Prediction Markets Face a $1 Billion Tax Question: Is It Gambling?

Belgium Remembers 1944-1945, Tweede Wereldoorlog België, 75 Jaar Bevrijding Expert · 2026-10-01

Imagine you're scrolling through a prediction market like Kalshi or Polymarket, eyeing a contract on whether the Chiefs win the Super Bowl. You put down $100, and if you're right, you pocket a profit. Sounds like trading, right? But the IRS might see it differently—and that could cost you big time. A new analysis from the Tax Law Center, published in Tax Notes, dives into this exact question: Are sports event contracts on prediction markets considered gambling for federal tax purposes? The answer isn't just academic. It could determine whether your winnings are taxed as capital gains (max 20% plus net investment income tax) or as gambling income (up to 37% ordinary income, and you can't offset losses the same way). ### Why the IRS Cares About Your Super Bowl Bet The core issue is whether these contracts are "wagers" or "financial instruments." If they're wagers, they fall under gambling tax rules—which are harsh. You can only deduct gambling losses up to the amount of winnings, and you can't use them to offset other income. If they're financial instruments, you get the more favorable capital gains treatment. The Tax Law Center's analysis argues that many sports event contracts have economic characteristics of gambling. They're binary outcomes based on real-world events, not underlying assets. But prediction markets counter that they're simply derivatives—contracts whose value depends on future events, just like options on stocks. > "The line between gambling and investing has always been blurry," the analysis notes. "But when you're betting on a football game, it's hard to argue you're 'investing' in anything." ### What This Means for Traders If the IRS classifies these contracts as gambling, here's what changes: - **Tax rate**: Your profits could be taxed at ordinary income rates (up to 37%) instead of long-term capital gains (20%). - **Loss deductions**: You can't deduct losses beyond your winnings, and you can't carry them forward. - **Reporting**: You'd need to report each winning contract as gambling income, which could trigger additional paperwork. On the flip side, if they're financial instruments, you get the same treatment as stock trades—capital gains rates, loss deductions, and wash sale rules. ### The $1 Billion Question Prediction markets have exploded in popularity. Kalshi recently won a court battle to offer election contracts, and sports event contracts are next. With billions of dollars potentially flowing through these platforms, the tax stakes are enormous. The Tax Law Center's analysis doesn't offer a definitive answer, but it highlights the need for clear IRS guidance. Until then, traders are left in limbo—and that's a risky place to be. ### What Should You Do Now? If you're active on prediction markets, here's the practical takeaway: - **Keep meticulous records**: Track every trade, including dates, amounts, and outcomes. - **Consult a tax pro**: This is uncharted territory. A CPA familiar with both gambling and investment taxation can help you navigate it. - **Watch for IRS guidance**: The agency may issue rules soon, and they could apply retroactively. In the meantime, the debate rages on. Is it gambling? Is it investing? Or is it something entirely new? One thing's for sure: the IRS will want its cut either way.