Issues

Gambling Winnings and Losses: How To Fight a Deficiency in Tax Court

You broke even at the casino, but the IRS wants tax anyway. A new 2026 law and the no-netting rule create a deficiency. Here's how to fight it.

You won $100,000 at the casino last year. You also lost $100,000—you walked away even, maybe down. So when a Notice of Deficiency arrives saying you owe tax on gambling income, it reads like a mistake. You didn't make any money. How can you owe tax on a breakeven year?

Here is the part nobody warned you about. Starting in 2026, the answer can be yes, you owe—even on a year you broke even. A law that took effect for tax year 2026 lets you deduct only 90% of your wagering losses, so on that $100,000 win against $100,000 in losses, you report $100,000 of income and deduct only $90,000. That leaves $10,000 of taxable "phantom income" on a year you didn't make a dime. And that is before the older traps—the no-netting rule and the standard-deduction trap—that have blindsided recreational players for decades.

This is the substantive merits guide to fighting a gambling deficiency in US Tax Court. It is a deep companion to Unreported Income Disputes in Tax Court, which owns the general 1099-matching machinery and burden-of-proof framework. Gambling now has its own dedicated guide because the rules changed so dramatically for 2026, and because winning the losses fight comes down to substantiation in a way few other income disputes do. This article goes deep on the new 90% cap, how all winnings get reported and matched, the casual-versus-professional split, and—the heart of it—how you actually prove your losses when the IRS asserts your gross winnings.

Which notice are you holding? Two very different documents bring people here, and they carry very different deadlines. A CP2000 is an automated proposed change—the IRS's computer matched a W-2G or 1099 you didn't report and is proposing extra tax. You can still respond and head it off, and no Tax Court clock has started. A Notice of Deficiency—the "90-day letter"—is the IRS's formal determination, and it starts your 90-day deadline to petition Tax Court. Figure out which one is in your hands first, because it sets both your deadline and your options.

The 2026 Change You Have To Know: The 90% Cap

For decades the rule under IRC § 165(d) was simple to state: you could deduct gambling losses, but only up to the amount of your gambling winnings. Lose more than you won, and the excess just disappeared—no deduction, no carryover. But at least a breakeven gambler could zero out the income.

That changed. The One Big Beautiful Bill Act (Pub. L. 119-21), enacted July 4, 2025, § 70114, rewrote § 165(d). For tax years beginning after December 31, 2025—that is, starting with the 2026 return you file in 2027—the wagering-loss deduction is computed in two steps:

Take 90% of your total wagering losses for the year (the new § 165(d)(1)(A)).
Then cap that result at your wagering winnings for the year (the old § 165(d)(1)(B) limit, unchanged).

You deduct the lower of the two. This is a two-step floor—not "90% of the lesser of losses or winnings." Read literally, you first haircut your losses by 10%, then apply the winnings ceiling.

Two Worked Examples

The breakeven year. You win $100,000 and lose $100,000.

Step 1: 90% × $100,000 in losses = $90,000.
Step 2: capped at $100,000 of winnings—no further reduction.
Deduction = $90,000. You report $100,000 of winnings as income and deduct $90,000, leaving $10,000 of taxable phantom income on a year you broke even.

The losing year. You win $50,000 and lose $80,000.

Step 1: 90% × $80,000 in losses = $72,000.
Step 2: capped at $50,000 of winnings—the winnings ceiling bites first.
Deduction = $50,000. Here the 90% haircut isn't even what limits you; the winnings cap does, because 90% of your losses still exceeds your winnings.

The lesson: the 90% haircut hits hardest when your losses are close to or equal to your winnings—exactly the high-volume recreational or professional player who churns large dollars to roughly break even. A clearly losing year is often limited by the winnings ceiling instead, the same as it always was.

Run your own number. The math scales to any size, so you can estimate your own exposure. Take your total winnings, subtract 90% of your substantiated losses—but never deduct more than your winnings—and whatever is left is what you're taxed on. Won $8,000 across the year and can document $8,000 of losses? You deduct $7,200 and owe tax on roughly $800, even though you broke even. Win $5,000 and document $3,000 of losses? You deduct $2,700 and are taxed on $2,300.

The Honest Hedge on Repeal

As of mid-2026, the 90% cap is in force for 2026 and later years. Do not assume it has been repealed. Several bipartisan bills would restore the full 100% deduction—the FAIR BET Act (H.R. 4304), the WAGER Act (H.R. 4630), and the FULL HOUSE Act (S. 2230 and its House companion H.R. 6985)—but as of this writing none has passed either chamber. Each is still in committee. Because this is the single most time-sensitive fact in this article, confirm the current status of § 165(d) before relying on the 90% figure for a return you are actually filing.

All Gambling Winnings Are Taxable Income

Before the loss rules even come into play, start with the income side—because that is what the IRS sees first.

Gross income under IRC § 61 is "all income from whatever source derived," and gambling winnings are squarely inside it. IRS Topic No. 419 puts it plainly: gambling winnings are "fully taxable and you must report the income on your tax return," whether or not a Form W-2G was issued. That includes cash winnings and the fair market value of non-cash prizes—a car, a trip, a boat. A casual gambler reports winnings on Schedule 1 (Form 1040).

No W-2G is no excuse. The income is taxable whether or not a form arrived. But the forms are how the IRS finds you, so it is worth knowing exactly which ones get filed and when.

Form W-2G—The 2026 Reporting Floor Is $2,000

This corrects a common assumption. You may have read that casinos issue a W-2G at $1,200 for slots and bingo and $1,500 for keno. Those are the legacy numbers, and for 2026 they no longer control reporting.

The Instructions for Forms W-2G and 5754 (Rev. January 2026) set a single, unified reporting threshold: for payments made in calendar year 2026, the minimum threshold amount for issuing a W-2G is $2,000, indexed for inflation in later years. The 2026 instructions no longer print the old $1,200/$1,500 figures for reporting—every category just points to "the applicable reporting threshold." So treat $2,000 as the 2026 W-2G reporting floor.

The old $1,200/$1,500 numbers survive only as withholding triggers, which are a separate rule under § 3402(q):

Regular gambling withholding is 24% when winnings minus the wager exceed $5,000 from sweepstakes, wagering pools, lotteries, parimutuel pools, and sports wagering—and, for the parimutuel and sports categories, when winnings are also at least 300 times the wager.
Regular withholding does not apply to bingo, keno, or slot machines.
Backup withholding is 24% if a reporting threshold is met and you don't furnish a correct taxpayer identification number.
Sports wagering is now its own explicit W-2G category in the 2026 instructions.
Foreign persons: winnings paid to a nonresident alien are generally subject to 30% withholding and reported on Forms 1042/1042-S, not W-2G. Most nonresident aliens (other than certain Canadians) cannot deduct gambling losses at all.

A caution worth flagging: how the new flat $2,000 reporting floor interacts with the higher $5,000/300× withholding triggers is not crisply reconciled in current IRS guidance. Treat $2,000 as the 2026 floor below which no W-2G should issue, and don't over-read the category interplay.

Form 1099-K and the DFS Apps

Two other forms shape what the IRS sees, and both moved recently:

Form 1099-K reverted to $20,000 and 200 transactions. Under OBBBA, a payment app or settlement organization files a 1099-K only if your gross payments exceed $20,000 AND your transactions exceed 200—both bars. This rolled back the much lower $600 threshold. The IRS confirmed the reversion in its newsroom FAQ release. A casual bettor cashing out through a payment app likely won't get a 1099-K unless they clear both bars.
Daily fantasy sports apps (DraftKings, FanDuel, PrizePicks) commonly issue a Form 1099-MISC when your net profit reaches $600—prize winnings minus entry fees plus bonuses. The IRS treats daily fantasy sports as gambling.
Online sportsbooks and gaming platforms report annual net winnings of $2,000 or more beginning in 2026, tracking the new W-2G floor.

The key takeaway: form or no form, the income is taxable. A missing or wrong W-2G, 1099-K, or 1099-MISC doesn't change what you owe—but it does shape what the IRS sees and what you have to rebut.

The No-Netting Rule

This is the trap that catches more recreational players than any other, and it is the reason a "losing year" can still generate a deficiency.

You cannot net your winnings against your losses and report only the difference. Publication 529 states it directly: "You can't reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction." Your records "should show your winnings separately from your losses."

So the mechanics are:

Gross winnings go on Schedule 1 as income—the full amount.
Losses go separately on Schedule A as an itemized deduction, subject to the § 165(d) cap (now 90% of losses, capped at winnings, for 2026 and beyond).

That split is what creates the deficiency. The income line and the deduction line live in different places, and they are treated differently depending on whether you itemize.

The Standard-Deduction Trap

Here is the cruelest version of the no-netting rule. Gambling losses are an itemized deduction—you only get them if you list your deductions out on Schedule A (mortgage interest, state and local taxes, these losses, and the like) instead of taking the flat standard deduction every filer is entitled to without itemizing. Because the losses live on Schedule A, a taxpayer who takes the standard deduction gets no offset at all—even when they truly lost money on the year.

IRS Chief Counsel guidance puts it bluntly: a casual gambler who takes the standard deduction rather than itemizing "may not deduct any wagering losses." So if you have $5,000 of W-2G winnings and $7,000 of actual losses but take the standard deduction, you owe tax on the full $5,000—the losses do nothing for you.

With the standard deduction now high, fewer filers itemize, which means more recreational gamblers lose the loss offset entirely. This is very often the actual reason a casual player ends up staring at a large Notice of Deficiency. It is not that the IRS thinks you came out ahead; it is that the structure of the deduction quietly disallowed your losses.

The AGI Gross-Up

There is a second, less obvious cost. Reporting gross winnings inflates your adjusted gross income, and many tax benefits phase out as AGI rises. IRS Chief Counsel has noted that reporting gross wagering gains "increases a casual gambler's AGI and has a significant tax impact (especially on low income taxpayers), because many tax benefits phase out as AGI increases." A big W-2G can push more of your Social Security into taxability, raise your Medicare IRMAA surcharge, and phase out credits—real dollars even before the deduction question is settled. Build this into your picture of what is actually at stake.

Casual vs. Professional Gambler

Which schedule your gambling lands on depends on whether you are a casual gambler or in the trade or business of gambling. The line matters a great deal, and it cuts both ways.

The governing test comes from Commissioner v. Groetzinger, 480 U.S. 23 (1987). The Supreme Court held that a full-time gambler betting solely for his own account can be engaged in a "trade or business." The test: if gambling "is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business." More generally, an activity is a trade or business when it is pursued with continuity and regularity for the primary purpose of income or profit—not "a sporadic activity, a hobby, or an amusement diversion."

Why it matters:

A professional gambler reports on Schedule C—winnings as gross receipts—and owes self-employment tax on net profit.
A casual gambler reports winnings on Schedule 1 and losses on Schedule A.

The IRS frequently argues a taxpayer is not a professional (to deny Schedule C business-expense deductions), or conversely that a claimed "hobby" loss is really a business. The factors are the same continuity, regularity, and livelihood factors that decide any hobby-versus-business question—see How To Prove Your Activity Is a Business, Not a Hobby.

The Professional's Expense Trap—Why Mayo Is Now History

There used to be a meaningful upside to professional status. In Mayo v. Commissioner, 136 T.C. 81 (2011), the Tax Court held that while a professional gambler's wagering losses are still capped at wagering gains under § 165(d), his non-wagering business expenses—car, office, travel, handicapping data, subscriptions—are deductible under IRC § 162(a) even if that produces an overall business loss. Mayo bet $131,760 and won $120,463 on horse races; the court let his roughly $11,000 of business expenses through despite the loss.

That result no longer holds. The Tax Cuts and Jobs Act amended § 165(d) to fold a professional's non-wagering business expenses back into the same cap, and OBBBA § 70114 made that permanent. The current § 165(d)(2) defines "losses from wagering transactions" to include "any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction." In plain terms: for 2026 and beyond, a professional gambler's total deductions—wagering losses and business expenses together—are limited to 90% of those amounts, capped at wagering gains.

So treat Mayo as the rule that Congress overrode, not current law. A professional cannot deduct business expenses beyond winnings today. And because there is no Schedule C escape hatch from the cap, a professional who breaks even faces the same 90% phantom-income exposure as a casual player—now potentially with self-employment tax on top.

How You Actually Win the Losses Fight

This is the heart of a merits guide. In almost every case you carry the burden of proving your losses, and often the practical burden of rebutting the IRS's income number too. The fight is won or lost on substantiation.

The Gambling Diary

The foundation is a contemporaneous diary. Drawing on Rev. Proc. 77-29, Pub. 529 says you "must keep an accurate diary or similar record" of winnings and losses, containing at least:

The date and type of your specific wager or wagering activity.
The name and address or location of the gambling establishment.
The names of other persons present with you at the establishment.
The amounts you won or lost.

Pub. 529 also lists proof to keep beyond the diary—Form W-2G; Form 5754; wagering tickets; canceled checks and bank withdrawals; credit records; and statements of actual winnings or payment slips from the establishment. It even spells out per-game supplemental records: slot machine number and winnings by date and time; table number and casino credit data for table games; validated keno tickets; records of races, wagers, and collected and lost amounts for racing; ticket purchases and dates for lotteries. The point is corroboration—a diary backed by independent records is far stronger than either alone.

The Session Method

You don't have to treat every pull of a slot machine as a separate taxable event. IRS Chief Counsel guidance (AM2008-011) and the Tax Court both recognize a per-session approach, which usually helps the taxpayer.

A casual gambler "recognizes a wagering gain or loss at the time she redeems her tokens"—the fluctuating wins and losses left in play are not income until you cash out and can definitively figure out whether you are above or below what you wagered. A "session" runs from when you start playing to when you cash out or leave. Within a session, your wins and losses net to a single gain or loss.

A worked example from that guidance: Mrs. X visits a casino 10 times with $100 each. On five visits she loses all $100 (=$500 of losses). On two she redeems $20 and $70 (=$110 of losses). On three she redeems $150, $200, and $300 (=$350 of gains). Her totals: $350 in gains, $610 in losses. She must report $350 of income under § 61, and under § 165(d) may deduct her losses only up to that $350—the rest disappears. If she takes the standard deduction, she deducts $0 and is taxed on the full $350.

The Tax Court adopted the same session approach in Shollenberger v. Commissioner, T.C. Memo. 2009-306. A couple hit a $2,000 slot jackpot, kept playing, lost $400, and cashed out with $1,600—and the court computed the session gain on that net basis rather than taxing the gross $2,000. Use Shollenberger for the core rule: a session runs from start of play to cash-out, and you net within it.

One important caveat about AM2008-011. It is IRS Chief Counsel guidance that, by its own terms, "may not be used or cited as precedent." Present it for what it is—the IRS's own stated position conceding per-session netting, which is helpful precisely because the agency adopted it—not as binding authority. The binding authority for the session method in court is Shollenberger. (The IRS also floated an optional safe harbor for electronically tracked slot play in Notice 2015-21, but that remains proposed, not final.)

Casino Win/Loss Statements Are Weak Alone

Most players reach for the casino's annual win/loss statement—the "player's card" report—as proof. Get it, but understand its limits. It captures only carded play (rated play and jackpots above a threshold), misses cash and uncarded play, aggregates across the whole year rather than by session, and casinos disclaim its accuracy. A win/loss statement is one piece of evidence, not proof on its own. Corroborate it with your diary, ATM and bank records, and—in a strong case—an expert reconstruction.

Does the Cohan Rule Rescue Undocumented Losses? Usually No

Here is the rule people most want to be true and most often get wrong. The Cohan rule lets a court estimate an established expense when records are imperfect—and people hope it will rescue undocumented gambling losses. It usually will not. The default outcome for missing loss records is zero deduction. A court cannot estimate a number out of thin air, and undocumented gambling losses are exactly the kind of claim courts refuse to guess at.

The case people cite for the opposite—Coleman v. Commissioner, T.C. Memo. 2020-146—is the exception that proves the rule. Coleman was a non-filer with $350,241 in W-2G winnings (160 separate W-2Gs) for one year and no session records. The Tax Court nonetheless used Cohan to estimate his losses and allowed a full offset—but only because the case was extraordinarily well built:

A gaming expert used statistical techniques (frequency of play times house win percentages) to conclude with near-certainty that Coleman had net losses, and that the odds of his even being $1 ahead were astronomically small.
ATM and bank records showed roughly $240,000 withdrawn at the casinos and no increase in his wealth.
His testimony was credible, and an unusual nontaxable settlement explained where the money came from.

That is what an exceptional loss-reconstruction case looks like—a compulsive gambler with a credible expert, bank records proving no accession to wealth, and a clean explanation of the cash flow. It is the rare taxpayer-favorable outlier, not the expected result. The general rule, repeated across the case law, is that Cohan does not rescue undocumented gambling losses. If you walk into Tax Court with a win/loss statement and nothing else, plan to lose the loss deduction—not to have it estimated for you.

For the contrast with expenses that require strict substantiation (a professional gambler's travel, meals, and car), see How To Prove Your Business Expenses—those fall under § 274(d), where even Cohan estimation is forbidden.

Burden of Proof and Verifying the IRS's Numbers

Before you argue your losses, pin down the IRS's income figure—because it is not as airtight as it looks.

Under Tax Court Rule 142(a), the petitioner—you—generally bears the burden of proof. You typically must show both that the IRS's income figure is wrong and that any loss deduction is substantiated. The exception: if the IRS raises a "new matter" or increases the deficiency in its answer, the burden on that piece shifts to the IRS.

But there is a powerful lever on the income side. IRC § 6201(d) provides that when a taxpayer "asserts a reasonable dispute" with an item of income on a third-party information return and "has fully cooperated" with the IRS, the IRS bears the burden of "producing reasonable and probative information concerning such deficiency in addition to such information return." In other words, a W-2G or 1099-K is not self-proving. If you reasonably dispute it—wrong amount, duplicate, wrong taxpayer, gross instead of session-net—and you cooperate, you can force the IRS to come forward with more than the bare form. This is the same § 6201(d) burden shift that runs through the parent unreported-income guide; it applies with full force to gambling forms.

How To Verify the IRS's Figures Yourself

Every step here is something you can do on your own:

Read the examination report (Form 4549) and the Notice of Deficiency line by line. Form 4549—the "Income Tax Examination Changes" report—is the worksheet that shows how the examiner built the proposed tax, item by item. It comes with your audit results; if you don't have a copy, request one from the examiner or with your case file. Identify exactly which W-2Gs and 1099s the IRS counted, and whether it double-counted any or used gross winnings instead of session-net.
Pull your IRS account transcript and—critically—your wage & income transcript. The wage & income transcript lists every W-2G and 1099 the IRS actually received under your SSN. Reconcile it against your own records. A duplicate or mis-keyed W-2G is a common and winnable error. The wage & income transcript is taxpayer-accessible through IRS.gov; see How To Get and Read Your IRS Transcripts.
Request the casino's player file and your ATM/marker records for carded play—informally first, then through discovery in Tax Court if needed.

If the IRS reconstructed your income indirectly—through bank-deposit or cash-T methods, common in non-filer cases—be alert that those methods often overstate a gambler's income because they treat money that simply cycled through play as if it were new income. Coleman is the template for rebutting an inflated reconstruction: bank and ATM records plus expert analysis showing no net accession to wealth.

Your Full Exposure—Beyond the Tax

The deficiency notice is rarely just the tax. Build the whole picture so nothing surprises you:

The accuracy-related penalty—20%. IRC § 6662 adds a 20% penalty—calculated on the extra tax you underpaid, not on the income or the winnings—where the underpayment is attributable to negligence or a substantial understatement, common on unreported W-2G winnings. Put the pieces together on the breakeven example: $10,000 of phantom income might mean roughly $2,400 of added tax at a 24% rate, a possible accuracy penalty of about $480 (20% of that tax), plus interest running from the return's original due date. There are real defenses: reasonable cause and good faith under § 6664(c), and the written-supervisory-approval requirement of § 6751(b). See How To Fight the IRS Accuracy Penalty.
Interest. Interest accrues from the original due date on both the tax and, eventually, the penalties. See How Interest Works on Your IRS Tax Debt and, for the whole running balance, Understanding Your IRS Balance.
AGI knock-on effects. As covered above, the gross-up of your AGI can tax more of your Social Security, trigger IRMAA surcharges, and phase out credits—even apart from the headline deficiency.
Self-employment tax for anyone treated as a professional gambler.

State Conformity—Often Worse Than Federal

The phantom-income problem is frequently worse at the state level. Many states tax your gross gambling winnings and do not allow the federal gambling-loss deduction at all—some have no itemized deductions, others simply decouple from § 165(d). The result: you can owe state tax on winnings even in a clearly losing year, with no offset whatsoever. Because gambling-loss deductibility turns on each state's conformity to or decoupling from the federal rule, check your own state's treatment—a net-losing year can cost you twice, and the new federal 90% cap stacks on top.

What To Do Now

If a gambling deficiency is in front of you, here is the sequence:

Identify the deadline on the notice. If it is a 90-day letter (Notice of Deficiency), you have 90 days (150 days if it was addressed outside the US) to file in Tax Court. It cannot be extended.
Pull your wage & income transcript and reconcile every W-2G and 1099 the IRS has against your records. Flag duplicates and gross-versus-session errors.
Read the Form 4549 to see exactly how the IRS built its number.
Build your loss substantiation—the diary, bank and ATM records, casino win/loss statement, and session math—knowing that missing records usually mean a lost deduction, not an estimated one.
If the dispute is still at the proposed stage, it likely started as a CP2000 notice—respond there and head off the deficiency. If the deficiency is already assessed and you missed the Tax Court window, audit reconsideration is the fallback door.
Decide whether to petition Tax Court. A timely petition preserves your prepayment forum; filing is $60, with a waiver available, and if your dispute is at or below $50,000 per year you can elect small-case procedures. See How To File Your Tax Court Petition. Most cases settle: most (76%) of Tax Court cases close by formal settlement, and the process typically takes 6-18 months.
Consider a Low Income Taxpayer Clinic. Many gambling deficiencies fall under the $50,000 dispute ceiling, and LITCs handle Tax Court cases for free if you qualify. See How To Find and Use a Low Income Taxpayer Clinic.

A note for non-filers: if the IRS prepared a substitute for return on your gambling winnings—as in Coleman—the normal 3 years assessment statute never started running, because you never filed. That keeps the year open indefinitely until a return goes in, which is its own reason to get a return on file rather than ignore the notice.

Resources

Statutes and rules:

IRS guidance, forms, and publications:

Companion articles on TaxCourtHelp:

Cases cited:

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.