The hidden tax battle behind America’s $50 billion prediction market boom

Prediction markets have taken the US by storm with a trading volume of over $50 billion in 2025 alone. However, a significant portion of their predictions come from sports-related bets, which happen to resemble a sports bet on the outcome of the game. While it may seem trivial to a user whether it matters whether they bet on the College Football Championship game through a sports betting app like FanDuel and DraftKings or a prediction market app like Kalshi, Polymarket and Underdog, there are significant tax and non-tax differences that lead to legal battles across the country.

Basic tax and non-tax differences between betting markets and sports books

When it comes to breaking down these two sports betting providers, a key difference between the two is where you can use them. Futures markets are regulated by the Commodity Futures Trading Commission, which is a US federal regulator, meaning it has the authority to allow futures markets nationwide. Meanwhile, following her Murphy v. NCAA A 2018 Supreme Court ruling gave the power to license and regulate sports betting to the states, which some decided to allow and others decided not to.

As of 2018, 39 states have legalized sports betting in some form, as I reported in Forbes factor article. However, California and Texas are notably absent from those that allow sports betting. In fact, despite the fact that sports gambling is legal in some form in about 80% of US states, it is available to a much smaller segment of the population. The lack of sports betting options in these more populous states is potentially a key reason why Kalshi has grown in popularity.

The tax implications potentially involved in this legal crossfire over how and where punters can place their sports bets. As I mentioned in a Forbes Contributor’s article, sports betting is treated differently than prediction betting.

Some punters will prefer to place their bets through prediction markets because unsuccessful predictions can be offset against successful predictions to reduce their overall tax liability. In fact, if the taxpayer has net worth — more losses than wins — throughout the year, the tax code allows the taxpayer to deduct up to $3,000 of those losses from ordinary income. Meanwhile, bettors can only deduct their losses to the extent of their winnings, and those deductions only happen if the taxman analyzes their taxes, which most Americans don’t. Finally, sports betting loss deductions will be limited from 2026, as I mention in Forbes factor article.

While prediction markets have a clear tax advantage, all activity from prediction markets is recorded and reported on tax forms, notably the 1099-B: Broker and Exchange Trading Income for most platforms. This tax form is provided to the taxpayer and the IRS. In contrast, sports betting tax forms – the W-2G – are only issued when the taxpayer wins more than $600 and 300 times the size of the bet, meaning the vast majority of sports bets do not trigger a tax form. Instead, taxpayers must voluntarily provide this information to the tax authority when filing their tax returns. While all gambling income, whether earned from a sports bet or a betting market, is subject to tax, taxpayers who fail to disclose their winnings from a betting market are more likely to be caught than those who fail to disclose their winnings from a sports betting market.

Are prediction markets really just sports books?

Although Kalshi and Polymarket offer predictions for a huge number of different types of events, sports-related results have dominated their market. For example, Keyrock estimates that 85% of Kalshi’s trading volume comes from sports. While they estimate that Polymarket has a much lower percentage (39%), sports-related predictions still make up the largest percentage of these two companies’ revenue streams.

The rise in sports-related predictions for these companies coincides with Kalshi’s partnership with golf superstar Bryson DeChambeau. DeChambeau is the first professional athlete to partner with a prediction market. However, sponsorships like this aren’t new to the gambling world, as players like Lebron James (DraftKings), Rob Gronkowski (FanDuel), Derek Jeter (BetMGM) and Shaquille O’Neal (WynnBET) have partnered with sportsbooks for years.

Further blurring the lines as to whether these prediction markets are really just sports books is that many sportsbooks now offer prediction markets. New to the scene in recent months is the introduction of FanDuel Predicts and DraftKings Predictions. In fact, Underdog left the traditional sports betting market for prediction markets in the state of North Carolina.

What’s next for the tax rules for forecast purchases?

Given the size of the sports betting market, how companies advertise to their users, and the mere fact that many sportsbooks are now entering the betting market, it’s less clear than ever whether betting markets are actually just sports betting apps.

While the average user may care very little about betting on a team to win via Underdog vs. FanDuel, the truth of the matter is that the choice has key implications for the state. For example, sports books are regulated by state, and each state has its own process for approving and taxing sports betting. In many states, such as North Carolina, permits and revenue go to fund state businesses. Additionally, when states legalize sports betting in their state, they form expectations of future revenue streams based on expected gambler activity. As prediction markets offer a more taxing means to bet, this revenue stream, as well as direct funding from providers, may be less than expected.

Probably a bigger issue is the regulations governing prediction markets. According to the APa prediction that Venezuelan President Nicolas Maduro would be out of office was made at Polymarket shortly before his overthrow and the bet exceeded $400,000. Although this prediction is not indicative of normal activity, it has prompted intense scrutiny of the rules and regulations governing prediction markets because of the potential for corruption through insider trading. This control is in stark contrast to what is seen with sports betting, where states have strict rules governing betting and have significant power and authority to prosecute bad actors.

Given some of the tax and non-tax concerns surrounding prediction markets, many states have made efforts to reclassify sports-related predictions as sports gambling and make them state-regulated. As reported by NexusPredictIllinois, Maryland, Nevada, New Jersey, New York, Ohio, Montana, Connecticut and Tennessee have issued cease and desist letters to betting market companies, alleging that companies like Kalshi and Polymarket are unlicensed sportsbooks and their sports betting activities are illegal.

States have also tried to appeal directly to federal regulators and have filed lawsuits against prediction market companies, arguing that they are really just gambling and not under the CFTC’s jurisdiction. While states may attempt to emphasize low regulatory oversight of markets, real concern by states may bottom out, according to InsideBitcoinswhich cites Tennessee’s complaints that foreclosure markets siphon off state tax dollars.

Whether prediction markets should be treated as sportsbooks is an open question that is unlikely to be resolved anytime soon. While there is a lot of uncertainty as to whether or not there will be a change, if it does, taxpayers may find themselves in the crosshairs as they will be subject to very different rules governing their winnings and losses from their bets.