Tax basics · Kalshi

OBBBA 90% Gambling-Loss Limit Under §165(d)

From tax year 2026 the OBBBA caps the gambling-loss deduction at 90%, so break-even bettors can owe tax on phantom income. How §165(d) now works, and who it hurts.

By Owen Monagan6 min read

Published Jun 20, 2026June 20, 2026Updated Oct 8, 2026October 8, 2026

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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. How prediction-market contracts fit this rule is unsettled; the IRS has issued no guidance on event contracts.

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.

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 things are unsettled:

No ruling says §1256 applies to event contracts. 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.

Whether the 90% limit reaches Kalshi and Polymarket US contracts is decided upstream of the 90% figure. §165(d) limits losses "from wagering transactions," so the haircut applies only if the contract is a wagering transaction in the first place. Neither the IRS nor any court has said whether an event contract traded on a CFTC-designated exchange, which can be sold before the event resolves, is one. If it is, the cost is the phantom income in the table above, charged on a year that may have finished flat.

So the characterization is genuinely open, and the 90% limit raised what turns on it.

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).

As of mid-2026, the 90% limit is the law for the 2026 tax year. A repeal passed later could change the math; none has passed.

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.
Know the treatment is open. The §1256-vs-wagering question has no IRS guidance, and the answer can depend on the facts and the venue.
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. Complete records support whichever treatment applies, and the repeal effort is the other thing that can change the 2026 math.

Questions people ask

What is the OBBBA 90% gambling-loss rule?

The One Big Beautiful Bill Act (OBBBA) amended IRC §165(d) to limit the deduction for wagering losses to 90% of those losses, still capped at total gambling winnings for the year. It applies to tax years beginning after December 31, 2025, so it first appears on the 2026 returns you file in early 2027. Because only 90% of losses are deductible, the non-deductible 10% of losses is taxed as "phantom" income: a break-even bettor who itemizes can end up taxed on an amount equal to 10% of their winnings.

When does the 90% gambling-loss limit take effect?

It is effective for tax years beginning after December 31, 2025, meaning the 2026 tax year. The old 100% rule still governs your 2025 return. As of mid-2026 the provision is in force; a bipartisan repeal effort (the FAIR BET Act) has been introduced but has stalled in Congress and has not become law.

Does the 90% limit apply to Kalshi or Polymarket trades?

It is an unsettled question. The §165(d) limit applies to "losses from wagering transactions." Some argue CFTC-regulated event contracts should instead be treated as regulated derivatives, potentially Section 1256 contracts, which are not subject to the §165(d) gambling-loss limit. The IRS and courts have not resolved how retail prediction-market contracts are characterized, and the IRS has issued no guidance on event contracts.

Has the FAIR BET Act repealed the 90% rule?

No. The FAIR BET Act, introduced to restore the full 100% gambling-loss deduction, has stalled in Congress: it was blocked from a House floor vote and an attempt to attach it to the defense bill failed. As of mid-2026 the 90% limit remains in effect for the 2026 tax year.

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