Prediction Markets Could Bring a Tax ‘Loophole’ For Sports Bettors

Until the IRS says otherwise, prediction markets like Kalshi and Polymarket are subject to the tax laws that govern futures contracts and options. (Tasos Katopodis/Getty Images)

Sports bettors may have an incentive to ditch their sportsbook and start wagering on prediction markets, tax experts say.

Gambling winnings, including those from betting on sportsbooks like DraftKings and Flutter’s FanDuel, are treated as income by the Internal Revenue Service and taxed at a taxpayer’s ordinary rate. But until the IRS says otherwise, the sports event contracts that effectively replicate sports betting are subject to the tax laws that govern futures contracts and options like straddles.

Those futures contracts are taxed at a blended capital gains rate: 60% is taxed at the lower long-term capital gains rate, and 40% is at the ordinary short-term capital gains rate. That blend is likely to be much lower than a sports bettor’s gambling tax rate.

“The tax treatment of gambling differs from the tax treatment of contracts and straddles, even though the underlying act is still gambling,” says Nicole DeRosa, director of tax at SKC & Co. “That’s the loophole.”

“There is no clear answer on how this will be treated by the IRS,” says April Walker, senior manager of tax practice and ethics at the American Institute of CPAs. Sports event contracts only became available in 2025, and the IRS hasn’t issued public guidance on the topic. There’s also no way to know when that guidance will come. It could be after next year’s filing deadline, Walker says, meaning millions of event contract traders would need to amend their tax return.

The IRS didn’t respond to Barron’s requests for comment.

In light of the uncertainty, Walker recommends event contract traders work with a tax professional and keep detailed records of the contracts they have traded, their outcomes, and total wins and losses.

The tax differences between sports bets and sports event contracts became more pronounced when Congress passed the GOP’s One Big Beautiful Bill Act.

In the past, bettors could deduct 100% of their gambling losses against winnings: If, for example, over the course of a year a roulette player won $100,000 and lost $100,000, the losses would offset the taxes that would need to be paid on the winnings. With the new GOP budget bill that provision was adjusted so that only 90% of losses can be deducted. Under the same example, the roulette player would have to report $10,000 of income.

Unless they have been betting with prediction markets, in which case they’ll pay a lower rate.

At least, that’s how it could work.

The IRS isn’t the only government agency that has to grapple with whether sports event contracts are gambling.

Event contracts are regulated by the Commodity Futures Trading Commission, which oversees all futures contracts. It has yet to definitively weigh on whether sports contracts count as gambling.

It went most of this year without a permanent chair and the commission has largely stood aside as prediction markets surged on the back of sports event contracts, upending the gambling and brokerage industries.

The regulator’s inaction looks likely to continue as lawsuits over sports event contracts are litigated across the country, seemingly on a path to the Supreme Court. When pressed on whether the contracts are gambling at his senate hearing in November, now confirmed CFTC Chair Michael Selig deferred to the pending court cases: “This could be one that works its way all the way to the top, so I’ll look to the courts on this issue.”

On a recent record-breaking day for Kalshi, the leading prediction-market firm, 97% of the volume was traded on sports event contracts, according to data analytics firm Dune. If courts rule those contracts to be gambling, they would fall under the jurisdiction of state gambling regulators and become subject to state taxes and regulations.

Kalshi and its competitor Polymarket have allies in Washington; the president’s son, Donald Trump, Jr., is a “strategic advisor” to both firms. Trump Media & Technology has announced plans to integrate a prediction market with sports event contracts into its social-media platform, Truth Social.

The IRS’ ultimate treatment of sports event contracts isn’t necessarily tied to any decision by the CFTC.

The IRS is “free to define gambling in their own way,” says James Creech, a principal at Baker Tilly’s specialty tax practice. “They’re not bound by the CFTC. They are their own agency.”

He says “there’s a very real chance that the IRS might come down and say, ‘Hang on guys. Betting on a football game is betting on a football game, whether or not it’s done through Robinhood or a sportsbook.’” In that case, sports event contracts would lose their preferential tax treatment.

As with any new innovation, the IRS will probably move slowly, says SKC’s DeRosa. She points to cryptocurrency as an example. This year, for the first time, the agency will require crypto exchanges to report digital asset sales via a new form.

“Bitcoin and cryptocurrency have been around for how many years at this point? Only now are we seeing movement from the IRS,” DeRosa says. She believes clarity from the IRS on sports event contracts is on a similar timeline.

Creech agrees: “The event contract for this tax question probably isn’t going to be resolvable until, like, 2028.”

In the meantime, what should prediction market sports bettors do when filing season rolls around? “Get comfortable with risk,” he says.

Write to Nick Devor at nicholas.devor@barrons.com