The 2026 Gambling Loss 90% Limit: What It Means for Prediction-Market Traders

Starting with tax year 2026, the federal deduction for gambling losses is capped at 90 percent of your losses, and it still can't exceed your gambling winnings. That means a gambler who breaks even for the year can owe tax on 10% of their losses, sometimes called "phantom" gambling income. If you report prediction-market results as gambling, this rule decides how much of your losing markets you can actually deduct.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed, and gambling is only one of several possible treatments. This article explains the 90% rule and its sources; a tax professional can tell you which position fits your situation.

What changed: the statute

The change comes from the One Big Beautiful Bill Act (Pub. L. 119-21, signed July 4, 2025), section 70114, which rewrote IRC §165(d). The new text says the deduction for losses from wagering transactions:

• "shall be equal to 90 percent of the amount of such losses during such taxable year, and"
• "shall be allowed only to the extent of the gains from such transactions during such taxable year."

Two more details matter:

1. Losses include expenses. Section 165(d)(2) defines "losses from wagering transactions" to include any deduction "otherwise allowable ... incurred in carrying on any wagering transaction." Travel, data subscriptions and similar costs of a gambling activity are pooled with losses and also capped. The Tax Cuts and Jobs Act had added this rule only for 2018 through 2025; the 2025 law makes it permanent.
2. Effective date. The amendment applies to "taxable years beginning after December 31, 2025." For most individuals, that is the 2026 return you file in 2027. Your 2025 return is still under the old 100% rule.

Excess losses still can't be carried forward. Whatever isn't deductible this year is gone.

Old rule vs new rule

Sources: IRC §165(d), IRS Topic 419, Gambling income and losses, About Schedule A.

Example 1: break even, still owe tax

You win $75,000 and lose $75,000 during 2026. Economically, you made nothing.

• Gambling winnings reported: $75,000
• Losses: $75,000 × 90% = $67,500 deductible (below the $75,000 winnings cap)
• Net gambling income that remains taxable: $75,000 − $67,500 = $7,500

At an assumed 24% marginal rate, that is about $1,800 of federal tax on zero profit. Under the 2025 rule, the same year would have netted to $0 (if you itemized).

Example 2: the standard deduction trap

The 90% cap stacks on top of an older problem: gambling losses are an itemized deduction. If your itemized deductions don't beat the standard deduction, the losses do nothing at all.

For 2026 the standard deduction is $16,100 single, $32,200 married filing jointly and $24,150 head of household (IRS, Rev. Proc. 2025-32 release).

Assume a single filer with $4,000 of other itemized deductions (state tax, charity):

A $2,000 profit raised taxable income by $15,900. Gross winnings also raise adjusted gross income (AGI), which can affect AGI-linked items such as credits and some phase-outs. This is the gap between "net profit" and "gambling income" that surprises most traders.

Example 3: a prediction-market year treated as gambling

Say a trader closed 200 markets on Kalshi and Polymarket in 2026. Winning markets total +$48,000, losing markets total −$45,000, so the net is +$3,000. Assume a 24% ordinary rate, itemized deductions that already exceed the standard deduction, and all positions held under a year.

If the trader didn't itemize, the gambling row becomes $48,000 of taxable winnings with no offset, about $11,520. That spread is why the classification question matters so much. We cover the other columns in gambling vs capital gains for event contracts and Section 1256 and prediction markets.

What counts as a "win" and a "loss"? The session question

The 90% cap applies to losses, so how you group wagers changes the result. The IRS has proposed a session-based safe harbor for slot machines (Notice 2015-21), and the Tax Court has accepted session netting for some casual gamblers. Nobody has said what a "session" is for an event contract.

Reasonable groupings a professional might consider:

• Per trade: every closing fill is a separate win or loss. This maximizes gross winnings and gross losses, and the 10% haircut bites hardest.
• Per market: net all fills in one market (for example, one Kalshi ticker or one Polymarket condition). OddsFile's gambling estimate uses this grouping and labels it.
• Per day or per venue: more netting, smaller gross figures, but less obvious support.

Fewer, larger "sessions" mean smaller gross losses and a smaller haircut. Whichever grouping is used should be applied consistently and documented. There's no authority specific to prediction markets, so this is a judgment call for you and your preparer.

Does the 90% rule even apply to prediction markets?

Only if your prediction-market results are treated as wagering. The IRS has not said whether event contracts are wagers, capital assets, Section 1256 contracts or something else. See are prediction market winnings taxable? for the full picture. Practitioners currently use several positions:

• Gambling: simplest analogy for sports and election contracts. The 90% rule now makes it the costliest option for active traders with large gross volume.
• Capital asset (Form 8949): losses net against gains in full; a net loss deducts up to $3,000 a year with the rest carried forward. No 90% haircut.
• Other income: net profit on Schedule 1 line 8z; net losses usually not deductible.
• Section 1256 (Form 6781): 60/40 rates, but widely considered aggressive for event contracts.

Some advisers note that sports contracts look more like wagering and economic-indicator or crypto-price contracts look more like financial instruments, but no rule draws that line. Court cases between Kalshi and state gambling regulators (Third Circuit in April 2026, Ninth Circuit in August 2026) are about state gambling law and federal preemption, not federal income tax.

Is Congress going to reverse it?

Possibly, but nothing has passed as of October 22, 2026:

• The FAIR BET Act (H.R. 4304 in the House, S. 2230 in the Senate) would strike "90 percent" and restore the full deduction.
• H.R. 10357, the Digital Asset Tax Certainty Act, includes a provision restoring the 100% deduction. The House Ways and Means Committee approved it 38–5 on September 16, 2026. It still needs a full House vote, Senate passage and a signature.
• Treasury proposed regulations in May 2026 to align the existing regulations, which still describe the old 100% rule, with the statute.

If a restoration passes and applies to 2026, estimates built on the 90% rule will need to be redone. OddsFile recalculates the gambling column when the rule changes, and we will update this page.

Reporting thresholds also changed

For payments made in 2026, the Form W-2G threshold for most gambling winnings rises to $2,000 (from $600, and from $1,200 for slots and bingo), and the general Form 1099-MISC threshold also rises to $2,000. Both are indexed for inflation after 2026. A higher reporting threshold changes what you receive, not what is taxable: all gambling winnings are reportable income, with or without a form (IRS Topic 419).

Prediction-market venues generally don't issue W-2Gs for event-contract results. Kalshi's documented forms cover interest, rewards and crypto transfers, not your event-contract profit; see Kalshi taxes and the 1099.

State taxes may differ

States decide for themselves whether to follow the federal gambling-loss rules. Some never allowed gambling losses at all, and states with fixed-date conformity may not adopt the 90% cap automatically. See prediction-market state taxes and check your state's 2026 instructions.

Records the IRS expects

The IRS requires an accurate diary or similar record of winnings and losses, with supporting statements (Topic 419). For prediction markets that means:

• Venue exports or API history (Kalshi fills and settlements, Polymarket activity, Hyperliquid fills).
• Per-market results with dates, amounts and fees.
• A note of the session grouping you used.

How OddsFile handles it

OddsFile imports your Kalshi, Polymarket and Hyperliquid history and computes the gambling treatment next to the alternatives: winnings as the sum of winning markets, 90% of losses for 2026 and later, capped at winnings, and zero benefit if you don't itemize. It shows the result beside other income, capital gains and Section 1256 so you and your preparer can compare. It doesn't recommend one.

Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup.

FAQ

Does the 90% limit apply to my 2025 taxes?

No. It applies to tax years beginning after December 31, 2025. Your 2025 return uses the prior rule: losses deductible up to 100% of winnings if you itemize.

Can I carry forward the 10% I can't deduct?

No. Section 165(d) has no carryforward. The disallowed portion is permanently lost.

Do I need to itemize to deduct gambling losses?

Yes, for casual gamblers. Losses go on Schedule A. If your itemized total is below the standard deduction ($16,100 single for 2026), the losses give no benefit. Professional gamblers report on Schedule C but are still subject to the 90% limit.

Are prediction-market losses gambling losses?

Only if your position is that event contracts are wagers. The IRS has not ruled. Capital-asset treatment would put the same losses on Form 8949 without the 90% haircut. Read gambling vs capital gains for event contracts.

Will Congress restore the full deduction?

H.R. 10357 passed the Ways and Means Committee in September 2026 and the FAIR BET Act is pending, but neither is law as of October 22, 2026. Check congress.gov before filing.

What is "phantom gambling income"?

It's the informal name for tax owed on gambling income when you didn't actually profit, for example the $7,500 taxed in the break-even example above.