Prediction-Market Bets Can Bring Taxes Even at Break-Even

Prediction-market bettors may face unexpected tax bills even when their overall returns are zero because taxable gains and losses can be calculated separately. Kalshi reported more than $2.5 billion in trading volume tied to the midterm elections in a Nov. 4 blog post, drawing attention to the tax treatment of these contracts.

Prediction markets offer contracts linked to elections, sports, political events and other outcomes. Tax advisers disagree over whether payouts should be treated as gambling income, short-term capital gains or another form of income.

Paul Karger, co-founder and managing partner of Boston-based registered investment adviser TwinFocus, cautioned clients against assuming that prediction-market winnings qualify as capital gains.

“Tax law often lags innovation in financial markets,” Karger said. “The biggest mistake investors can really make is assuming that because they’re trading on some kind of financial platform that their winnings are automatically going to be capital gains. That may not be the case. It may be considered ordinary income.”

Some of Karger’s clients have experimented with prediction markets. He advises them to proceed cautiously because the tax rules remain unclear. A person could break even economically while still owing tax if winning and losing contracts are treated separately, he added.

Gabriel Shahin, principal and founder of Falcon Wealth Planning in Ontario, California, classifies prediction-market winnings as short-term capital gains, which are taxed at ordinary income rates. He believes positions held longer could qualify for long-term capital-gains treatment and compares the activity with futures trading.

Shahin also places prediction-market betting in the gambling category because of its speculative nature. His clients generally have not wagered more than $10,000 through these markets, while the average client at his firm has about $800,000 in assets.

“If they want a prediction market portfolio … it’s gambling, and we’re just not comfortable to do that,” Shahin said.

Jordan Kienzle, a partner at San Francisco-based Baker Street Advisors, called for stronger regulation of prediction markets. He described them as legalized gambling, even when platforms present them as financial trading.

“I don’t think they should get a pass for tax treatment or regulation just because they’re trying to frame it as a different type of investment transfer,” Kienzle said.

Kienzle also advised clients against using prediction markets as a long-term hedging tool. He linked repeated betting with risk-seeking behavior and overconfidence, which can affect investment decisions.

A September survey by the Brennan Center for Justice at New York University School of Law found that 48% of registered voters supported stronger regulation of prediction markets. Another 16% favored banning them completely.

Kalshi’s Nov. 4 blog post reported that trading volume tied to the midterm elections exceeded $2.5 billion. The tax treatment of those transactions remains uncertain for bettors and their advisers.