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

Prediction markets are booming, with monthly trading in the billions and a recent estimate from a consulting firm saying that the relatively new phenomenon could grow to $1 trillion by the end of the decade. That’s a lot of money to tax, and the government hasn’t exactly figured out how to account for it.

While activities on prediction markets resemble gambling, these platforms claim a major distinction. They say they’re offering financial contracts regulated by the Commodity Futures Trading Commission, whereas gambling is state-regulated. This is a distinction can be meaningful for taxpayers, and because they are so new, the IRS hasn’t issued specific guidance, which tax practitioners say is leaving things open to interpretation. 

Fundamentally, predictions made on apps aren’t different from bets at a casino, yet the treatment could be completely different, according to James Creech, principal with Baker Tilly’s specialty tax practice. And even if someone is making many small bets, tax treatment differences can be meaningful over time. “It feels like people are taking tax risks that they don’t know they’re taking,” he said.

For sure, more retail investors and others will be discovering access to predictions markets across more apps. At Robinhood, prediction markets have become the fastest-growing product line by revenue, with 11 billion contracts traded by more than one million customers since launching last year. It is far from alone in going after a bigger piece of the action pioneered by platforms like Polymarket and Kalshi. Interactive Brokers, Coinbase, Crypto.com, DraftKings, Flutter Enteraintment‘s FanDuel, and Fanatics are among other recent entrants.

Currently, there’s no consensus on how to treat gains and losses from prediction markets. While tax advisors agree that income and losses from prediction markets need to be reported, they’re divided on how to do this for tax purposes.

There are a few possibilities. One is that prediction markets contracts should be treated as a capital asset, like a stock or bond, subject to rules regarding capital gains and losses. Short-term gains owned one year or less are typically taxed at a taxpayer’s ordinary income rate, as high as 37% in 2025. Losses on investments are first used to offset capital gains of the same type, short-term or long-term. Investors with an overall net capital loss for the year can deduct up to $3,000 in capital losses each year, with the ability to carry additional losses forward to later years. 

Another possibility is that prediction-markets contracts could be treated as gambling wins or losses. Gambling earnings are considered taxable income, and there may be withholding requirements. But there are also rules for deducting gambling losses that apply to taxpayers who itemize. (Notably, only about 10% of all taxpayers chose to itemize for tax year 2022, according to the Tax Policy Center.)

Taxpayers who itemize can offset gambling losses up to the amount of the year’s gains from gambling. So, for illustrative purposes, a taxpayer with gambling losses of $200,000 and $100,000 of gains could offset $100,000 of losses in 2025. In 2026, the taxpayer would only be able to offset 90% of gambling losses due to changes under the major tax legislation passed last summer, The One Big Beautiful Bill Act. 

A third option is that prediction-markets contracts could be treated as Section 1256 contracts, a specific category of financial instruments defined by the IRS, said April Walker, senior manager for tax practice and ethics with 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 was held, according to TaxSlayer. That means that 60% is treated as a long-term capital gain or loss, and 40% is treated as a short-term capital gain or loss. Some tax professionals said they don’t think prediction-markets contracts meet the IRS’s strict criteria for Section 1256 contracts, but there’s no consensus. Investments in this category include non-equity options, foreign currency contracts, regulated futures contracts, dealer equity options and dealer securities futures contracts, according to TaxSlayer.

Onus on taxpayer to track gains and losses, and prepare for IRS

It’s really the Wild West until the IRS provides guidance. What is important for taxpayers to know, however, is that they should report income earned from prediction markets in some way and keep detailed records. Generally, no matter how it’s treated, it’s going to be taxable income or a taxable loss, Walker said.

Taxpayers who use prediction markets shouldn’t rely on platforms to track their gains and losses, said Mark Gallegos, tax partner with accounting firm Porte Brown. Platforms may not issue investors a tax form that shows their gains and losses, but the onus is still on the taxpayer to track gains and losses, and keep good documentation. “It’s very important, always,” he said, but he added it’s especially important because of the lack of clarity. Two investors could take the same positions on prediction markets and end up with a different tax bill, depending on how they classify things, Gallegos said.

If the IRS comes out with guidance, it could mean taxpayers will have to amend returns, depending on how they characterized the income, said Brian Kearns, founder and president of Haddam Road Tax and Consulting. The IRS could could provide a safe harbor, but that’s also unknown. “When you’re dealing with tax and tax planning, you want to have a structure to work off of, you don’t want to be guessing and that’s kind of what this space is looking at. That level of uncertainty doesn’t help anybody,” Kearns said.

The IRS did not respond to requests for comment.

Practitioners do expect IRS guidance to come at some point, and that will lead to risks for taxpayers. “We’re going to be using hindsight to tell people what they did wrong,” Baker Tilly’s Creech said.

In the meantime, other factors are at play. President Trump said recently he would consider eliminating federal taxes on gambling winnings. “We have no tax on tips, we have no tax on Social Security, and we have no tax on overtime,” he told reporters during a recent press gaggle on Air Force One. “No tax on gambling winnings, I don’t know. I’m gonna have to think about that,” Trump said.

The gambling tax hike including in the president’s big tax bill irked some Republicans, and led to criticism from the gambling industry as it faces new competition from the predictions markets.

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

“The U.S. is the biggest frontier for prediction markets, and the momentum we’re seeing makes a unified industry voice not just important, but necessary,” Matt David, an executive board member of the coalition and chief corporate affairs officer at Crypto.com, said in a news release to announce the organization’s founding.

Muddying the waters is the fact that sports-betting platforms such as DraftKings and FanDuel have launched their own prediction market platforms. “I think the IRS would have grounds to say it’s the same bet you’re making at the casino,” Creech said.

Disclosure: CNBC and Kalshi have a business relationship.