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More than half of 2026 has passed, and the Internal Revenue Service has yet to issue guidance on how winnings and losses from prediction markets should be taxed.
That silence has left traders confused, said Ryan Schutz, a former IRS special agent and founder of First There Tax: “I think it’s extremely confusing for the users of prediction markets because they’re getting a lot of conflicting guidance,” Schutz told CNBC.
Traders face three tax paths, no clarity yet
Tax experts say prediction market winnings and losses could fall into one of three categories:
- Gambling income
- Capital gains
- Section 1256 contract
The federal tax treatment of gambling losses changed under President Donald Trump’s One Big Beautiful Bill Act, which took effect in 2025. “Sports gambling is actually in very bad tax treatment right now,” said Nathan Goldman, an accounting professor at North Carolina State University.
Under the previous rules, taxpayers could deduct their total gambling losses from their winnings — someone who won $100 and lost $100 owed nothing. The new law caps that deduction at 90%, so the same trader could deduct only $90 and would still owe tax on $10 of income.
Capital gains treatment works differently: Traders who lose more than they win can deduct up to $3,000 in realized losses against ordinary income.
Section 1256 contracts, which apply to futures, offer a third option: 60% of the gain is taxed at the lower long-term capital gains rate and 40% at the higher short-term rate, regardless of how long the position was held. Long-term rates run 0%, 15% or 20%, while short-term gains are taxed as ordinary income, up to 37%.
Most traders would prefer capital gains or Section 1256 treatment over gambling income.
“For the vast majority of people, the 1256 treatment or capital gain treatment would result in the least amount of tax.”
Kalshi’s perpetuals blur the line on tax treatment
Kalshi‘s May launch of “perpetual” event contracts, which have no expiration date, adds another wrinkle. Schutz said these contracts may warrant different tax treatment than standard event contracts because they don’t share the same 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,” Schutz told CNBC.
George Salis, chief economist and senior tax policy director at Vertex, said the variety of contract types is part of the problem. “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,” Salis said. Without IRS guidance, he said, there’s no clear way to determine the right treatment for each type.
States want gambling status; CFTC calls it derivatives
Sports-based event contracts — such as bets on which team will win a championship — now account for a large share of trading volume on prediction market platforms, and many states argue they’re identical to sports betting. Classifying them that way would open a new tax revenue stream for states. But the Commodity Futures Trading Commission classifies event contracts as swaps, a type of derivative, not gambling.
“Treating [contracts] as gambling income is more beneficial to states, because that’s a revenue driver,” Schutz told CNBC. Online sports betting is taxed at 50% or higher in states including New York, New Hampshire and Oregon.
Conflicting court rulings deepen the regulatory standoff
States and the CFTC remain locked in legal battles over who has authority to regulate — and by extension tax — prediction markets.
On July 7, US District Judge Analisa Torres in Manhattan denied Kalshi’s request to block New York from enforcing its gambling laws against the company’s sports-related contracts, ruling that the federal Commodity Exchange Act does not override the state’s authority. Kalshi has appealed, but the ruling clears the way for New York regulators to pursue enforcement while the broader case continues.
“If states come in and they start enacting their own laws, we have these converging laws all over the place, and that makes what Washington ultimately does a lot more challenging,” Goldman said.
North Carolina has taken a different approach. Rather than treat prediction markets as gambling, the state recognized them as falling under CFTC jurisdiction and imposed a 6% tax on them — well below the 23% it levies on sports betting sites.
Experts say the lower rate may be a strategic move to avoid a legal fight. “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.
With the legal fight over jurisdiction still unresolved and no federal tax guidance in sight, experts say clarity from the IRS is overdue.
“I would love to see IRS guidance. I think that would be the most definitive solution,” Schutz told CNBC. “I think the IRS might be hesitant to come out with guidance that conflicts with the CFTC position.”
