Some of us (OK, me) view prediction markets as no more reliable than psychic readings. But millions disagree, buying contracts on any- and everything, including sports outcomes. (Photo by Vinicius “amnx” Amano for Unsplash+)
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Prediction market platforms offer another way to bet on athletic events. The trade association that represents licensed casinos contends that it essentially is illegal sports betting without the rules, and has cost governments tax due on $1 billion (and counting).
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This week is a big one for sports fans.
The National Basketball Association (NBA) playoffs are underway. World Cup games start this week across the United States.
Some of those following the games don’t have an emotional attachment to the NBA or Fédération Internationale de Football Association (FIFA) teams. Their interest is in betting on the match-ups.
That’s easier now for millions of U.S. gamblers, thanks to the 2018 Supreme Court ruling allowing states to regulate sports betting. Currently, 38 states and the District of Columbia allow sports betting.
That’s also a bonus for the Internal Revenue Service and state tax collectors, which are notified in most cases of the taxable transactions.
But, says a national gaming group, the growing popularity of prediction markets is shorting government treasuries tax due on more than $1 billion.
Prediction markets mean tax losses: Tax revenue is not being collected because some bettors are using an alternative.
No, not the unlawful neighborhood bookie. They’re putting their money into what prediction markets call futures contracts.
And that’s bad news for tax officials, says the American Gaming Association (AGA).
Prediction markets argue that oversight of these sports event contracts belongs to the federal commodities regulator. That allows them (and the buyers/bettors) to avoid longstanding state and tribal regulatory frameworks that govern legal sports betting.
That regulatory stance costs state and tribal treasuries taxes that are paid through other channels on gaming revenue, according to the AGA.
How prediction markets work: The various prediction platforms, such as Kalshi and Polymarket, offer consumers an event contract. This lets participants put money on the outcome of real-life events.
That includes everything from the length of the Super Bowl halftime show to whether a corporate CEO will say the word Bitcoin during an earnings call.
To me, that sounds a lot like your basic sporting prop bets. Many others agree. And that determination, and how it affects U.S. tax collection, is at the core of multiple pending lawsuits.
If prediction markets are found to constitute gambling, they would be subject to state and tribal gaming commissions.
But if, as the platforms assert, their offerings are futures contracts, the transactions would be regulated by the Commodities Future Trading Commission (CFTC), not the more restrictive state governments.
“We recently had 41 Attorneys General from around the country weighing in saying the CFTC plays an important role in the nation’s economy, but they’re not the regulator of national sportsbooks. Forty-one attorneys general — that’s from every political stripe that there is in this country,” AGA President and CEO Bill Miller said during a recent interview on CNBC’s Squawk Box.
“It’s not about the AGA or the gaming industry, it’s about states and tribes that are losing literally $1 billion in state and tribal revenue that would otherwise go to fund important community projects and pay taxes to these states,” added Miller.
Missed tax revenue costs everyone: Miller’s take is expected. He heads the national trade group representing U.S. licensed commercial and Tribal casino operators.
But all of us taxpayers should be concerned about another industry getting a tax pass.
States have been facing tough budget questions, especially since the COVID pandemic. The federal government is projected to post a $2 trillion deficit in fiscal year 2026.
These governmental financial challenges ultimately will make all our lives less affordable.
Prediction markets and the IRS: Taxes on prediction market transactions at the federal level are officially in flux.
Of course, the U.S. government asserts that income from prediction market payouts are, like any source of income, taxable.
But the question is how should this income be classified for federal tax purposes. The answer depends, in part, on the resolution of the aforementioned lawsuits.
So far, the IRS hasn’t taken a position on the tax treatment of event contracts. Tax experts note, however, that several Internal Revenue Code (IRC) sections may apply. They are —
- IRC §§ 61, 165(d) – Gambling income;
- IRC §§ 1222 – Capital gain income; and
- IRC §§ 1256 – Options, Swaps, and Futures Contracts.
Each IRC section has specific rules and requirements for reporting and possible ways to offset the taxable amounts. So whatever ultimate decision is made on prediction markets’ status (and tax treatment), anyone who participates in event contracts should consult a tax professional.
The tax advice can provide direction while we wait for additional IRS guidance in this area. And yes, I am having cryptocurrency tax rules flashbacks!
Be tax proactive: One thing, however, is settled. The cardinal tax rule applies. Keep good records.
That includes a contemporaneous log of prediction market activity. Many of these platforms do not track the information that’s essential for accurate tax reporting. They also do not issue 1099 forms.
And if you are betting on the New York Knicks/San Antonio Spurs or any FIFA games the old-fashioned — and legal! — way through a sportsbook and win, remember you’ll owe taxes on that money when you file your federal (and state) 2026 returns next year.
You can find more on reporting your gambling winnings (and claiming any allowable losses) in my post on how to do so using Form 1040 Schedule 1.
And by next tax season, maybe we’ll have some clarity from the IRS on how to report prediction market income.
World Cup addenda: Since I mentioned the World Cup at the top of this post, it’s seems appropriate that it get another mention in closing.
But, since I’m not a global football/fútbol/soccer fan, I’m focusing on another component of the competition. The national teams’ player selection videos.
My favorite is England’s. Why? It’s set to The Beatles’ “Come Together,” and opens with a vintage clip of John Lennon. Enough said, or rather, shown.
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You also might find these items of interest:
- IRS urges sports bettors to wager legally, and pay tax on all winnings
- IRS missing $1.4 billion in tax due from unreported gambling winnings
- Winning bets, on Super Bowl Sunday and the rest of the year, are taxable income
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