000 in wagering gains and $230,000 in wagering losses (including §162 business expenses) from professional gambling sessions. Michael reports his professional gambling activity on Schedule C. Michael deducts $200,000 on his Schedule C, but this is not a change from current law (90% of $230,000 is $207,000, further limited to the $200,000 of wagering gains).