Prediction-market World Cup bets could get tax edge

Bets placed on prediction markets for the World Cup could be taxed as investment income instead of gambling winnings, a treatment that would allow bettors broader deductions for losses. The Internal Revenue Service and the Treasury Department have not issued guidance on the issue.

The tax difference depends on whether payouts are treated as gambling winnings or proceeds from financial contracts. Prediction markets let users buy and sell standardized event contracts that settle based on outcomes. Trades are cleared through market infrastructure and some of these platforms are regulated by the Commodity Futures Trading Commission. Examples of such platforms include Kalshi and Polymarket US. Major sportsbook operators have also launched prediction-market products.

State-regulated sportsbooks and betting apps operate under state levies and federal excise taxes and are taxed as gambling. Under current rules, gamblers can deduct losses only if they itemize deductions and only to the extent of their winnings. By contrast, treating payouts as investment income could allow full offset of gains and losses, use of up to $3,000 of net capital losses against other income in a year, and carrying forward additional losses.

Some tax advisers favor the investment view. They point to differences in contract structure, third-party clearing, federal regulation and the way some markets report transactions for tax purposes. Nathan Goldman, an accounting professor, described the contracts as resembling financial products. Carl Kennedy, a partner focused on financial markets regulation, emphasized that prediction markets use clearinghouses and federal rules in ways typical online sportsbooks do not.

Other tax professionals and legal experts stress the economic similarity to traditional betting and note that courts often evaluate substance over form. Seth Hanlon, a senior fellow at a tax law center, cited cases where courts rejected attempts to reclassify gambling activity by changing legal structure. James Creech, a tax principal, posed the central question as whether the activity should be treated as gambling.

A more aggressive tax strategy would seek treatment under Section 1256 of the tax code, which applies a 60/40 split of long-term and short-term capital gains rates to certain types of derivatives regardless of holding period. Tax specialists say the rules for Section 1256 are narrow and that sports-event contracts may not meet the required parameters.

Tax advisers warn of enforcement risk. If the IRS later treats prediction-market payouts as gambling, taxpayers who claimed investment treatment could face back taxes, interest and penalties. Andrew Lautz, director of tax policy at a public policy center, cautioned that uncertainty increases potential liabilities for taxpayers.

The debate comes as online sports wagering grows. Surveys show more than a quarter of Americans report an active online sports betting account, and state-regulated sports betting revenue reached $16.96 billion last year. Interest from cryptocurrency platforms, gaming companies and large tech firms in event contracts has expanded the number of market participants and products.

Tax professionals recommend that individuals consider their risk tolerance and consult advisers before treating prediction-market payouts as investment income. Robert Stoddard, a tax partner with gaming industry experience, said taxpayers must decide how much enforcement risk they can accept given the lack of definitive IRS guidance.