New Academic Paper Argues Prediction Markets Warrant Gambling Tax Treatment Over Investment Gains
Professors Mirit Eyal and Jay Soled argue prediction markets are mainly wagering, not investments, and should face ordinary income tax up to 37% with no retail loss deductions. Exceptions apply for hedging and professionals. Platforms like Kalshi and Polymarket handle 1099 forms differently amid zero IRS guidance.
SCCG Take — This analysis signals rising pressure for regulators to treat event contracts as gambling, which could increase operator compliance costs and curb retail appeal while protecting hedging uses.
A new paper in the George Washington Law Review argues that the vast majority of prediction market trades should be taxed as gambling rather than investments. Mirit Eyal, a law professor at the University of Alabama, and Jay Soled, a taxation professor at Rutgers Business School, make the case in “Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts.”
The professors write that “This article contends that participation in event-contract markets is predominantly a form of consumption-oriented wagering rather than profit-seeking investment.” They draw a direct comparison: a $100 sports bet on the Eagles via FanDuel functions the same as a $100 event contract on the same outcome. Both involve staking money on an uncertain result to win more.
Tax consequences differ sharply. Ordinary income rates reach 37%, while long-term capital gains top out at 20%. Eyal and Soled reject capital gains treatment, noting participants acquire no ownership stake in an asset.
Platform Reporting Gaps and Loss Limits
Kalshi issues Form 1099-MISC for winnings, 1099-INT for cash balance interest, and 1099-B for select transactions. Polymarket issues no tax forms and directs users to self-prepare returns. Recent tax changes limit gambling loss deductions to 90% of winnings, barring any deduction for those taking the standard deduction.
The paper urges eliminating loss deductions for ordinary retail users entirely, treating the activity as nondeductible entertainment akin to a golf round or concert ticket. Exceptions would cover legitimate business hedging, such as weather contracts, and professional market makers who demonstrate risk-management purposes.
“The vocabulary of the platform may determine how the transaction is marketed,” the authors write, “but its economic function should determine how it is taxed.” As detailed by InGame, the analysis arrives with zero IRS guidance on classification as ordinary income, capital gains, or futures. A KPMG report highlighted in a September 4, 2026 post by @billsperos further flags the unresolved reporting questions for sports event contracts.
The Open Question for Tax Frameworks
Absent clear IRS direction, prediction market platforms and users operate in persistent uncertainty that could invite stricter alignment with wagering rules. Operators should track potential congressional or agency moves that prioritize economic substance over product labeling, as shifts in treatment stand to alter compliance demands and retail participation.
Reporting: InGame
Generated by SCCG’s automated editorial system from published source reporting. SCCG Management holds editorial responsibility.
This academic push to reclassify event contracts as gambling could reshape operator compliance and chill retail enthusiasm absent hedging carve-outs.
We've watched prediction markets explode without tax clarity — this paper gives regulators the blueprint to treat them like sports betting. That means higher effective rates, no loss offsets for casual users, and a compliance patchwork across platforms. For operators and institutional players hedging real risk, the hedging exception matters. SCCG sits at the table where regulatory strategy, product design, and tax structure converge.
- Professors argue prediction markets warrant ordinary income tax (up to 37%), not capital gains
- Paper urges eliminating retail loss deductions except for hedging or professional market makers
- Zero IRS guidance exists; platforms like Kalshi and Polymarket report taxes inconsistently
SCCG angle: SCCG works across regulated markets helping platforms design compliant structures before the tax hammer drops. Our regulatory advisory and legal network can help operators position hedging use-cases, build reporting consistency, and engage with state and federal tax authorities as classification rules crystallize.
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