It’s doctrinally clear that hitting an inside straight on the river constitutes gambling. But what about buying or selling a futures contract that the Broncos win the Super Bowl? More on the changing landscape of sports betting and its tax implications, below the fold.
In the United States, the cultural connections between gambling and futures markets are longstanding. Oliver Wendell Holmes recognized the inevitable draw of the former, as well as the economic necessity of the latter. As the justice famously wrote in 1905, “[p]eople will endeavor to forecast the future and make agreements according to their prophecy.”
But what happens when the two become truly interchangeable? Sports gambling appears to be in that moment of convergence, as CFTC-registered prediction markets, such as Kalshi, increasingly offer substitutes for bets placed at recently legalized sports books. Indeed, Kalshi’s trading volume overwhelmingly involves sports-related futures contracts.
The gambling industry’s response has been predictable: in late 2025, various electronic sports betting platforms—including Fanatics, DraftKings, and FanDuel—launched their own prediction markets. Perhaps inevitably, some of these platforms are integrating with crypto exchanges, derivatives exchanges, and securities trading apps. Regulators are struggling, even as Wall Street firms seek to enter the market for this “red-hot asset class.”
Tax law, of course, is part of this gathering storm. Gambling activities and futures contracts are taxed very differently, especially after the One Big Beautiful Bill Act. The IRS seems unlikely to offer formal guidance on sports-related futures contracts in the near term, even as the tax stakes of these products enter popular consciousness.
From a holistic perspective, however, any potential revenue loss may be muted, even under the most aggressive tax positions with respect to prediction market contracts. Why? The substantive tax rules that favor prediction markets over conventional gambling have a counterweight in the increased administrative rigor that attaches to trading in these novel markets.
Prediction markets are taxed more favorably than gambling in two ways. First, § 1256 arguably—with emphasis on the adverb—treats income from the disposition of prediction market contracts as 60% long-term capital gain and 40% short-term capital gain. This income is subject to lower rates than ordinary gambling income and can absorb hard-to-use capital loss from other sources.
Second, § 1256 would allow taxpayers greater access to losses than conventional wagering. After the OBBBA, only 90% of gambling losses are deductible (and only to the extent of gambling gains, with this number dependent on where and how gambling “sessions” occurred), and then only if a taxpayer forgoes the newly enhanced standard deduction. By contrast, net losses on prediction market contracts, calculated on a mark-to-market basis, are allowable to the extent of capital gains, plus $3,000 for individual filers. For individuals, there’s also a potentially valuable three-year carryback election to offset prior § 1256 gains. Whether a taxpayer wins or loses, substantive tax law seems to favor using prediction markets to do so—an intuition already established in the tax-sensitive world of sports betting.
The information reporting rules, however, are potentially more rigorous for prediction markets than sports books. Prediction markets generally issue Forms 1099—B, K, or MISC—with potentially no quantitative threshold for reporting on, for example, Form 1099-B, which seems most appropriate for reporting trades. By contrast, sports gambling is reportable on Form W-2G. Starting in 2026, the threshold for these forms is much higher—$2,000, and $5,000 for withholding—with an additional requirement that winnings exceed 300 times the amount of the wager. The second threshold may matter, even with a higher $2,000 reporting threshold for Forms 1099 in 2026. The differences in these reporting thresholds are potentially meaningful.
The upshot: prediction markets likely will do a lot more information reporting than sports books. To the extent that substantive tax rules encourage people to switch from sports books to prediction markets, the increase in information reporting may enhance compliance. And more people might make this switch, if information reporting is less salient to taxpayers than substantive law—an intuition borne out by media coverage.
Overall, prediction markets may herald an apocalypse in the sports betting world, but it’s not clearly the case that this potential adversity will extend to federal income tax receipts.
