The recent NBA betting scandal that led to more than 30 arrests has spurred renewed regulatory and fan focus on illegal gambling and professional sports.
Financial advisors, meanwhile, say the spike in legal sports wagering in recent years has resulted in a surge of client questions, and costly misunderstandings, about the way gambling winnings and losses are taxed.
With so much on the line, as well as tax changes in the coming year, wealth managers are finding that clients need to know the score when it comes to the trifecta of legal betting, financial planning and taxes.
Since the Supreme Court legalized sports betting in 2018, most states have followed suit, and the industry has expanded rapidly. New York, for example, is now the largest sports betting market in the country, with more than $22.6 billion in total wagers last year.
While sports betting has become a mainstream pastime, it is important to remember that it is not an investment strategy, according to Mallon FitzPatrick, head of wealth planning at Robertson Stephens. Most importantly, from a federal perspective, all gambling winnings are considered ordinary income and taxpayers must report them, regardless of the amount.
“Casinos and online betting platforms, such as DraftKings, are required to report certain payouts directly to the IRS, typically issuing Form W-2G when winnings exceed specific thresholds. For instance, this form may be generated for sports betting winnings over $600 that are at least 300 times the wager. Even if a W-2G is not issued, all gambling income must still be reported on an individual’s tax return, Schedule 1, Form 1040,” FitzPatrick notes.
This year, gambling losses can fully offset winnings for federal tax purposes if the taxpayer itemizes their deductions on Schedule A. However, beginning in 2026, the recently passed One Big Beautiful Bill Act (OBBBA) will limit the deduction. Federal deductions for gambling losses will be capped at 90% of losses going forward. This means an individual with $100,000 in winnings and $100,000 in losses could still owe tax on $10,000 of income despite breaking even overall.
State tax treatment adds another layer of complexity. FitzPatrick notes that most states with a personal income tax also classify gambling winnings as ordinary income. However, not all states permit offsetting winnings with losses with Connecticut and Rhode Island are notable examples.
“Those who gamble regularly or in significant amounts should maintain comprehensive records and coordinate with their CPA to ensure proper reporting and to plan for both federal and state tax implications. As a general rule, all gambling winnings should be reported. And remember, that “lucky” $1,000 win may ultimately amount to only about $650 after taxes,” Fitzpatrick said.
TALKING WITH CLIENTS ABOUT GAMBLING INCOME
Jeff Getty, chief tax strategist at Callan Family Office, points out that gambling has always been a taxable pursuit. However, it becomes a more expensive one beginning in 2026 so advisors need to warn their clients ahead of time.
“The new ninety percent limit on loss deductions means that even when a client breaks even, the government may still come out ahead. Advisors should describe this as the rise of ‘phantom income,’ where tax is owed on profit that never existed,” Getty said.
As with most forms of phantom income, the danger hides in plain sight.
“Clients often believe that a break-even year means no tax, but once the ninety percent rule begins, that illusion disappears. A year that feels neutral at the tables can still produce taxable income that exists only on paper,” Getty said.
And while, many clients may believe that small or occasional wins “don’t count,” Carl Cesarano, a principal and CPA with Cesarano & Khan, reminds them that “under the IRS rules, every dollar does.”
“Advisors should also explain that losses are deductible only if the taxpayer itemizes and keeps accurate records of wins and losses, such as receipts or betting statements,” Cesarano said.
Helping clients understand these realities now can prevent unpleasant surprises later. In the meantime, Cesarano says there is a short window, through the end of 2025, when taxpayers can still deduct gambling losses up to 100% of their winnings.
“Advisors should use this period to encourage clients to review their play history, gather detailed records, and consider timing larger tournaments or betting activity before the 2026 tax year. Clients who wager regularly should also strengthen their recordkeeping habits now, since those same records will support loss deductions under the tighter 90% cap,” Cesarano said.
He added that advisors may want to coordinate with clients on estimated tax payments or withholding adjustments to manage cash flow if they expect substantial winnings.
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