Prediction Markets Taxation Remains Unclear as IRS Withholds Guidance

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As prediction markets gain traction, traders face uncertainty regarding tax obligations, since the Internal Revenue Service has not issued guidance on how winnings are taxed.

Nearly six months into the year, the IRS has still not provided clarity on the federal tax treatment of prediction market winnings and losses.

“I think it’s extremely confusing for users of prediction markets because they’re getting a lot of conflicting guidance,” said Ryan Schutz, a former IRS special agent and founder of First There Tax.

Potential tax classifications for prediction market winnings include gambling income, capital gains, or Section 1256 contract treatment, according to tax experts.

FanDuel, DraftKings and other online gambling apps are displayed on a phone in San Francisco on Sept. 26, 2022.

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Under the recently enacted “One Big Beautiful Bill Act,” sports gambling losses are capped at a 90% deduction limit. Previously, taxpayers could deduct full losses against winnings, but the new framework allows only a $90 deduction per $100 in winnings, leaving $10 taxable.

“Sports gambling is actually in very bad tax treatment right now,” said Nathan Goldman, a professor of accounting at North Carolina State University.

Alternatively, capital gains treatment permits taxpayers to offset up to $3,000 in realized losses against ordinary income annually.

Section 1256 contracts offer another pathway, where 60% of gains are taxed at lower long-term capital gains rates (0%, 15%, or 20%) while 40% are treated as short-term gains taxed at ordinary income rates, potentially up to 37%. This 60/40 split applies regardless of holding period.

These alternative classifications are generally more favorable than gambling income treatment for taxpayers.

“For the vast majority of people, the 1256 treatment or capital gain treatment would result in the least amount of tax,” Schutz explained.

Unique event contracts may face different treatment

In May, prediction market platform Kalshi launched perpetual futures, or “perps,” which have no expiration dates. Schutz suggests these may fall under different tax guidelines due to their structure.

“I could definitely see an argument of someone saying that event contracts could have a different categorization than perpetuals,” he said. “When I first found out about the perpetuals, they felt more like a real financial contract because they don’t have a specific end date and that kind of tracks with the mechanics of 1256.”

Without IRS guidance, determining appropriate tax treatment for prediction market contracts—such as which team wins the World Cup final—remains challenging.

“Some contracts may look more like sports wagering, while others may resemble financial or economic forecasting,” said George Salis, chief economist and senior tax policy director at Vertex. “That range makes it harder to create one simple tax framework that applies cleanly across every type of contract.”

Event contracts tied to sports continue to dominate leading platforms and face scrutiny from states arguing they mirror illegal sports betting operations.

While Kalshi and Polymarket declined to comment on platforms’ roles in educating users about tax obligations, both provide Form 1099 for reporting activity. Taxpayers must still report earnings even without receiving a 1099.

Neither the IRS nor the Department of Treasury responded to CNBC’s request for comment.

States say it’s gambling

Prediction markets may generate tax revenue for states if classified as gambling income.

“Treating [contracts] as gambling income is more beneficial to [states] because that’s a revenue driver,” Schutz noted.

Following a 2018 Supreme Court decision legalizing sports gambling, states like Oregon, New York, and New Hampshire have implemented at least a 50% tax on online sports betting sites.

The Commodity Futures Trading Commission claims jurisdiction over prediction markets, asserting that platforms’ event contracts are structured as swaps.

Unlike other states, North Carolina recognized prediction markets as operating under the CFTC, imposing a 6% tax on operators and 23% on sports betting sites. This approach may help North Carolina avoid lawsuits from prediction market platforms, according to Goldman.

“I think North Carolina is pretty much saying, ‘Maybe if we go in with a lower number, we won’t have as big of a fight in the courtroom over whether we’re allowed to impose this,'” Goldman said.

Jurisdiction battle

Multiple states are pursuing legal action against prediction market platforms, alleging illegal sports betting operations. The CFTC has intervened to defend its claimed exclusive jurisdiction over event contracts.

A New York federal judge recently rejected Kalshi’s request to halt New York’s state gambling laws from applying to the platform’s sports-related contracts.

The legal proceedings add complexity to the federal tax landscape.

“If states enact their own laws, we have converging regulations everywhere, making what Washington ultimately does more challenging,” Goldman said.

Tax experts emphasize the need for clarity, though the lack of guidance persists.

“I would love to see IRS guidance. I think that would be the most definitive solution,” Schutz said. “I think the IRS might be hesitant to issue guidance that conflicts with the CFTC position.”

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.

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