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State of Play’s TL;DR
- A Tax Law Center analysis says sports-event contracts on prediction markets should be treated as wagers under federal tax law.
- That would place them under the same tax rules that apply to traditional sports betting.
A new Tax Law Center analysis argues that sports-event contracts traded on prediction markets should be treated as wagers for federal tax purposes. If that view gains traction, prediction market sports trading could face the same tax rules that already apply to conventional sports betting.
The analysis, published Oct. 1, focuses on whether sports-event contracts on platforms such as Kalshi should fall under existing federal gambling tax rules. The issue matters because prediction markets have become a meaningful channel for sports-related activity in the US, even as their tax treatment remains unsettled.
Tax analysis says existing gambling rules should apply
According to the Tax Law Center summary, there is currently no explicit public guidance or case law specifically addressing the federal tax treatment of a sports-event contract on a prediction market.
The article concludes that these contracts appear to be wagers, and that the activity should be treated as wagering subject to the same federal tax rules used for sports gambling.
Those rules include the federal excise tax on sports and contest wagers, ordinary income treatment for winnings, and limits on deductions for gambling losses.
The analysis pushes back on arguments that sports-event contracts should be taxed like investment instruments, such as section 1256 contracts, option contracts, or other capital assets. According to the Tax Law Center, similar arguments have historically failed in court when gamblers used them to try to avoid wagering treatment.
To illustrate the point, the article compares a hypothetical $100 Braves bet on DraftKings Sportsbook with a $100 purchase of Kalshi “Yes” contracts on the same game. The payouts cited were nearly identical: $170.42 on DraftKings and $169.91 on Kalshi.
Why prediction markets are drawing tax attention
The Tax Law Center says sports-event contracts account for about 80% to 90% of volume on the dominant US prediction market by some estimates. It also cites one analyst’s estimate that 27% of US sports bets during the recent World Cup took place on prediction markets.
That scale helps explain why the tax question is gaining attention. The analysis says IRS guidance clarifying that sports-event contracts are subject to gambling tax rules would improve tax administration and give taxpayers more certainty.
What bettors, operators, and lawmakers may watch next
The article also notes that some policymakers are considering higher federal wagering taxes to raise revenue or discourage gambling. According to the analysis, those proposals would need to cover prediction markets to have their intended effect.
For now, the biggest open questions are whether the IRS will issue formal guidance, whether Congress will revisit the wagering excise tax, and how courts would rule if the treatment of sports event contracts is challenged.
Based on reporting by The Tax Law Center.
