Philip Robin Cleary (J.D. 2008, Brooklyn) has published Note, Predicting the Taxation of Prediction Markets, 27 Va. Tax Rev. 953 (2008).  Here is part of the Introduction:

To date, federal tax law gives little guidance on how to treat gains and losses from these types of contracts. As a result, the actual taxation proceeds at the discretion of the taxpayer reporting the income. In fact, only one exchange, HedgeStreet, puts a tax label on its contracts. Other taxpayers might genuinely consider the activity to be gambling, investing, or some other occupation entirely. The lack of federal guidance on how to characterize proceeds from prediction contracts also enables taxpayers to elect inconsistent tax treatments for gains and losses from year to year in order to achieve the most beneficial tax result. In sum, there is a lack of consensus and awareness about the taxation of this type of income, a type that is growing exponentially.

In response, this note first aims to discuss what is known about the current taxation of prediction markets. This note then attempts to answer how they should be taxed under current tax law and concludes that prediction derivatives based on political and financial events should best be considered forward contracts under current tax law. Part II summarizes the development of prediction markets. Part III discusses the current lack of consensus on their tax treatment. Three specific prediction markets are examined: Intrade, HedgeStreet, and Iowa Electronic Markets. In Part IV, the case is made that prediction derivatives are best understood as forward contracts under current tax law. Part V elaborates on this point by discussing why prediction futures do not represent gambling or mere income producing contracts held by the taxpayer as property. Finally, the conclusion, Part VI, reaffirms the proposition that prediction contracts are forward contracts and thereby creatures of finance.