NYU Tax Law Center Study Urges IRS to Apply Gambling Tax Rules to Prediction Market Contracts

A group of experts at New York University School of Law’s Tax Law Center has concluded that sports event contracts on prediction market platforms should be taxed under the same federal rules that govern sports gambling.

The study, titled “Are Sports Event Contracts on Prediction Markets Gambling for Federal Tax Purposes?” and published this month in Tax Notes, recommends that the IRS issue formal guidance. Absent that guidance, the authors warn, taxpayers, businesses and accountants may apply inconsistent treatments, resulting in filing errors and unequal burdens.

Seth Hanlon, Miles Johnson, Michael A. Kaercher, Kyle Sweeney and Sophia Yan determine that winnings from these contracts are taxable as ordinary income. Limits on gambling-loss deductions apply, and beginning in 2026 only 90% of wagering losses may be deducted. The contracts are also subject to the federal excise tax on sports wagers: 0.25% on state-authorized bets and 2% on unauthorized ones. The tax is levied on the amount wagered plus any fees, regardless of outcome.

Substance Over Labels in Tax Analysis

The authors note that the tax code does not expressly define “wagering,” but courts have described it as risking money on the outcome of a specific uncertain event. That definition, they maintain, captures sports event contracts because both activities involve monetary risk on the resolution of an uncertain sports result.

Labels do not control tax consequences when they conflict with economic realities, the study asserts. Calling an arrangement an “event contract” traded on an “exchange” rather than a bet placed at a sportsbook therefore changes nothing. The fact that users bet against one another rather than against a house is likewise “a distinction without a meaningful difference.”

“Gambling on sports with one’s peers,” the authors write, “is no less gambling than gambling on sports against a bookie or house, and peer-to-peer betting on sports is unquestionably wagering for federal tax purposes.” Registration with the CFTC as a designated contract market is irrelevant to tax treatment. “Tax treatment does not turn on nontax regulatory treatment,” the study states.

Industry Reaction and Ongoing Court Conflicts

Robert Raiola, CPA and director of the sports and entertainment group at PKF O’Connor Davies, agrees that “clear IRS guidance would give taxpayers and the industry a more consistent framework.” He adds that whenever “someone risks money on the outcome of a game for a potential payout, the tax consequences deserve careful attention.”

As reported by Sportico, the tax questions arrive while federal appeals courts remain split on the underlying regulatory classification. The 3rd Circuit has treated the contracts as CFTC-regulated swaps shielded from state gambling laws, while the 9th and 6th Circuits view them as sports bets subject to state licensing and prohibition rules. Kalshi only began offering sports event contracts in January 2025, and the products’ novelty has amplified both their popularity and the surrounding legal uncertainty.