Prediction markets are drawing more attention from traders, but the tax rules around them are still uncertain. According to the report, the Internal Revenue Service has not yet issued guidance on how federal taxes should apply to gains and losses from these contracts, even as the year is already more than halfway over.
That absence of direction is creating confusion for users and tax professionals alike. Experts say prediction market proceeds could potentially be treated in more than one way, including as gambling income, capital gains, or under Section 1256 contract rules. Each path has different tax consequences. Gambling treatment is generally the least favorable, especially after a provision in President Donald Trump’s “One Big Beautiful Bill Act” capped gambling loss deductions at 90%. Under capital gains treatment, taxpayers may be able to use up to $3,000 in realized losses to offset ordinary income. Section 1256 treatment is often viewed as more attractive because 60% of gains are taxed at the lower long-term rate and 40% at the higher short-term rate, regardless of how long the asset was held.
Tax specialists say the right classification may depend on the type of contract. Some prediction market products may resemble sports wagering, while others look more like financial or economic forecasting. That issue could become even more complicated with newer products such as perpetual futures, or “perps,” which Kalshi introduced in May and which do not have expiration dates. Because they differ from traditional event contracts, some experts believe they may fit more naturally into a financial-contract framework. For now, though, the lack of IRS guidance leaves traders without a clear answer on how to report these positions.
Sports-related event contracts remain a major part of activity on leading prediction market platforms and continue to face scrutiny from states and critics who say they resemble sports betting. The report says Kalshi and Polymarket declined to comment on what role platforms should play in helping users understand their tax obligations.
Source: cnbc.com
