Federal Tax Analysis Finds Prediction Market Contracts Qualify as Wagers

A Tax Analysts study concludes that sports event contracts on prediction markets are best read as wagers under the federal tax code. This would subject them to the same rules that govern sports gambling, including ordinary income reporting on wins for consumers and potential excise taxes for market makers or platforms.

The research considers the tax code, case law, and legislative history. It finds that contracts do not qualify as regulated futures, foreign currency contracts, nonequity options, dealer equity options, or dealer securities futures contracts. As reported by InGame, the authors determine that federal tax treatment does not depend on how the CFTC or other nontax regulators classify the contracts.

Tax Scenarios for Market Makers and Operators

The paper presents two scenarios. In the first, based on the 1957 Calamaro Supreme Court case and 1959 IRS regulations, market makers and professional bettors who assume the risk of profit or loss would be subject to excise tax. Prediction platforms serving only as facilitators would not be, but their trading arms likely would. The bar for being in the business of accepting wagers is not high.

In the second scenario, if the activity fits the definition of a wagering pool, the operators themselves could be liable. The study lists four common characteristics of wagering pools that prediction markets appear to satisfy: the organizer sets rules and profits from fees, there is an entry mechanism that can vary by odds, the pot minus fees is paid out based on the sports event outcome. Under this view, platforms should be liable for excise tax on amounts wagered by each bettor, including fees paid to the platform.

Where the Tax Risk Lies

The applicable rate is .25% for wagers in states where betting is legal and 2% where it is not. This raises complications because minimum ages differ—18 for many prediction platforms versus 21 in most sports betting states—and because determining where a digital wager is placed or accepted remains unresolved. Prediction markets face no state taxes except in North Carolina starting Jan. 1, 2027.

The authors stress that IRS clarity is required to improve tax administration and taxpayer certainty. Absent that guidance, platforms and participants face persistent uncertainty over reporting obligations and potential tax exposure that could alter operational costs and market participation.

Reporting: InGame

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