Prediction markets are platforms which offer a product called an event contract. Event contracts allow participants to put money on the outcome of real-life events; everything from the length of the Super Bowl halftime show to whether the CEO of NVIDIA will say the word ‘Bitcoin’ during an earnings call.
The prediction market industry has exploded in popularity in the past 2 years. The two most notable platforms are Kalshi and Polymarket; however, several other financial, crypto, and sports betting platforms, including RobinHood, Coinbase, DraftKings, and FanDuel, have launched prediction marketplaces of their own.
Legal Landscape
The main issue under contention is whether prediction markets constitute gambling, making them subject to state and tribal gaming commissions. The platforms assert that they offer futures contracts, meaning they would be regulated by the Commodities Future Trading Commission (CFTC), not state governments.
The latter treatment is more favorable to the industry, as it would allow them to skirt more restrictive state-level gaming laws. Kalshi is involved in more than a dozen lawsuits, both suing and being sued by state governments, over this issue.
Tax Treatment
Income and losses from prediction markets are, like any source of income, taxable. The question is how such income should be classified for federal tax purposes. The answer will likely hinge, in part, on the resolution of lawsuits currently trickling through the court system.
Meanwhile, the IRS has yet to take a position on the tax treatment of event contracts. Based on their characteristics, one of several sections of the Internal Revenue Code (IRC) may apply:
- IRC §§ 61, 165(d) – Gambling income
- IRC §§ 1222 – Capital gain income
- IRC §§ 1256 – Options, Swaps, and Futures Contracts
Gambling income
The treatment of wagering income and losses is particularly unfavorable to taxpayers. Wins and losses cannot be netted. Rather, the IRS requires tracking gambling activity on a “per session” basis. A win or loss must be recorded for each session.
Taxpayers must report gross gambling winnings as other income, while gross losses are taken as an itemized deduction up to the amount of winnings.
The One Big Beautiful Bill Act (OBBB, or H.R. 1) created an additional restriction on gambling losses. Beginning with tax year 2026, taxpayers can only claim up to 90% of losses against winnings as an itemized deduction.
Capital gain
A capital asset is any property held by a taxpayer, whether or not it is connected to a trade or business, unless specifically excepted. Common capital assets include stocks, bonds, vehicles, and machinery.
Capital gains and losses are subject to several favorable provisions of the IRC. First, unlike gambling income, taxpayers are allowed to net gains and losses. Net capital losses can offset up to $3,000 of ordinary income. Net short-term gains (assets held less than one year) are taxed as ordinary income, while net long-term capital gains are taxed at preferential rates, with a maximum rate of 20% (versus 37% for ordinary income).
Section 1256 gain
Gains and losses related to certain financial instruments, including derivatives and futures contracts, are subject to special rules.
First, 1256 contracts held at the end of the tax year are “marked to market,” meaning they are treated as if they were sold at year-end for fair market value. Second, of the total net gain or loss, 60% is classified as long-term capital gain and 40% is classified as short-term capital gain, regardless of how long the asset was held.
The IRC states that for a contract to fall under these rules, it must be “traded on or subject to the rules of a qualified board or exchange” regulated by the SEC or CFTC.
Takeaways
There are numerous unanswered questions concerning prediction marketplaces, and the landscape is rapidly evolving—faster than lawmakers and regulators can react.
Regardless of tax treatment, it is extremely important for individuals who engage in transactions with prediction marketplaces to keep a contemporaneous log of their activity. Many platforms do not track information that is essential for accurate tax reporting, nor do they issue Forms 1099 to customers.
Individuals who had income from event contracts in 2025 should consult with their tax advisor and wait for additional IRS guidance.