He Won $20,000 Betting on Sports and Lost Every Dollar. The IRS Could Still Tax More of His Social Security
A retiree who won and lost the exact same $20,000 assumed the IRS had nothing to collect, but the tax code treats winnings and losses in completely separate buckets, and that quirk quietly turned a break-even year into a surprise…
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He won $20,000 betting on sports, then lost it all and figured there was nothing left for the IRS to tax. He was wrong.
For this 64-year-old retiree, the surprise reaches beyond his bets. He claimed Social Security at age 62 and collects about $2,000 a month. Those gambling winnings can make part of that benefit taxable, even though he kept none of the money.
Why a Break-Even Year Still Shows Up as Income
The tax code keeps winnings and losses in separate categories, so every dollar won counts as gross income, the top line of the return. Losses come off later. They count only as an itemized deduction on Schedule A, the form you use when you list deductions instead of taking the standard deduction.
That deduction got smaller this year. Starting in 2026, the IRS limits the gambling loss deduction to the lesser of 90% of your losses or your winnings. For our retiree, $20,000 in losses becomes an $18,000 deduction. That leaves $2,000 taxed as income he never actually kept. Congress has seen bills to lift the limit, but those efforts have so far stalled.
There’s a second catch. The loss deduction only helps if he itemizes. The 2026 standard deduction for single filers is $16,100, which he gets automatically. Itemizing his losses puts him only $1,900 ahead of that.
How $20,000 in Winnings Made $11,300 of His Benefits Taxable
Whether Social Security gets taxed depends on combined income: half your benefits plus your other income, including tax-exempt interest. If you file single and your combined income tops $25,000, up to 50% of the benefits can be taxed. Above $34,000, up to 85% can be.
Combined income uses gross winnings. The Schedule A loss deduction comes later on the return, so it never lowers this number.
He files single and collects $24,000 a year in benefits, plus $10,000 in taxable IRA withdrawals, with no other income. Without the gambling, his combined income is $22,000. That’s under the first threshold, so none of his benefits are taxed.
His standard deduction more than covers the IRA withdrawal, so his federal tax bill is zero. Now add the winnings. His combined income jumps to $42,000, past both thresholds, and $11,300 of his Social Security becomes taxable.
His adjusted gross income (AGI) goes from $10,000 to $41,300. Take off his $18,000 loss deduction and he’s left with $23,300 of taxable income.
At 2026 rates of 10% and 12%, that comes to about $2,500 in federal tax. He owes it for a year in which he didn’t make a dollar of profit.
Where the Winnings Collide With His IRA Withdrawals
Once winnings push combined income past $34,000, every extra dollar of other income in that year can make another 85 cents of benefits taxable. A large IRA withdrawal in a big winnings year costs more than the same withdrawal in a quiet year. If he can put off a large IRA withdrawal until the following year, the tax cost may be lower.
Timing his payments matters too. The IRS doesn’t automatically withhold tax from many gambling payouts, so a bill can come all at once in April. Social Security lets you withhold 7%, 10%, 12%, or 22% of each monthly payment, which spreads that cost out and helps you avoid an underpayment penalty.
Two Habits That Protect Your Benefits at Tax Time
- Keep complete records of every session: dates, amounts won, amounts lost, and account statements because the IRS will only allow the loss deduction if you can back it up. Without proof of his losses, he could lose the gambling deduction, though he could still take the standard deduction.
- Treat these as two separate questions. The loss deduction lowers taxable income and only matters if you itemize. This benefits calculation runs on gross winnings no matter how much you lost. Smaller taxable IRA withdrawals can help lower that number. Gambling losses cannot.
Every return has its own mix of income, filing status, and age-based deductions. This gambling quirk quietly costs retirees real money. It is one of several IRS rules, and we mapped out the rest in a free guide. He finished the year even with the sportsbook. The tax return tells a different story.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
