US Tax Professors Push IRS to Settle Prediction Market Tax Rules
Two US law professors say prediction market winnings should be taxed like gambling, not investments, as trading volumes surge past $24 billion a month.
This article was produced with AI assistance and edited by the ON360 newsroom.
Two American tax law professors are urging the US Internal Revenue Service to formally declare that money won on prediction markets should be taxed the same way as gambling winnings, not as investment income. Jay A. Soled of Rutgers Business School and Mirit Eyal-Cohen of the University of Alabama School of Law make the case in a forthcoming Tax Notes article shared with Gambling Insider, arguing the current lack of guidance is becoming unsustainable as trading volumes explode.
According to the professors, global monthly trading volume across leading prediction market platforms rose from less than $5 billion in September 2025 to roughly $24 billion by April 2026. Despite that growth, there is still no clear IRS rule telling an ordinary user how to report those trades on a tax return.
Gambling or investing?
Prediction markets let users trade contracts tied to the outcome of future events, from elections to sports results, rather than betting against a bookmaker in the way a sportsbook works. Prices shift as sentiment changes, and a trader who buys a contract at 62 cents can sell it for 80 cents before the event is even settled.
That structure makes positions look like tradeable financial assets. Soled and Eyal-Cohen say that resemblance is largely superficial for the typical retail user, who is not managing a portfolio so much as placing a wager with a binary win-or-lose result.
Their paper, titled “Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts,” describes most retail activity on these platforms as “consumption-oriented wagering rather than profit-seeking investment.” The professors argue two people making the same economic bet should not face different tax outcomes simply because one used a sportsbook and the other used a regulated prediction market.
Why capital gains treatment runs into trouble
The professors walk through why treating event contracts as capital assets is legally shaky. Under Section 1222 of the US tax code, capital treatment generally requires a “sale or exchange.” Someone who simply holds a contract until the underlying event resolves never makes that exchange, they note.
They also argue an event contract often reflects a user’s research or educated guesswork about a future outcome, which could exclude it from the tax code’s definition of a capital asset. Section 1256 treatment, sometimes applied to regulated futures contracts, is dismissed too: while some CFTC-regulated prediction markets satisfy part of that test, the professors say event contracts fail the required mark-to-market element.
“The issue of the taxation of gains and losses associated with prediction market participation is too significant to ignore,” Soled and Eyal-Cohen write. “Given the gravity of the stakes, the IRS should take a formal position and lift the veil of uncertainty surrounding this issue.”
The professors also flag a catch for users hoping for capital gains treatment: if gains count as capital, losses should too, which brings its own restrictions rather than the more generous deductions some traders might expect.
A cross-border wrinkle for Canadian users
The proposal targets US tax law and has no direct bearing on the Canada Revenue Agency’s approach, which generally treats casual gambling winnings as non-taxable. But the underlying question, whether prediction markets are financial products or a form of wagering, is the same one Canadian regulators are watching as platforms such as Kalshi and Polymarket push into contested US markets and face lawsuits and state-level bans.
Ontario’s regulated sportsbooks and casino operators already operate under AGCO oversight with mandatory responsible-gambling tools, including deposit limits and self-exclusion. Prediction markets currently sit outside that provincial framework, a gap regulators in several jurisdictions are still working through as trading volumes keep climbing.
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