IRS silence leaves prediction-market traders facing tax uncertainty

The Internal Revenue Service has not issued guidance on how U.S. taxpayers should report gains and losses from prediction-market contracts, leaving traders and platforms without a clear federal tax framework. Tax specialists told CNBC the classification could materially change after-tax results because gambling income, capital gains and Section 1256 contracts are taxed under different rules.

Prediction markets allow users to buy and sell contracts tied to the outcome of events, including sports, politics and economic indicators. A contract typically pays according to whether a specified event occurs, which has led regulators and tax advisers to compare some products with sports wagers and others with financial derivatives.

Ryan Schutz, a former IRS special agent and founder of First There Tax, told CNBC that users are receiving conflicting interpretations. He said the uncertainty is acute because the tax code already contains several possible categories, each with different treatment for losses.

Three possible tax paths

One route is gambling income. Under President Donald Trump’s “One Big Beautiful Bill Act,” gambling loss deductions are capped at 90%, CNBC reported. Under the example described by CNBC, a taxpayer with $100 of gambling winnings and $100 of gambling losses would be able to deduct only $90, leaving $10 of taxable winnings. Nathan Goldman, an accounting professor at North Carolina State University, told CNBC that sports gambling now receives unfavorable tax treatment.

A second possibility is capital gains treatment. Under that framework, taxpayers whose realized capital losses exceed gains can use as much as $3,000 of those losses to reduce ordinary income, CNBC reported. Gains held for short periods are taxed at ordinary income rates, while long-term capital gains are taxed at preferential rates, depending on the taxpayer’s circumstances.

A third possible classification is Section 1256, a regime used for certain futures contracts. Section 1256 applies a blended method: 60% of the gain is treated as long-term capital gain and 40% as short-term capital gain, regardless of the holding period. CNBC reported that long-term capital gains are taxed at 0%, 15% or 20%, while short-term gains are taxed as ordinary income at rates as high as 37%.

Schutz told CNBC that for many taxpayers, capital gains or Section 1256 treatment would generally produce lower tax bills than gambling treatment. That assessment depends on individual facts and does not resolve how the IRS will classify prediction-market activity.

Contract design may affect treatment

Kalshi introduced perpetual futures in May, CNBC reported. These products, often called perps, have no expiration date and differ from traditional event contracts that settle when a defined outcome occurs. Schutz said the structure could support different tax classifications for perpetual products and one-off event contracts, because perps look more like financial contracts.

George Salis, chief economist and senior tax policy director at Vertex, told CNBC that some prediction-market contracts resemble sports wagers, while others look closer to financial or economic forecasting. That range, he said, makes a single tax framework harder to apply across all products.

Kalshi and Polymarket declined to comment to CNBC on what role platforms should play in helping users understand tax obligations. CNBC reported that both platforms provide users with Form 1099 reporting, although taxpayers must report taxable income even when they do not receive a 1099. The IRS and the Department of the Treasury did not respond to CNBC’s requests for comment.

States and the CFTC remain at odds

State governments have an incentive to classify some contracts as gambling because sports betting taxes can be a revenue source. After a 2018 Supreme Court ruling allowed states to regulate sports betting, states including Oregon, New York and New Hampshire imposed taxes of at least 50% on online sports betting operators, according to Tax Foundation data cited by CNBC.

The Commodity Futures Trading Commission says prediction-market event contracts are swaps under its jurisdiction. Several states have challenged prediction-market platforms, arguing that sports-related contracts amount to illegal sports betting. Earlier this month, a federal judge in New York denied Kalshi’s request to block the state from applying gambling laws to its sports-related event contracts, CNBC reported.

North Carolina has taken a different approach, recognizing prediction markets as operating under the CFTC and imposing a 6% tax on prediction-market operators, compared with a 23% tax on sports betting sites. Goldman told CNBC the lower rate may reduce the likelihood of litigation over the state’s authority.

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

This story draws on original reporting from CNBC.