Arbitrage Betting Taxes: The 90% Rule Changes the Math

On January 1, 2026, one number in the tax code turned a lot of profitable arbitrage into a losing trade. The number was 90. Congress rewrote Section 165(d) so gambling losses now deduct at 90 cents on the dollar instead of 100. For a casual bettor that is an annoyance worth a few dollars. For anyone running arbs it is the whole story, because arbitrage betting taxes get calculated on your gross wins and gross losses, never on the profit you actually keep.

What actually changed on January 1

The One Big Beautiful Bill Act was signed on July 4, 2025, and the gambling provision took effect for tax years beginning after December 31, 2025. The amended statute allows a deduction "equal to 90 percent of the amount of such losses during such taxable year, and shall be allowed only to the extent of the gains from such transactions." Both limits stack, and the text draws no line between a recreational bettor and a full-time one. The Tax Foundation ran the poker version: a player who wagers a million and wins a million goes from a $0 tax bill to a real one. Break even, pay anyway.

Why arbitrage betting taxes hit harder than any other style

The IRS does not let you report a net figure. Each wager is its own transaction, so your winning leg is income and your losing leg is an itemized deduction on Schedule A. That is invisible on a $100 weekend bet. It is brutal if you cycle a bankroll through hundreds of positions, because every arb manufactures a large gross win and a large gross loss to produce a small net. A single-side bettor with a 4% ROI reports numbers close to what they earn. An arber working a 2% edge at the odds they locked in reports numbers twenty times larger.

One arb, taxed two ways

Real shape of a two-way arb. DraftKings has one side at +115, BetMGM has the other at -105. In decimal that is 2.15 and 1.952, so the implied probabilities are 46.51% and 51.22%. They sum to 97.73%, leaving a 2.32% edge at those odds. Split $1,000 proportionally and you stake $475.91 on the +115 and $524.09 on the -105. Either result returns $1,023.22. You clear $23.22.

Now file it. The +115 leg wins:

• Winning leg: $475.91 staked, $1,023.22 back. Gambling income of $547.30.
• Losing leg: $524.09 gone. A wagering loss of $524.09.

Under the old rules you reported $547.30, deducted $524.09, and paid tax on $23.22. It matched reality. Under the 2026 rules you report the same $547.30 but deduct only $471.68. Taxable income of $75.62 on a trade that made you $23.22.

At a 24% marginal rate that is $18.15 of federal tax. You keep $5.07 of a $23.22 profit. A 78% effective rate, before your state takes a cut, and nine states do not allow gambling loss deductions at all.

Your phantom income is 10% of your losing stakes

The disallowed 10% is the whole effect:

Phantom income = 10% of everything you staked on legs that lost.

Check it. 10% of $524.09 is $52.41, plus the real $23.22 profit, gives $75.63. The taxable figure. It reconciles every time.

Arbitrage splits your stake roughly in half, so about half your annual handle lands on losing legs. Second shortcut: phantom income runs near 5% of total handle. Push $1,000,000 through the books at that 2.32% edge and you made about $23,200 while reporting roughly $75,600. Around $52,400 of that is fictional.

The minimum edge you now need to break even

Phantom income is about 5% of handle regardless of edge, but profit scales with edge. So there is a threshold below which tax exceeds the trade. The break-even edge works out to 0.05r / (1 - r), where r is your marginal rate:

• 22% bracket: you need better than a 1.41% edge.
• 24% bracket: better than 1.58%.
• 32% bracket: better than 2.35%.
• 37% bracket: better than 2.94%.

Most arbs on any scanner sit between 1% and 3%. A 1.2% arb in the 24% bracket is not a small win anymore. It is a loss you fund in April.

Raise your minimum edge floor and stop treating volume as the goal. Fewer, fatter positions make the same profit on a fraction of the handle, which shrinks phantom income directly. It also keeps your accounts alive longer. The tax code and the risk desk want the same thing from you now.

You probably will not get a W-2G, and that does not help

The 2026 W-2G threshold went up, and the IRS instructions set it at $2,000. But the dollar figure is only half the test. A book files the form when winnings hit the threshold and are "at least 300 times the amount of the wager." Arb legs are priced near even money. A 2.15 payout is roughly 1.15 to 1, so you will never see 300 to 1 on one. Run a million in handle and you can finish the year with zero forms. That is not a loophole. IRS Topic 419 is blunt: winnings are fully taxable and you must report them whether or not anyone sends you a form.

What to do before you file

1. Log per leg, not per arb. You need each wager's date, book, market, stake, odds, and result. A spreadsheet storing only net profit per opportunity cannot produce the gross columns the return asks for.
2. Confirm you can itemize. Wagering losses only exist on Schedule A. The 2026 standard deduction is $16,100 single and $32,200 married filing jointly. If your itemized total lands under that, you deduct zero losses and report every dollar of gross winnings. For a high-handle arber that is catastrophic. Check it first.
3. Do not plan around repeal. The FAIR BET Act (H.R. 4304) would restore the full deduction, but the House Rules Committee declined to advance it on January 12, 2026. The FULL HOUSE Act (H.R. 6985) carries the same language with bipartisan support. Nothing has reached a floor vote. The 90% cap is the law for 2026.

FAQ

Can I just report my net arbitrage profit?

No. The IRS treats each wager as a separate transaction. Winning legs are income, losing legs are an itemized deduction, and the 90% cap applies to that deduction. A net figure skips the limitation the law imposes.

Should I bet smaller to reduce phantom income?

Smaller stakes cut phantom income and profit by the same proportion, so the ratio does not improve. What moves the ratio is edge. Sizing discipline matters for other reasons, just not this one. Where you can legally place the bets is a separate question.

Run your 2025 numbers through the 10% rule this week, because arbitrage betting taxes hinge on it. If the phantom figure is bigger than what you actually cleared, you were not running an arbitrage operation last year. You were running a very efficient way to hand money to the IRS, and 2026 is the year that bill comes due.

Disclaimer: Informational only, not tax, legal, or financial advice. Consult a qualified tax professional about your own situation. Betting involves risk, and arbitrage returns depend on odds holding until both bets are placed. Odds move and markets suspend. BetSuite is a data and detection tool, not a sportsbook: it holds no funds, places no bets, and you place every bet yourself. Betting laws vary by state and province.