The rapid growth in trading volume on prediction market platforms, such as Kalshi, is occurring without clear guidance from the U.S. Internal Revenue Service (IRS) on how to tax profits from these transactions. This regulatory gap could allow users to benefit from more favorable tax treatment compared to traditional sports betting, potentially reshaping the entire gambling sector.
In traditional sports betting, winnings are taxed as ordinary income at rates as high as 37%. Furthermore, losses can only offset winnings if the taxpayer itemizes deductions. Starting in 2026, deductible gambling losses will be capped at 90% of total losses, which means taxpayers could still face tax liability on "phantom income" even if their net result is break-even.
In contrast, prediction market platforms are regulated by the Commodity Futures Trading Commission (CFTC), and their products are classified as "event contracts." Consequently, many tax professionals believe these contracts may fall under U.S. tax rules for futures, qualifying for the "60/40" tax treatment. Under this rule, 60% of gains or losses are treated as long-term capital gains (taxed at a maximum rate of 20%), while 40% are treated as short-term capital gains (taxed at a maximum rate of 37%). This can significantly lower the effective tax rate for high-income taxpayers. Additionally, gains and losses from such contracts can be netted within a tax year. Losses can offset capital gains first, and any remaining losses can be used to offset up to $3,000 of ordinary income annually, with the balance carried forward indefinitely.
Because the IRS has not issued specific guidance, this potential tax treatment remains contentious. Some states are attempting to regulate or tax prediction markets, arguing they are essentially gambling. However, until clear rules are established, the expectation of this tax advantage could drive more users away from traditional sportsbooks and toward prediction markets.
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