Tax Professors Urge IRS to Align Prediction Market Taxation with Gambling Rules

Two tax professors have called on the IRS to resolve uncertainty over how gains and losses from prediction markets should be reported. Jay A. Soled, Distinguished Professor of Taxation at Rutgers Business School, and Mirit Eyal-Cohen, Joseph D. Peeler Professor of Law at the University of Alabama School of Law, argue that these transactions amount to wagering and should receive equivalent tax treatment to traditional gambling. As reported by Gambling Insider, the pair make their case in a forthcoming Tax Notes article and a longer paper titled Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts.

Global monthly trading volume across leading platforms rose from less than $5 billion in September 2025 to around $24 billion by April 2026. That compares with roughly $14 billion a month wagered through legal US sportsbooks on average during 2025. The professors state that “the issue of the taxation of gains and losses associated with prediction market participation is too significant to ignore” and that “given the gravity of the stakes, the IRS should take a formal position and lift the veil of uncertainty surrounding this issue.”

Core Arguments Against Capital Gains Treatment

Prediction markets allow users to trade contracts before events resolve, such as purchasing at $0.62 and selling at $0.80. This structure can resemble financial assets. Soled and Eyal-Cohen maintain that the underlying activity remains a binary wager. “While prediction market advocates may present them as investments, their basic nature is to engender a wager: Someone always wins, and the counterparty always loses. Period.” They describe most retail participation as “consumption-oriented wagering rather than profit-seeking investment.”

Technical barriers further complicate capital treatment. Contracts held to settlement may lack the required “sale or exchange” under Section 1222. The professors also reject Section 1256 treatment, noting that event contracts fail the mark-to-market test. If gains receive capital treatment, losses must follow suit, subjecting them to restrictive capital loss rules that many users would find unattractive. “When distilled to their essentials, the similarities between these two enterprises — prediction market event contracts and gambling — warrant identical tax treatment.”

Risks of Tax-Driven Market Distortion

Favorable tax rules for prediction markets could tilt competition against sportsbooks. The professors warn that permitting unlimited loss deductions to offset wages and other income “would ring a death knell for traditional gambling.” They recommend the IRS issue a notice applying ordinary income treatment to gains and gambling-style limitations to losses. Longer term, they suggest Congress eliminate deductions for both activities, treating losses as nondeductible personal consumption.

Exceptions would remain for genuine commercial hedging, such as a business offsetting weather-related revenue risk. Soled and Eyal-Cohen distinguish these uses from recreational bets on sports or elections. @EyalMirit posted: “Pleased to see my article with Jay Soled “Betting on Tomorrow” featured in the Roundup on TaxProf Blog about the tax implications of prediction markets and emerging financial technologies.”

Why Clarity Must Come From the IRS

Absent guidance, taxpayers lack a consistent framework, and platforms risk gaining an unintended edge. The professors note that Congress, Treasury, the IRS or the courts could act, yet the agency can provide relief promptly through a simple notice. Operators in both prediction markets and sports betting should track this debate closely, as the eventual stance will shape competitive incentives and compliance obligations going forward.

Reporting: Gambling Insider

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