Prediction markets are booming. No one knows how to tax winnings

Prediction markets are booming, with monthly transactions reaching billions of dollars, and a recent estimate by a consulting firm suggests that this relatively new phenomenon could grow to $1 trillion by the end of the decade. That’s a lot of tax, but the government doesn’t know exactly how to account for it.

Although working in prediction markets is similar to gambling, there are important differences between these platforms. They argue that they offer financial contracts that are regulated by the Commodity Futures Trading Commission, whereas gambling is regulated by the state. This distinction is meaningful to taxpayers and is so new that the IRS has not issued specific guidance and tax practitioners argue that it is open to interpretation.

James Creech, principal in professional tax at Baker Tilly, said that while predictions made in apps are essentially the same as betting at a casino, they can be treated very differently. And even if someone makes small bets over and over again, the difference in tax treatment can become meaningful over time. “It feels like people are taking on tax risks without knowing it,” he said.

Certainly more retail investors and others will have access to prediction markets in more apps. in robin hoodPrediction Marketplace has become the fastest growing product line in terms of revenue, with 11 billion contracts traded by more than 1 million customers since its launch last year. The company isn’t alone in chasing bigger actions pioneered by platforms like Polymarket and Kalshi. interactive broker, coinbase,Crypto.com, draft kings, flutter entertainmentFanDuel and Fanatics are recent entrants.

Currently, there is no consensus on how to handle profits and losses from prediction markets. Although tax advisors agree that gains and losses from prediction markets need to be reported, they disagree on how to do this for tax purposes.

There are several possibilities. One is that prediction market contracts are treated as capital assets, like stocks and bonds, and are subject to rules regarding capital gains and losses. Short-term gains held for less than one year are typically subject to the taxpayer’s ordinary income tax rate, which will reach 37% in 2025. Investment losses are first used to offset similar capital gains, whether short-term or long-term. Investors with an overall net capital loss for the year may deduct up to $3,000 of capital loss each year and may carry additional losses forward to later years.

Another possibility is that prediction market contracts could be treated as gambling wins and losses. Gambling proceeds are considered taxable income and may be subject to withholding tax. However, there are also rules for deducting gambling losses that apply to taxpayers. (Notably, only about 10% of all taxpayers have opted to line items for the 2022 tax year, according to the Tax Policy Center.)

Taxpayers can offset gambling losses up to the amount of their gambling profits for the year. So, for purposes of illustration, a taxpayer with $200,000 in gambling losses and $100,000 in profits could potentially offset $100,000 of the losses in 2025. In 2026, taxpayers will only be able to offset 90% of their gambling losses due to changes under the One Big Beautiful Bill Act, a major tax law passed last summer.

A third option is that prediction market contracts could be treated as Section 1256 contracts, a specific category of financial instruments defined by the IRS, said April Walker, senior manager of tax and ethics at the American Institute of Certified Public Accountants.

According to TaxSlayer, gains and losses from Section 1256 contracts are taxed in a 60/40 split, regardless of how long the contract was held. That is, 60% is treated as long-term capital gain or loss and 40% is treated as short-term capital gain or loss. Some tax experts have said they do not believe prediction market contracts meet the IRS’s strict standards for Section 1256 contracts, but there is no consensus. According to TaxSlayer, investments in this category include non-equity options, foreign currency contracts, regulated futures contracts, dealer stock options, and dealer securities futures contracts.

Taxpayer’s Responsibility to Track Profit and Loss and Prepare for the IRS

It’s the wild west until the IRS gives us guidance. However, the important thing for taxpayers to know is that they must somehow report the income they receive from prediction markets and keep detailed records. Generally, it’s taxable income or taxable loss, regardless of how it’s treated, Walker said.

Mark Gallegos, a tax partner at accounting firm Port Brown, said taxpayers who use prediction markets should not rely on the platforms to track profits and losses. Although the platform may not issue tax forms to investors showing their profits and losses, the responsibility to track profits and losses and maintain proper documentation is still on the taxpayer. “That’s always very important,” he said, but added that it’s especially important because of the lack of clarity. Mr. Gallegos said that depending on how you categorize things, two investors could take the same position in a prediction market and end up with different tax bills.

Brian Kearns, founder and president of Haddam Road Tax & Consulting, said once the IRS releases guidance, taxpayers may have to amend their returns depending on the characteristics of their income. It’s possible the IRS will provide a safe haven, but that’s also unclear. “When you’re dealing with taxes and tax planning, you want to have a structure to work from and you don’t want to make assumptions. That’s what the field is focused on. That level of uncertainty doesn’t help anyone,” Kearns said.

The IRS did not respond to requests for comment.

Practitioners expect that at some point there will be guidance from the IRS, which poses risks to taxpayers. “We’re going to use the benefit of hindsight to tell people what went wrong,” Baker Tilly’s Creech said.

Meanwhile, other factors are also at play. President Trump recently said he would consider eliminating federal taxes on gambling winnings. “We don’t tax tips, we don’t tax Social Security, we don’t tax overtime,” he told reporters at a recent press conference on Air Force One. President Trump said, “I don’t know if gambling winnings are tax-free. We’ll have to think about that.”

The gambling tax hike included in the president’s big tax bill has irritated some Republicans and led to criticism from the gambling industry, which faces new competition from betting markets.

There are also new efforts to counter the industry’s encroachment on gambling, including state efforts to regulate betting markets and the American Gaming Association, which recently hired former New Jersey Gov. Chris Christie as a strategic advisor on challenges to the legality of sports betting markets. A new national lobbying group, the Prediction Markets Coalition, was recently formed to counter these efforts. These platforms argue that allowing different states to regulate prediction markets undermines guardrails meant to maintain market fairness and prevent insider profits.

“The United States is the biggest frontier for prediction markets, and the momentum we are seeing makes a unified voice in the industry not only important, but necessary,” Matt David, coalition board member and CEO of Crypto.com, said in a news release announcing the organization’s formation.

Adding to the muddy picture is the fact that sports betting platforms like DraftKings and FanDuel are launching their own prediction market platforms. “I think the IRS has a case for saying it’s the same bet you’re making at a casino,” Creech said.

Disclosure: CNBC and Kalsi have a business relationship.