IRS Hasn't Issued Tax Guidance for Prediction Markets
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- IRS has not issued any guidance on the federal tax treatment of prediction market winnings and losses more than halfway through 2025, leaving traders without a definitive framework, per former IRS special agent Ryan Schutz.
- Tax experts say prediction market winnings could be classified as gambling income, capital gains, or Section 1256 contracts, with the 60/40 long-term/short-term split under Section 1256 or capital gains treatment resulting in the least tax for most users.
- Trump's "One Big Beautiful Bill Act" caps gambling loss deductions at 90%, so a taxpayer who wins $100 and loses $100 would still owe tax on $10 of winnings, a treatment North Carolina State professor Nathan Goldman called 'very bad' for sports gambling.
- Kalshi introduced perpetual futures ("perps") in May without expiration dates, and Schutz argued those contracts may resemble 1256 financial contracts more than traditional event contracts, potentially drawing different tax treatment.
- Multiple states are in legal proceedings with prediction market platforms over alleged illegal sports betting, while the CFTC has sued to defend its exclusive jurisdiction over event contracts as swaps — a New York federal judge rejected Kalshi's bid to block state gambling laws earlier this month.
- State tax rates diverge sharply: Oregon, New York, and New Hampshire impose at least 50% on online sports betting, while North Carolina recognized CFTC jurisdiction and set a 6% tax on prediction market operators versus 23% on sports betting sites, a move Goldman said may be designed to avoid getting sued.
- Kalshi and Polymarket both declined to comment on helping users understand their tax obligations, though they do issue Form 1099s; neither the IRS nor the Treasury Department responded to CNBC's request for comment.
Why it matters: Prediction market users face real money consequences from the IRS silence: Trump's 90% gambling-loss cap means a $100 win and $100 loss still triggers $10 of taxable income. With state rates ranging from North Carolina's 6% to New York's 50%+ and the CFTC-states jurisdiction fight unresolved, traders are flying blind into tax season.
