This week, Jeff Gordon (Vanderbilt, Google Scholar) reviews Mirit Eyal (University of Alabama, Google Scholar) & Jay Soled (Rutgers Business School, Google Scholar), Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts, 95 Geo. Wash. L. Rev. __ (forthcoming 2026).

In a sense, prediction market contracts are a lawyer’s dream. They are a regulatory Rorschach test, amenable to comparisons to investment securities on the one hand, or to gambling arrangements on the other. Enter the lawyers armed with analogies, our stock in trade. The fight has been playing out at the regulatory level, i.e., as to whether prediction markets should be governed by state gambling agencies or by the CFTC. The tax law version of this dispute is lower profile but plenty consequential. Should the law treat gains and losses from event contracts—the core offerings on sites like Kalshi and Polymarket—analogously to gambling, investing in securities, trading commodities on an exchange, or otherwise? One can approach the question on a blank canvas, as a matter of public policy. Alternatively, one can seek doctrinal consistency, hoping to place event contracts in the proper box in relation to the law’s existing categories.

In their lively and provocative article, Mirit Eyal and Jay Soled take both approaches. The authors entertain a wide range of possible tax treatments for event contracts. While they acknowledge some appeal of hybrid approaches that would treat prediction market gains and losses as something between ordinary and capital (à la Section 1256), the main thrust of the argument is that event contracts should be treated how the Code treats gambling, or possibly even more harshly.

As a matter of public policy, the authors argue that tax law should not encourage an activity that they view as consumption. The strongest public-interest case for prediction markets has long been that they can aggregate “the wisdom of the crowd” and provide unmatched insight into likely futures, putting citizens and policymakers in a better position to anticipate real-world challenges. Prediction markets have had their moments on this score, predicting Federal Reserve rate cuts, inflation statistics, and certain election results more accurately than other information sources. On the other hand, much prediction market volume pertains to events without compelling public informational stakes, such as sports outcomes or markets on whether a public official will say a certain word in a speech. The track record is still sufficiently mixed that one cannot easily justify a tax-driven subsidy. Meanwhile, prediction markets also serve an entertainment function, and arguably a socially pernicious one given that most participants lose money at the hands of a few sharks. 

Most of all, the authors ground their arguments in the logic of symmetry: the law should not treat event contracts any better than it treats gambling, with which prediction markets have so much in common. But here, a challenge arises: the tax treatment of gambling is fairly illogical in its own right. As scholars have observed, the law treats gambling worse than other forms of speculative activity blessed with the label of financial investment. Betting on slots or horse races is not clearly different from buying options in meme stocks—not in terms of social desirability, impact on corporate finance, or consumer financial protection. It is therefore difficult to justify a particular tax treatment for event contracts on the grounds of symmetry with gambling, because the question of “how is this different from financial speculation” continually rears its head.

For example, the authors argue that event contracts should not be treated as capital assets under Section 1221(a) because they resemble the property types described in Section 1221(a)(3): inventions, designs, secret formulae, artistic compositions, or other property where the taxpayer’s “personal efforts created such property.” They argue that event contracts are similarly the product of taxpayers’ intellectual efforts, i.e., because taxpayers believe they possess an insight superior to that of the market. But the same logic would apply to the selection and purchase of stock or options, which are prototypical capital assets. Later, the authors acknowledge that at least some event contracts are used “to hedge objectively identifiable risks” and might suitably qualify for capital asset treatment. It seems challenging to sort contracts on a case-by-case basis, but one could imagine different rules for broad categories of predictions, e.g., sports versus politics versus macroeconomics.

The article’s most thorough and valuable doctrinal analysis is its application of Section 1256 to event contracts. Section 1256 effectively provides mark-to-market treatment and a blended short-term/long-term capital gains rate for a range of derivatives contracts (60% of gains are treated as long-term capital gains, and 40% are treated as short-term capital gains). Even as they do not ultimately endorse this view, Eyal and Soled raise a persuasive case that event contracts resemble exchange-traded futures contracts. There are subtle differences between the two forms, but not obviously differences that bear on the (blended) capital asset treatment. In fact, the Section 1256 framework is especially appealing insofar as its blended rate would reflect a balance between the more gambling-like and more investment-like features of event contracts. Under current law, the best argument for Section 1256’s applicability would be to view event contracts as “nonequity options” under Section 1256(b)(1)(C). Nonequity options are options that settle in relation to some metric other than a company’s stock, such as an index or a currency. Nonequity options commonly settle in cash rather than acquisition of the underlying asset—just like event contracts. It would be useful to undertake an even deeper analysis of the nonequity option concept to determine whether event contracts might plausibly be covered.

When it comes to the treatment of losses from event contracts, Eyal and Soled arrive at their most taxpayer-unfavorable argument: that these losses should be treated at least the same as gambling losses or hobby losses, but possibly even worse. Today, gambling losses are deductible only up to 90% of those losses and then limited to gambling gains, and hobby losses generally are disallowed. That is, neither form of loss can offset other income. The authors see some appeal in disallowing prediction market losses entirely on the grounds that the activity is mere consumption. Even if it is only consumption, it is a form of consumption that sometimes produces income—a distinction that has traditionally justified the (circumscribed) pre-TCJA use of loss offsets as in the cases of gambling and hobbies. Without loss offsets, taxpayers could make two bets, win one, come out economically neutral before tax, and yet still face tax on the gross gain. Prediction markets should not enjoy a regulatory advantage over gambling companies, but neither should they face a tax disadvantage relative to those same companies.

Eyal and Soled’s paper lands as the leading academic paper on the taxation of event contracts. They ably survey the range of options for how these instruments might be taxed, and put forward a distinctive perspective that not everyone will agree with. For those who think the extant treatment of gambling is illogical compared to that of its close cousin, financial speculation, the tempting alternative would be to harmonize all of these practices with one another. 

Here is the rest of this week’s SSRN Tax Roundup:

Akanchaya Acharya (Acharya CPA & Co.), Compliant by Design: A Circular 230 Framework for Delivering AI-Assisted Tax Strategy to Underserved Taxpayers (Mar. 9, 2026)

Zeba Ahmed (Hamdard Inst. L. Stud. & Rsch.), Delayed GST Refunds in India: Examining Section 54, Interest Liability, Administrative Discretion and Taxpayer Rights (Sept. 10, 2026)

Benjamin Alarie (Toronto), Policy Forum: Cognitive Infrastructure for Public Revenue Systems, 74 Can. Tax J. 367 (2026)

Reuven S. Avi-Yonah (Michigan), Coca-Cola Redux: The Problematic Absence of Comparables, 123 Tax Notes Int’l 951 (Aug. 10, 2026)

Reuven S. Avi-Yonah (Michigan), Implicit Support and the Arm’s-Length Standard, 123 Tax Notes Int’l 443 (July 30, 2026)

John Azzi (Western Sydney U.), Taxing Software Payments: Embedded Royalties and the Australian Taxation Office’s Nonuniform Approach, Bull. for Int’l Tax’n (2026)

Bruce Ball (Canadian Tax Found.), Enhancing the Role of Tax Professionals in the Tax Policy Process, 74 Can. Tax. J. 437 (2026)

Fred B. Brown (Baltimore) & Yehoshua (Josh) Friedman (Harvard), Reforming the Effectively Connected Income Rules to More Accurately Capture U.S. Business Income 79 Tax. Law. 483 (2026)

Emily Cauble (Wisconsin), Consumer Protection from Tax Misinformation, 62 Wake Forest L. Rev. __ (forthcoming 2027)

Emily Cauble (Wisconsin), Guiding Tax Return Preparers Informally, __ Fla. Tax Rev. __ (forthcoming)

Kiran Chawla (Chicago), Compensation for Climate Change Loss and Damages (L&D) (Mar. 1, 2025)

Divine Chukwuma (Nigerian L. Sch., Lagos), Incentives for Foreign Investors Under Nigeria Tax Act (Aug. 31, 2026)

Conor Clarke (Wash. U.) & Ari Glogower (Northwestern), The Indirect Taxes, 102 Notre Dame L. Rev. __ (forthcoming 2027)

Heather Evans (Canadian Tax Found.), Private Sector Contributions to the Canadian Tax Policy Process, 74 Can. Tax J. 455 (2026)

Heather M. Field (UC Law SF), Tax Enforcement, Gutted: Tax Lawyers’ Duties When the Revenue System Is Under Attack, 78 Rutgers U. L. Rev. __ (forthcoming 2026)

Jacqueline Lainez Flanagan (Maryland), Direct Cash Transfers: A Proposed Tax Regime, __ Okla. L. Rev. __ (forthcoming 2026)

Hans Gribnau (Tilburg L. Sch.), Tax Law Scholarship: We Need to Talk About Methodology (June 30, 2026)

Reuven S. Avi-Yonah (Michigan), Domenico Imparato (U. Hamburg, Inst. L. & Econ.) & Karen Sam (Independent), Data Centers as Engines of Corporate Tax Base Restructuring, 192 Tax Notes Fed. 823 (Aug. 3, 2026)

Young Ran (Christine) Kim (Cardozo) & Dmitry Erokhin (Int’l Inst. for Applied Sys. Analysis), Algorithmic Tax Ownership, 51 BYU L. Rev. 1437 (2026)

Israel Klein (Ariel U., Dept. Econ. & Bus. Admin.), The Right to Be Wrong: Rethinking the Regulation of Tax Positions, 29 U. Pa. J. Bus. L. __ (forthcoming 2027)

Justin Miller (Evercore Wealth Mgmt.), QSBS 2.0: Opportunities and Pitfalls After OBBBA, 52 ACTEC L. J. __ (forthcoming 2027)

Gillian Petit (U. Calgary, Dept. Econ.); Lindsay M. Tedds (U. Calgary, Dept. Econ.); Jennifer Robson (Carleton U., Dept. Pol. Mgmt.), Policy Forum: Tax Filing as State Administrative Infrastructure—Governance Gaps in Canada’s Tax-Based Benefit System (2026)

Jennifer Robson (Carleton U., Dept. Pol. Mgmt.) & Yves Giroux (C.D. Howe Inst.), Built for Purpose: A Permanent Public Tax Policy Advisory Body, 74 Can. Tax J. 471 (2026)

Libin Zhang (Fried Frank), Like-Kind Exchanges on Mars and Beyond, 192 Tax Notes Fed. 253 (July 13, 2026)