The 2026 FIFA World Cup brought increased attention not only to the sport of soccer, it also shined a spotlight on prediction markets, driving increased visibility and participation. As more taxpayers participate in these markets, a largely unanswered question has come into focus: How should prediction market winnings be taxed?
Platforms such as Kalshi and Polymarket allow users to buy and sell contracts tied to the outcome of future events, including sporting events, elections, and economic indicators. While these platforms have grown in popularity, the federal tax treatment of many prediction market transactions remains uncertain.
The key issue is whether these contracts should be treated as gambling activity or financial instruments for tax purposes. The answer could significantly affect how gains, losses, and reporting requirements apply to both U.S. and international participants.
Key Takeaways
- Prediction markets are attracting increased attention during the 2026 FIFA World Cup, but their tax treatment remains uncertain.
- A key question is whether prediction market contracts should be treated as gambling transactions or financial instruments.
- The classification can significantly impact how gains, losses, and reporting requirements are handled.
- U.S. and non-U.S. taxpayers may face different tax consequences depending on how these contracts are ultimately characterized.
- Until additional guidance is issued, taxpayers should maintain detailed records and consult with their tax advisors.
What Are Prediction Markets?
Prediction markets allow participants to buy and sell contracts tied to the outcome of future events. These events may include elections, economic indicators, sporting events, weather outcomes, or other measurable occurrences.
Rather than placing a traditional wager through a sportsbook, participants purchase contracts that increase or decrease in value based on the probability of a particular outcome occurring.
Platforms such as Kalshi and Polymarket have helped bring prediction markets into the mainstream, attracting both casual users and sophisticated investors.
Why the Tax Treatment Remains Uncertain
Although prediction markets may appear similar to sports betting, some operators argue that their contracts are regulated financial products rather than gambling activities.
This distinction matters because the Internal Revenue Code contains different tax rules for:
- Gambling winnings and losses
- Capital gains and losses
- Certain regulated futures and derivative contracts
Currently, there is no comprehensive IRS guidance specifically addressing the tax treatment of many prediction market transactions. As a result, taxpayers and advisors are left to analyze existing tax rules and apply them to a rapidly evolving marketplace.
Why Classification Matters
The way prediction market contracts are classified can have a significant impact on a taxpayer’s tax and reporting obligations.
If Treated as Gambling Activity
If prediction market transactions are ultimately treated as gambling, winnings would generally be taxable as ordinary income, and gambling loss limitations would apply.
Beginning in tax year 2026, the loss limitations become more restrictive, as taxpayers generally may deduct only 90% of their losses against winnings.
As a result, whether prediction market activity is classified as gambling may have a significant impact on both the amount and reporting of taxable income.
If Treated as Financial Instruments
If prediction market contracts are treated as financial products, gains and losses could potentially be subject to an entirely different set of tax rules.
Depending on the characteristics of the contract and applicable tax provisions, taxpayers may be able to net gains and losses differently than under gambling rules.
However, the specific treatment could vary based on the structure of the contract and whether it qualifies under existing tax provisions governing derivatives or futures contracts.
International Tax Considerations
The uncertainty becomes even more significant for non-U.S. participants.
For foreign individuals, tax consequences may depend on factors such as:
- Whether the income is considered U.S.-source income
- Where the transaction occurred
- How the contract is classified
- Applicable tax treaty provisions
Different classifications could potentially lead to dramatically different U.S. filing and withholding obligations.
As prediction markets continue to attract participants from around the world, these cross-border tax issues are likely to receive increased attention.
Could Additional Guidance Be Coming?
Prediction markets continue to face regulatory scrutiny at both the federal and state levels. Ongoing legal and regulatory developments may influence how tax authorities ultimately view these transactions.
As participation grows and transaction volumes increase, additional IRS guidance or judicial authority will be needed to clarify the appropriate tax treatment.
Until then, uncertainty remains.
What Taxpayers Should Do Now
Individuals participating in prediction markets should consider:
- Maintaining detailed transaction records.
- Tracking gains and losses by platform.
- Retaining account statements and transaction histories.
- Consulting with a tax advisor regarding reporting requirements.
- Monitoring future IRS and regulatory developments.
Because the tax treatment remains unsettled, proactive recordkeeping may help taxpayers respond more effectively if future guidance changes reporting expectations.
How ML&R Can Help
Emerging financial products often create tax questions long before formal guidance is issued. ML&R’s tax professionals monitor legislative, regulatory, and IRS developments to help taxpayers understand potential reporting obligations and evaluate the tax implications of evolving investment and wagering activities.
Frequently Asked Questions
What is a prediction market?
A prediction market allows participants to buy and sell contracts tied to the outcome of future events, such as elections, sporting events, or economic indicators.
Are prediction market winnings taxable?
Generally, gains from prediction market transactions are likely taxable. However, the specific tax treatment may depend on how the transaction is ultimately classified under federal tax law.
Are prediction markets considered gambling?
The answer remains unclear. Some regulators and market participants view prediction market contracts differently than traditional gambling activities, and the tax consequences may depend on that distinction.
Can losses offset prediction market gains?
Potentially, but the rules may vary depending on how the activity is classified for tax purposes.
Has the IRS issued guidance on prediction market taxation?
As of now, comprehensive IRS guidance addressing the tax treatment of many prediction market transactions remains limited.
Questions about the tax treatment of prediction market transactions or other emerging investment activities? Contact ML&R’s tax team to discuss your specific situation.
