That's Entertainment: Gambling and the Tax Code

This article was co-authored by Mirit Eyalthe, the Joseph D. Peeler Professor of Law at the University of Alabama School of Law, and Jay A. Soled, a Distinguished Professor of Taxation at Rutgers Business School.

Americans love winners and learning about those who gamble and succeed, such as Mr. Edwin Castro, who last year won a $2 billion Powerball jackpot. Intoxicated by the prospects of winning, Americans wagered over $1.75 billion on the 2026 Super Bowl alone, according to the American Gaming Association, a record that underscores just how normalized gambling has become.

Indeed, over the course of the last decade, gambling has become ubiquitous. Once relegated to places like Las Vegas, Atlantic City, and tribal lands, smartphones have cut those ties. Gambling can now be conducted literally anywhere, and at any time. Combine this flexibility with the legalization of sports gambling and the advent of prediction markets, such as Kalshi and Polymarket, and the types and amounts of bets that can now be wagered are virtually limitless. 

What propels the popularity of gambling? In a word, entertainment: akin to the adrenaline rush experienced by race car drivers, mountain climbers, and other thrill seekers, the activity of gambling releases dopamine into the brain and its participants – win or lose – obtain a feeling of elation.

Because gambling is a form of entertainment, the Tax Code should eliminate gambling loss deductions in their entirety. More specifically, it is a form of personal consumption, not a productive economic activity. As such, the Tax Code precludes expenditures of this nature from being deductible (e.g., food and shelter purchases), as opposed to business and investment-related expenses, which are deductible (e.g., office supply purchases). 

Some may argue that if gambling winnings are taxed, fairness requires allowing offsetting losses, as with stocks or other investments. But the Tax Code already denies deductions for income-producing activities that are infused with personal consumption, such as hobbies (like dog breeding) and business entertainment (like taking a prospective client to a Broadway show). Consistency requires the denial of the congressional gambling loss deduction.

Equity is another important consideration. As Congress has currently conceived the gambling loss deduction, the deck is deeply stacked against the majority of low- and moderate-income taxpayers while favoring high-income taxpayers. How so? Taxpayers must report their gambling winnings, but high rollers (who generally itemize their deductions for tax purposes) get to deduct the majority of their gambling losses, whereas low rollers (who generally take the standard deduction in lieu of itemizing their deductions) do not.

The plight of two taxpayers—Rich and Bill—illustrates this point. Rich, a high-income company CEO, is a regular gambler. Over the course of the year, he wins $1 million and loses $1 million. Under the Tax Code, because Rich itemizes his deductions, he can deduct up to 90 percent of his gambling losses (90% x $1 million = $900,000) that do not exceed his gambling winnings ($1 million). As such, Rich will thus pay income tax on $100,000 ($1 million - $900,000 of losses), which is only 10 percent of his gambling winnings.

By contrast, Bill, a middle-income accountant, infrequently gambles. Over the course of the year, he wins $10,000 and also loses $10,000. However, due to Bill’s financial circumstances, he does not itemize his deductions and instead takes the standard deduction. As a result, he cannot deduct any of his gambling losses from his gambling winnings. Bill must therefore bear income tax on $10,000, which is 100 percent of his gambling winnings.

In many cases, the plight of low-income taxpayers is even more severe. The reality is that the financial lifeblood of many low-income taxpayers is the Earned Income Tax Credit (EITC), a refundable federal income tax credit for working individuals and families; it is probably the nation’s single largest and most effective anti-poverty tool, designed to provide a financial boost and encourage employment. Here’s the rub: gambling gross winnings (not offset by gambling losses) increase a taxpayer’s so-called adjusted gross income. This increase reduces the odds that a taxpayer will qualify for the EITC and, even if she does, may significantly diminish the amount of benefit received.

Eliminating the gambling loss deduction would achieve several important public policy goals. First, it would bring consistency to the Tax Code, which traditionally disallows deductions for personal consumption. Second, it would foster tax equity across the income spectrum. Finally, substantial tax revenue could be raised (the Tax Policy Center estimates that eliminating gambling losses deductions could generate $3 billion annually, helping reduce the federal deficit).

When it comes to the elimination of gambling loss deductions, it does not matter if one is or isn’t a proponent of wagering. Rather, the Tax Code should make clear that activities fused with fun, excitement, and personal enjoyment are never an occasion for a tax deduction, and second, equity should never be left to chance.