IRS Yet to Clarify Tax Rules for Prediction Market Winnings as Trading Activity Expands

Prediction Market Traders Await IRS Tax Guidance

The rapid expansion of prediction markets has brought renewed attention to their tax implications, particularly as platforms offering event contracts attract growing trading volumes.

Despite the sector's growth, the IRS has not clarified whether gains from prediction market contracts should be treated as gambling income, capital gains, or Section 1256 futures contracts, creating uncertainty for both retail and professional traders.

Ryan Schutz, a former IRS special agent and founder of First There Tax, said the lack of official guidance has generated conflicting interpretations.

"I think it's extremely confusing for the users of prediction markets because they're getting a lot of conflicting guidance," Schutz said.

Several Tax Treatments Remain Under Consideration

According to tax specialists, prediction market winnings could ultimately fall into one of several existing tax categories.

One possibility is gambling income, a classification that has become less favorable following the enactment of President Donald Trump's One Big Beautiful Bill Act, which limits gambling loss deductions to 90%.

Under the revised framework, a taxpayer who wins and loses the same amount during the year may still owe taxes because not all losses are deductible.

Nathan Goldman, Professor of Accounting at North Carolina State University, noted the impact of the new legislation.

"Sports gambling is actually in very bad tax treatment right now," Goldman said.

Capital Gains and Section 1256 Could Offer Better Outcomes

Alternative classifications could significantly reduce tax liability for prediction market participants.

If contracts qualify for capital gains treatment, taxpayers may offset gains with losses and, under certain conditions, deduct up to US$3,000 in net realized losses against ordinary income.

Another possibility is classification under Section 1256 contracts, commonly used for certain futures products.

Under this framework, 60% of gains are taxed at long-term capital gains rates, while the remaining 40% is taxed as short-term income, regardless of how long the contract was held. Because long-term capital gains are generally taxed at lower rates than ordinary income, many tax professionals view this approach as more advantageous than gambling tax treatment.

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

New Products Could Require Different Tax Treatment

The emergence of new financial products is adding further complexity to the discussion.

In May, prediction market platform Kalshi introduced perpetual futures, or "perps," which differ from traditional event contracts because they do not have a fixed expiration date.

According to Schutz, these products could warrant a separate tax classification.

"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."

Industry Calls for Regulatory Clarity

Tax experts agree that the wide variety of contracts currently offered by prediction market platforms makes it difficult to establish a single tax framework.

George Salis, Chief Economist and Senior Tax Policy Director at Vertex, said different event contracts may require different tax treatment.

"Some contracts may look more like sports wagering, while others may resemble financial or economic forecasting. That range makes it harder to create one simple tax framework that applies cleanly across every type of contract."

Sports-related event contracts continue to account for a significant share of trading volume on leading prediction market platforms. At the same time, they remain under close scrutiny from state gaming regulators and industry critics, many of whom argue that these products closely resemble traditional sports betting.

Until the IRS issues formal guidance, uncertainty over the taxation of prediction market contracts is expected to remain a key issue for operators, traders, and the broader regulated gaming industry.