HB 6985 replaces section 165(d) of the Internal Revenue Code to limit deductible wagering losses to the amount of gains from wagering transactions and to treat any deduction incurred in carrying on a wagering transaction as a wagering loss. The change is broad: it reaches beyond simple netting of wins and losses to capture otherwise allowable chapter deductions tied to wagering activities.
That narrower deduction rule affects individuals who report gambling activity, professional gamblers and entities that run wagering operations, tax preparers, and the IRS. By constraining how losses from wagering are matched against other income, the bill alters tax planning, recordkeeping, and the treatment of business-style gambling operations starting with tax years after December 31, 2025.
At a Glance
What It Does
The bill substitutes new statutory text for IRC §165(d) so that losses ‘‘from wagering transactions’’ are deductible only to the extent of gains from those transactions. It explicitly states that ‘‘losses from wagering transactions’’ include any deduction otherwise allowable under the tax code that is incurred in carrying on a wagering transaction.
Who It Affects
The rule applies to all taxpayers subject to the Internal Revenue Code — individuals, partnerships, S corporations, and C corporations — whenever deductions arise from wagering transactions. Practically, it targets professional gamblers and businesses conducting wagering activities, as well as tax practitioners who prepare returns claiming such deductions.
Why It Matters
The statutory language is intentionally broad and likely to disallow business-style or operational deductions connected to wagering when a taxpayer has a net wagering loss, closing a pathway that could otherwise offset unrelated income. That changes tax liability calculations, compliance needs, and audit focus for wagering-related activities.
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What This Bill Actually Does
The bill rewrites IRC §165(d) to create a single, categorical rule: losses tied to wagering transactions are allowed only up to the amount of wagering gains. That means a taxpayer who has $10,000 in gambling winnings may deduct up to $10,000 in wagering losses, but not more; any excess does not reduce non-wagering income.
The bill goes further than a simple win-loss cap by defining ‘‘losses from wagering transactions’’ to include any deduction under the internal revenue chapters that is incurred in carrying on a wagering transaction, which brings business-style expenses within the limitation.
The phrase ‘‘incurred in carrying on any wagering transaction’’ is broad on its face: it reaches not only direct cash losses from bets but also deductions that a taxpayer might claim for activities tied to wagering — for example, travel expenses, supplies, promotional costs, or other ordinary and necessary expenses where the expense is directly connected to placing or facilitating wagers. The provision therefore restricts taxpayers who attempt to characterize wagering operations as a business whose operating expenses exceed wagering receipts and then deduct the shortfall against other income.The bill applies prospectively to taxable years beginning after December 31, 2025.
Practically, taxpayers and advisors will need to separate wagering-related activity and track gains and any associated deductions carefully. Tax preparers should expect to adjust reporting practices and consider documentation to demonstrate whether an expense is ‘‘incurred in carrying on’’ a wagering transaction and therefore subject to the cap.Because the statute is concise and directive, most of the interpretive detail will come from IRS guidance and audits.
The measure leaves open key implementation questions — for example, how to allocate mixed-purpose expenses, how the rule interacts with other loss limitation regimes, and whether any unused wagering losses can be carried forward or recognized under other provisions — which will determine how blunt or narrowly targeted the limitation ends up being in practice.
The Five Things You Need to Know
The bill replaces the existing text of IRC §165(d) with a rule allowing wagering losses only to the extent of gains from wagering transactions.
It defines ‘‘losses from wagering transactions’’ to include any deduction otherwise allowable under the tax code that is incurred in carrying on a wagering transaction, sweeping business-style expenses into the cap.
The limitation applies to all taxpayers under the Code — individuals, partnerships, and corporations — whenever deductions are linked to wagering activity.
Unrealized in the text are explicit carryforward or net operating loss mechanics; the statute itself simply bars deductions beyond wagering gains rather than prescribing a separate carryforward mechanism.
The rule is effective for taxable years beginning after December 31, 2025, so returns for those tax years will need to reflect the new limitation.
Section-by-Section Breakdown
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Short title — FULL HOUSE Act
This section provides the act’s short title for citation. It has no substantive tax effect but will be used in references, committee reports, and rulemaking preambles.
Amendment to IRC §165(d): cap on wagering losses
This is the operative change: the section replaces existing language in §165(d) with a compact rule that limits deductible wagering losses to the amount of gains from those transactions. Importantly, it expands the notion of ‘‘losses’’ to include any deduction under the tax code incurred in carrying on wagering transactions, which draws ordinary business deductions into the limitation and signals a congressional intent to prevent wagering-related deductions from offsetting unrelated income.
Effective date
The amendment applies to taxable years beginning after December 31, 2025. That timing means taxpayers should prepare to apply the limitation for fiscal years that start in 2026 and calendar-year 2026 returns, affecting planning and how expenses are classified and supported for those tax years.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- The Department of the Treasury and IRS — The cap simplifies an audit posture and reduces opportunities for taxpayers to use wagering losses and related deductions to offset unrelated income, which can increase federal tax receipts and lower administrative complexity in distinguishing allowable losses.
- Non-wagering competitors and businesses — Firms that do not engage in wagering avoid competitive pressure from rivals that might otherwise use large deductible wagering-related losses to reduce taxable income across their operations.
- Tax compliance vendors and specialists — The change creates demand for software, recordkeeping solutions, and advisory services to segregate wagering activity and defensibly allocate deductions, creating commercial opportunities for providers in the tax-compliance market.
Who Bears the Cost
- Professional gamblers and entities running wagering operations — Taxpayers who treat wagering activity as a business and incur operating expenses that exceed winnings will lose the ability to deduct net wagering shortfalls against other income.
- Individual taxpayers with substantial gambling-related expenses — High-frequency or semi-professional gamblers who try to deduct travel, lodging, or promotional costs tied to wagering will face higher tax liabilities and more stringent documentation burdens.
- Tax preparers and advisors — Preparers must rework return positions, revise engagement scopes, and defend allocation choices in audits; this raises compliance costs and increases exposure to disputes over what counts as ‘‘incurred in carrying on’’ wagering transactions.
- Smaller wagering operators and startups — Small businesses that operate wagering activities seasonally or experimentally may see after-tax losses deepen if they cannot deduct operational deficits against other receipts.
Key Issues
The Core Tension
The central dilemma is balancing the desire to prevent taxpayers from using wagering losses and associated deductions to shelter other income against the legitimate claim that some wagering enterprises operate as businesses and should be entitled to ordinary business deductions even in an unprofitable year; the bill solves the sheltering problem by imposing a blunt cap, but in doing so it may deny relief to bona fide business actors whose economic losses are real and economically meaningful.
The bill’s operative language is short and intentionally broad, which creates substantial interpretive work for the IRS. The pivotal phrase — deductions ‘‘incurred in carrying on any wagering transaction’’ — will drive outcomes, but the statute does not define its contours.
Questions include how to allocate mixed-purpose expenses (for example, business travel with both wagering and non-wagering purposes), whether overhead and capital-related deductions tied to a wagering business fall within the cap, and how the rule interacts with existing loss regimes (such as NOLs, hobby-loss rules, and passive activity limits). Those interactions are not addressed in the text, so guidance or litigation will likely fill the gaps.
Another implementation challenge is classification: taxpayers and preparers must trace deductions to particular wagering transactions to determine the cap, but many expenses are fungible or aggregated on tax returns. The statute does not create an express carryforward for disallowed wagering losses, nor does it specify whether disallowed amounts are permanently nondeductible or can be recognized under another provision later.
That leaves open the risk that the limitation will operate as a permanent denial in some circumstances, potentially deterring legitimate commercial wagering activity and prompting restructuring strategies (for example, separating activities into different entities or shifting expense characterization) that create tax planning complexity and new administrative burdens for the IRS.
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