Prediction market taxes remain unclear as IRS stays silent

People trading prediction-market contracts still do not have a clear federal tax playbook. That matters because the same winning trade could produce different tax results depending on whether the IRS treats it like gambling, an investment gain or a special type of futures contract.

The Internal Revenue Service has not issued guidance on how prediction-market wins and losses should be reported, CNBC reported. Prediction markets let users buy and sell contracts tied to event outcomes, such as sports results or economic forecasts.

Ryan Schutz, a former IRS special agent and founder of First There Tax, told CNBC that users are receiving conflicting information. Tax experts cited by CNBC said the income could potentially fall into several buckets: gambling income, capital gains or treatment under Section 1256 of the tax code.

Why the category matters

If prediction-market profits are treated as gambling income, the tax math may be less favorable for many users. President Donald Trump’s “One Big Beautiful Bill Act” includes a rule that caps gambling loss deductions at 90%, according to CNBC. Under that framework, a person with $100 of gambling winnings and $100 of gambling losses could deduct only $90, leaving $10 of taxable winnings.

Nathan Goldman, an accounting professor at North Carolina State University, told CNBC that sports gambling currently receives “very bad tax treatment.”

Capital gains treatment works differently. Capital gains are profits from selling an asset for more than its cost. If a taxpayer’s realized investment losses are larger than their gains, they can use up to $3,000 of those losses to offset ordinary income, CNBC reported.

Section 1256 contracts, a tax category that can apply to some futures contracts, have another formula. Under that treatment, 60% of the gain is taxed at long-term capital gains rates, while 40% is taxed at short-term rates, regardless of how long the position was held. CNBC noted that long-term capital gains rates are 0%, 15% or 20%, while short-term gains are taxed as ordinary income and can reach 37%.

Schutz told CNBC that, for most people, Section 1256 or capital gains treatment would likely lead to less tax than gambling treatment.

Contracts do not all look the same

Tax experts said the variety of prediction-market products makes a single answer harder. Kalshi introduced perpetual futures, known as “perps,” in May, CNBC reported. Unlike a typical event contract, a perp has no expiration date.

Schutz told CNBC that event contracts and perpetuals could face different classifications. He said perpetuals may look more like financial contracts because they lack a specific end date and resemble some mechanics associated with Section 1256.

George Salis, chief economist and senior tax policy director at Vertex, told CNBC that some contracts resemble sports wagers, while others look closer to financial or economic forecasting. That range, he said, complicates any clean tax framework.

Kalshi and Polymarket declined CNBC’s request for comment on what role platforms can play in helping users understand tax obligations. CNBC reported that both platforms provide users with Form 1099 reporting documents, though taxpayers still must report earnings even if they do not receive one.

The IRS and Treasury Department did not respond to CNBC’s requests for comment.

States and regulators are fighting over the label

States have a financial reason to call some contracts gambling, Schutz told CNBC, because gambling taxes can generate revenue. After a 2018 Supreme Court decision allowed states to regulate sports betting, states including Oregon, New York and New Hampshire set online sports-betting tax rates of at least 50%, according to CNBC and Tax Foundation data cited by CNBC.

North Carolina has taken a different approach. CNBC reported that the state recognized prediction markets as operating under the Commodity Futures Trading Commission and imposed a 6% tax on prediction-market operators, compared with a 23% tax on sports betting sites. Goldman told CNBC that the lower rate may reduce the likelihood of a court fight.

Several states are in legal disputes with prediction-market platforms, arguing that sports-related event contracts amount to illegal sports betting, CNBC reported. The CFTC has asserted authority over the markets, saying event contracts are structured as swaps, a type of derivatives contract.

Earlier this month, a federal judge in New York rejected Kalshi’s request to block the state from applying gambling laws to its sports-related event contracts, according to CNBC. Goldman told CNBC that state-by-state laws could make any federal tax decision more difficult.

CNBC disclosed that it has a commercial relationship with Kalshi, including customer acquisition and a minority investment.

This story draws on original reporting from CNBC.