Prediction markets are booming. How to tax winnings is anyone’s guess

Prediction markets are booming; Monthly trade is in the billions of dollars, and a recent forecast from a consulting firm says the relatively new phenomenon could reach $1 trillion by the end of the decade. That’s a huge amount of money to be taxed, and the government hasn’t quite figured out how to account for it.

Although activities in prediction markets are similar to gambling, these platforms claim a big difference. They say they offer financial contracts regulated by the Commodity Futures Trading Commission, while gambling is regulated by the government. This is a distinction that may be meaningful to taxpayers, and because these are so new, the IRS has not issued specific guidance; tax practitioners say this leaves everything open to interpretation.

According to James Creech, director of Baker Tilly’s exclusive tax practice, predictions made through apps are essentially no different from betting in a casino, but the treatment can be completely different. Even if someone makes many small bets, the differences in tax treatment can be significant over time. “People seem to be taking tax risks they didn’t know they were taking,” he said.

Of course, more retail investors and others will discover access to prediction markets on more apps. On: robinhoodPrediction marketplaces have become the fastest-growing product group in terms of revenue, with 11 billion contracts executed by more than one million customers since its launch last year. It is not alone in pursuing a larger action led by platforms such as Polymarket and Kalshi. Interactive Brokers, coinbaseCrypto.com, DraftKings, Flutter EntertainmentFanDuel and Fanatics are also among the new entrants.

There is currently no consensus on how to handle gains and losses from prediction markets. While tax advisors agree that income and losses from prediction markets should be reported, they are divided on how to do this from a tax perspective.

There are several possibilities. The first is that prediction market contracts should be treated as a capital asset, like stocks or bonds, subject to rules regarding capital gains and losses. Short-term gains held for a year or less are generally taxed at the taxpayer’s ordinary income rate, which is up to 37% in 2025. Losses on investments are first used to offset short-term or long-term capital gains of the same type. Investors who experience a total net capital loss during the year can deduct up to $3,000 in capital losses each year, with the ability to carry additional losses to subsequent years.

Another possibility is that prediction market contracts can be treated as gambling wins or losses. Gambling winnings are considered taxable income and may have withholding requirements. However, there are also rules regarding deducting gambling losses that apply to taxpayers who itemize gambling losses. (Only 10% of all taxpayers chose to itemize for the 2022 tax year, according to the Tax Policy Center.)

Taxpayers can offset gambling losses up to the amount of annual winnings from gambling. For example, a taxpayer with a gambling loss of $200,000 and a win of $100,000 could recover a loss of $100,000 in 2025. In 2026, taxpayers will only be able to recoup 90% of their gambling losses due to changes under The One Big Beautiful Bill Act, landmark tax legislation passed last summer.

A third option, prediction markets contracts, could be treated as Section 1256 contracts, a specific category of financial instruments defined by the IRS, said April Walker, senior director of tax practice and ethics at the American Institute of CPAs.

Gains or losses from Section 1256 contracts are taxed using a 60/40 split, regardless of how long the contract is held. According to TaxSlayer. This means that 60% is treated as long-term capital gain or loss and 40% is treated as short-term capital gain or loss. Some tax experts said they did not think prediction markets contracts met the IRS’s strict criteria for Section 1256 contracts, but there was no consensus. Investments in this category include non-equity options, foreign exchange contracts, regulated futures contracts, dealer stock options and dealer security futures contracts, according to TaxSlayer.

Responsibility for taxpayers to track their gains and losses and prepare for the IRS

This truly is the Wild West until the IRS provides guidance. However, what is important for taxpayers to know is that they must somehow report their income from prediction markets and keep detailed records. Generally, no matter how it’s treated, it will be a taxable income or a taxable loss, Walker said.

Mark Gallegos, tax partner at accounting firm Porte Brown, said taxpayers who use prediction markets should not rely on the platforms to track their gains and losses. Platforms may not provide investors with a tax form showing their gains and losses, but the taxpayer still has the responsibility of tracking gains and losses and keeping good documentation. “This is always very important,” he said, but added that it was especially important because of the lack of clarity. Gallegos said two investors could take the same position in prediction markets and face a different tax bill depending on how they classify things.

If the IRS issues guidance, it could mean taxpayers will have to make changes to returns depending on how they define income, said Brian Kearns, founder and president of Haddam Road Tax and Consulting. The IRS may provide a safe harbor, but that too is unknown. “When you’re dealing with tax and tax planning you want to have a structure that you can work from, you don’t want to be guessing, and that’s what this field looks at. That level of uncertainty doesn’t help anyone,” Kearns said.

The IRS did not respond to requests for comment.

Practitioners expect the IRS guidance to arrive at some point, which will lead to risks for taxpayers. “We’re going to look back to tell people what they did wrong,” Baker Tilly’s Creech said.

Meanwhile, other factors also come into play. President Trump recently said he would consider eliminating federal taxes on gambling winnings. “We don’t have a tax on tips, we don’t have a tax on Social Security, and we don’t have a tax on overtime.” he told reporters during a recent press joke about Air Force One. “There’s no tax on gambling winnings, I don’t know. I’ll have to think about it,” Trump said.

President’s big tax bill includes gaming tax hike made some Republicans uncomfortableand has sparked criticism from the gambling industry as it faces new competition from prediction markets.

There are also government efforts to regulate prediction markets and new efforts to challenge the industry’s encroachment on gambling; such as the American Gaming Association, which recently hired former New Jersey Governor Chris Christie as a strategic advisor on challenges to the legality of sports betting markets. Recently, a new national lobby group, the Prediction Markets Coalition, was formed to combat these efforts. These platforms argue that allowing different states to regulate prediction markets would weaken guardrails intended to keep markets fair and prevent insider advantage.

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

Muddying the waters is the fact that sports betting platforms like DraftKings and FanDuel are launching their own prediction market platforms. “I think the IRS would have grounds to say that this is the same bet you placed at the casino,” Creech said.

Disclosure: CNBC and Kalshi have a business relationship.