The New 90% Gambling Loss Limit: What New Jersey and New York Taxpayers Need to Know for 2026
Updated: Aug 18
Thomas F. DiLullo & Associates | Published August 2026
Beginning with the 2026 tax year, federal law limits the deduction for gambling losses to 90% of those losses, and still only up to the amount of gambling winnings. The practical result is that a taxpayer who wins and loses the same amount over the course of a year - someone with no economic profit at all - can still owe federal income tax. Tax professionals have taken to calling the difference phantom income.
For New Jersey and New York residents, the picture is more complicated than the federal rule alone suggests, because the two states handle gambling losses very differently from each other and from the IRS.
Key points
The 90% federal cap applies to tax years beginning after December 31, 2025. The 2026 return you file in spring 2027 is the first one it touches.
New Jersey did not adopt the 90% cap. NJ treats gambling as a "net" category of income with its own rules.
The information-reporting threshold rose from $600 to $2,000 for 2026, meaning fewer Forms W-2G, but not less taxable income.
You must itemize on Schedule A to deduct gambling losses federally. Standard-deduction filers deduct nothing.
Substantiation matters more than it ever has. Undocumented losses are the first thing disallowed in an examination.
Gambling Winnings Are Taxable Whether or Not You Receive a Form
Every dollar of wagering gain is gross income under IRC §61, regardless of whether a payer issues you a form. That covers casinos, sportsbooks, online platforms, poker tournaments, horse racing, daily fantasy contests, and lottery prizes.
This is the point where taxpayers most often get into trouble, and it is about to get worse.
The reporting threshold changed for 2026 - and that is a trap
Section 70433 of the 2025 tax act raised the general information-reporting threshold under §6041(a) from $600 to $2,000 for payments made after December 31, 2025. Proposed regulations conform to the gambling-specific rules in Treas. Reg. §1.6041-10, replacing the long-standing $1,200 bingo and slot machine threshold and the $1,500 keno threshold with $2,000 for calendar year 2026. The $1,200 figure had not moved since 1977.
Withholding did not change. Under §3402(q), a payer still withholds 24% when proceeds exceed $5,000 and are at least 300 times the wager.
The trap: you will receive fewer Forms W-2G in 2026 than you did in 2025. Your taxable income did not go down. It simply became less visible to you, while remaining perfectly visible to the IRS through the payer's other records. Taxpayers who treat "no form" as "no income" are building an underreporting case against themselves.
What Changed: The 90% Cap on the Gambling Loss Deduction
IRC §165(d), as rewritten by the One Big Beautiful Bill Act, now allows a deduction for 90% of your wagering losses for the year, and still only to the extent of your wagering gains.
A worked example
Assume that over the course of 2026 you win $100,000 and lose $100,000 — a break-even year.
2025 rules | 2026 rules | |
Gambling winnings reported | $100,000 | $100,000 |
Deductible losses | $100,000 | $90,000 |
Taxable gambling income | $0 | $10,000 |
You never kept a dollar, and you owe federal tax on $10,000.
The effect compounds in ways that are easy to miss. Gross winnings flow into adjusted gross income before any loss deduction is taken. A higher AGI can affect the new floor on charitable deductions, the taxability of Social Security benefits, Medicare premium surcharges, and every other AGI-tested item on the return. For higher-income taxpayers, the secondary AGI effects can exceed the direct cost of the 10% haircut.
This applies to professional gamblers too
Taxpayers who report wagering activity on Schedule C as a trade or business do not escape the cap. Under the amended rule, wagering losses and related ordinary business expenses are subject to the same 90% limitation.
Should you wait for Congress to fix it?
No. The FAIR BET Act (H.R. 4304) would restore the full deduction and has bipartisan support, but it has not advanced out of the House Ways and Means Committee. Plan and file on the assumption that 90% is the law, and treat any repeal as an upside surprise rather than a strategy.
New Jersey Does Not Follow the Federal 90% Cap
This is the point most national coverage misses, and it matters a great deal if you file an NJ-1040.
New Jersey treats gambling as a "net" category of income. Per the Division of Taxation's Technical Bulletin TB-20(R), documented same-year gambling losses may be used to offset gambling winnings, not to exceed total winnings. New Jersey has not adopted the federal 90% limitation.
Several features of the NJ rule differ meaningfully from the federal treatment:
You do not have to itemize. New Jersey has no Schedule A analogue for this purpose. A standard-deduction filer who gets nothing federally may still net losses against winnings for New Jersey.
There is a zero floor. If losses exceed winnings, net gambling winnings are reported as zero. You cannot carry a negative figure against wages or any other category of income.
No carryforward. Losses must be used in the same year the winnings occurred.
Six-year retention. NJ instructs taxpayers to keep substantiating records for six years after filing — longer than the three-year federal assessment period most people plan around.
Federal vs. New Jersey at a glance
Federal (2026) | New Jersey | |
Loss deduction limit | 90% of losses, capped at winnings | 100% of losses, capped at winnings |
Must itemize? | Yes (Schedule A) | No |
Carryforward of excess losses | No | No |
Record retention guidance | Generally 3 years | 6 years |
New Jersey withholding is its own layer. Payers generally withhold on certain non-lottery gambling payouts, and New Jersey Lottery winnings above $10,000 are subject to state gross income tax with withholding at rates that depend on whether a valid taxpayer identification number was provided. If you are a New Jersey resident who paid tax to another state on out-of-state winnings, Schedule NJ-COJ may be relevant. If you have significant gambling activity and are unsure how it interacts with the rest of your return, this is worth reviewing with a New Jersey tax attorney before filing rather than after a notice arrives.
New York and New York City Taxpayers
New York's treatment is less favorable than New Jersey's. New York generally builds its itemized deduction from the federal figure, which means the 90% federal cap flows through to the New York return. New York City and Yonkers residents face additional local income tax on the same gross winnings.
Separately, legislation has been introduced in Albany (S7876) that would reduce the New York itemized deduction for gambling losses to zero. It has not been enacted. New York taxpayers with meaningful wagering activity should confirm current-year treatment before relying on any state-level offset.
How to Prove Gambling Losses to the IRS
Every rule above assumes you can substantiate your losses. In practice, this is where cases are won and lost. An examiner will not disallow your winnings — those are documented by the payer. An examiner will disallow your losses, because they are the item you are responsible for proving.
What the IRS expects to see
The IRS has long expected a contemporaneous log — a diary or similar record created as you go, not reconstructed the following April — that captures, for each session:
The date and type of wagering activity
The name and address or location of the establishment or platform
The names of any other people present with you
The amounts won and lost
A log alone is rarely sufficient on its own. It should be corroborated by independent documentation.
Supporting documentation to keep
Forms W-2G and any 1099s issued for promotional or non-wager income
Casino win/loss statements and player-club account histories
Downloaded transaction and account histories from each sportsbook or online platform, exported at least annually — operators do not keep them available forever
Bank and credit card records showing deposits to and withdrawals from gaming accounts
Wagering tickets, receipts, and canceled checks
Geolocation records, where the platform provides them, if you wager across state lines
Three substantiation mistakes that come up repeatedly
Reconstructing the log after the fact. A spreadsheet built in March from memory carries very little weight. A record kept as you went carries a great deal.
Reporting only the net. Winnings and losses generally must be reported separately — winnings as income, losses as a deduction. You typically cannot offset a losing day against a winning day and report only the difference as income.
Relying on a single year-end win/loss statement. Most casino statements carry an express disclaimer that they are estimates and not intended for tax reporting. They are corroboration, not proof.
Because New Jersey asks taxpayers to hold substantiating records for six years, keep gambling records for at least six years even if your federal exposure would ordinarily close sooner.
If you have already received an examination notice questioning claimed losses, the substantiation strategy changes considerably. That is a matter for audit defense rather than recordkeeping.
When a Gambling Tax Issue Becomes an IRS Controversy
Most gambling tax questions are compliance questions. Some become something else. The typical progressions we see:
Underreporting notices. The IRS matches Forms W-2G against your return. A mismatch generates a CP2000 underreporter notice proposing additional tax, interest, and often an accuracy-related penalty. With the reporting threshold rising in 2026, taxpayers who relied on receiving forms to remember their winnings are at increased risk here.
Disallowed losses and a proposed deficiency. If losses are examined and the documentation does not hold up, the result is a notice of deficiency. The winnings stay; the offset disappears. On a large wagering year, the resulting balance can be substantial.
Collection exposure. Unpaid balances move into the collection stream — notices of intent to levy, federal tax liens, wage garnishment. At that stage the question becomes what resolution options are realistically available, whether an installment agreement, currently-not-collectible status, or an offer in compromise.
Willfulness questions. Sustained, deliberate nondisclosure of significant gambling income is a different category of problem than a documentation dispute. Where there is a pattern of unreported income, the appropriate first call is to counsel, not to a return preparer, because of the attorney-client privilege issues involved. Our practice includes criminal tax defense, and several of our attorneys have prior experience on the government side of these matters.
Practical Steps for the Rest of 2026
Start or fix your log now. A record begun in August is worth far more than one reconstructed in April. If you have been gambling all year without one, reconstruct what you can from platform histories and keep contemporaneous records from this point forward.
Export your account histories. Pull full transaction records from every sportsbook and online casino you use, and repeat at year end.
Run the itemize-versus-standard-deduction comparison early. If you will not itemize, your federal loss deduction is zero regardless of how well documented your losses are — which changes how you should think about your withholding and estimated payments.
Check your withholding. Twenty-four percent withheld at the window is not necessarily the right number once the 90% cap and your marginal rate are accounted for.
Model the state side separately. A New Jersey resident and a New York City resident with identical wagering activity can end up in materially different positions.
Frequently Asked Questions
Can I deduct gambling losses if I take the standard deduction? Not on your federal return. Federal gambling losses are an itemized deduction on Schedule A. New Jersey is different — the NJ-1040 allows same-year losses to offset winnings without itemizing.
Do I have to report winnings if I never received a Form W-2G? Yes. All gambling winnings are taxable income whether or not a form is issued. The 2026 increase in the reporting threshold to $2,000 reduces the number of forms issued; it does not reduce what is taxable.
Can I net a losing day against a winning day? Generally no. Winnings and losses are reported separately — winnings as income, losses as a deduction subject to the 90% cap and the winnings ceiling. Session-level accounting is treated differently from annual netting, and how it applies depends on the type of play.
Does New Jersey follow the federal 90% cap? No. New Jersey has not adopted the 90% limitation. It treats gambling as a net category of income under its own rules, with documented losses offsetting winnings up to the amount of those winnings.
How long should I keep gambling records? At least six years. New Jersey specifically instructs taxpayers to retain substantiating records for six years after filing, which is longer than the federal period most taxpayers assume applies.
What if I already got an IRS notice about gambling income? Deadlines on IRS notices are short and some are jurisdictional — a missed response date can eliminate options that were available the week before. Have the notice reviewed promptly.
Talk to a Tax Attorney
Thomas F. DiLullo & Associates, P.C. represents individuals and businesses in New Jersey and New York in IRS and state tax matters, including examinations, underreporting notices, collection matters, and criminal tax investigations. Our firm's principal is admitted both as an attorney and as a certified public accountant.
If you have significant gambling activity and want to understand your exposure under the 2026 rules or if you have already received a notice, contact our office to arrange a confidential case evaluation.
This article is provided for general informational purposes and reflects federal and state tax law as of August 2026. It is not legal or tax advice, does not address any specific taxpayer's circumstances, and does not create an attorney-client relationship. Tax law changes frequently; legislation affecting the gambling loss deduction was pending in Congress at the time of writing. Consult a qualified professional regarding your own situation.
Last reviewed: August 2026
