Professors Urge IRS to Clear Up Prediction Market Tax Confusion

Tax professors argue prediction market gains should be ordinary income as uncertainty risks giving platforms an advantage over traditional sportsbooks.

Prediction markets may look and feel increasingly like financial trading, but when it comes to tax, two US professors argue that most people using them are essentially gambling —  and they want the IRS to say so.

Jay A. Soled, Distinguished Professor of Taxation at Rutgers Business School, and Mirit Eyal-Cohen, Joseph D. Peeler Professor of Law at the University of Alabama School of Law, are calling on the agency to clear up what has become a significant gray area for prediction market users.

In a forthcoming Tax Notes article shared with Gambling Insider, the professors argue that prediction market gains should generally be taxed as ordinary income, while losses should face the same restrictions that apply to traditional gambling.

“The issue of the taxation of gains and losses associated with prediction market participation is too significant to ignore,” they write. “Given the gravity of the stakes, the IRS should take a formal position and lift the veil of uncertainty surrounding this issue.”

The question has become harder to ignore as prediction markets have grown. The professors cite global monthly trading volume across leading platforms rising from less than $5 billion in September 2025 to around $24 billion by April 2026. Yet there is still no straightforward answer for an ordinary American trying to work out how those trades should appear on a tax return.

Possible interpretations range from ordinary income to capital gains and Section 1256 treatment. In their longer paper, Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts, Eyal-Cohen and Soled say there are currently “no clear answers” over the tax consequences of buying and selling event contracts.

Looking Like a Financial Market Does Not Make It an Investment

Part of the difficulty is that prediction markets do not work exactly like sportsbooks. Rather than betting against a bookmaker, users generally trade contracts against one another. Prices move as the market’s view of an outcome changes and, crucially, users do not necessarily have to wait for the final result.

Someone who buys a contract for $0.62, for example, could sell it for $0.80 before the event is resolved and pocket the difference. That makes a prediction market position look much more like a tradeable financial asset than a conventional sports bet.

While prediction market advocates may present them as investments, their basic nature is to engender a wager: Someone always wins, and the counterparty always loses. Period.

Eyal-Cohen and Soled acknowledge that this is one of the strongest arguments for capital treatment. A user can say they have bought a transferable piece of intangible property that can rise or fall in value and can be sold before the underlying event takes place. But the professors argue that focusing on those features misses what most retail customers are actually doing.

Strip away the financial-market terminology, they say, and prediction markets and traditional gambling have a lot in common. Both generally end with a binary win-or-lose outcome. Both are priced around probabilities. Neither produces dividends or a physical product. And both can provide the same excitement and entertainment for the person putting money at risk. Their research describes most retail prediction market activity as “consumption-oriented wagering rather than profit-seeking investment.”

The tax code tends to treat gambling and investment very differently. The professors argue that two people taking essentially the same economic bet should not end up with different tax treatment simply because one used a sportsbook and the other used a regulated prediction market.

Selling Before Settlement Does Not Settle the Tax Question

There are still some fairly technical hurdles to treating event contracts as capital assets. One concerns users who simply hold their contracts until the event happens. Eyal-Cohen and Soled argue that there is then no “sale or exchange,” which is required for capital treatment under Section 1222.

They also argue that an event contract can represent the result of someone’s intellectual effort to become knowledgeable about a future event, or at least make an educated guess about it. That, they contend, creates another potential obstacle under the tax code’s definition of a capital asset.

Section 1256 treatment is another possibility the professors reject. While CFTC-regulated prediction markets may meet one part of the test for a regulated futures contract, Eyal-Cohen and Soled argue that event contracts do not meet the required mark-to-market element.

When distilled to their essentials, the similarities between these two enterprises — prediction market event contracts and gambling — warrant identical tax treatment.

There is another catch for users who would prefer their winnings to count as capital gains. If the gains are capital, the professors argue, the losses should be capital too. In other words, taxpayers cannot necessarily take the more favorable treatment when they win and then switch to ordinary treatment when they lose. Capital losses come with their own restrictions, something the professors suggest many prediction market users might find considerably less attractive.

Tax Uncertainty Could Tilt the Playing Field Against Sportsbooks

This is not only a question of what an individual user owes the IRS as it could also affect competition between prediction markets and sportsbooks. If prediction market customers are able to claim more favorable tax treatment than people making economically similar wagers through traditional gambling operators, the professors argue that the tax system could effectively make one product more attractive than the other.

“If the IRS grants prediction market participants the unlimited use of their losses and enables them to shelter their other taxable income (including their salaries and wages), it would ring a death knell for traditional gambling,” they write.

Their proposed answer is to apply the same restrictions to prediction market losses that apply to traditional gambling losses. That question could become increasingly important if prediction markets continue growing. The professors’ research points to around $24 billion in monthly global prediction market trading volume by April 2026. For comparison, roughly $14 billion a month was wagered through legal US sportsbooks on average during 2025.

Their concern is that tax treatment could start influencing where people choose to put their money. The longer paper argues that favorable treatment could make event contracts relatively more attractive than traditional investments or other forms of wagering, potentially changing consumer behavior and competition between platforms.

A Genuine Commercial Hedge Is a Different Proposition

There is, however, an important caveat. Eyal-Cohen and Soled are not arguing that every event contract should be treated as recreational gambling. Imagine a company whose revenue is heavily affected by the weather. It could buy weather-event contracts to offset the financial damage caused by an unusually hot or cold period.

Likewise, a business could potentially use contracts based on economic data to hedge against a genuine commercial risk. The cases look very different from someone buying a contract because they think their team will win on Sunday.

The professors’ longer paper specifically recognizes that distinction, pointing out that a business using weather contracts to reduce exposure to temperature-sensitive revenue, or macroeconomic contracts to hedge commercial risks, receives more business value and less entertainment value from the transaction.

Their proposed framework would therefore preserve narrow exceptions for bona fide commercial hedging and professional market-making. In practice, that means looking at what the contract is actually being used for rather than assuming that everything traded on a prediction market belongs in the same tax bucket.

The IRS Does Not Need to Wait for Congress

The professors’ longer paper says Congress, Treasury and the IRS or the courts could ultimately resolve the uncertainty. But Eyal-Cohen and Soled do not think the IRS needs to sit around waiting for that to happen.

Whatever the reason, the absence of guidance leaves taxpayers without a consistent framework for reporting their gains and losses.

Their Tax Notes article calls for immediate guidance and argues that the agency could provide clarity relatively simply. “In a simple notice, the IRS could readily dispel taxpayer uncertainty and offer clarity,” they write.

Their preferred short-term rule is that prediction market gains should be ordinary income and losses should face the same limitations as gambling losses, but their longer-term proposal goes considerably further.

They want Congress to reconsider whether people should be allowed to deduct gambling and prediction market losses at all. The reasoning is that if recreational gambling is essentially entertainment, losing money doing it is a form of personal consumption. And taxpayers generally cannot deduct the cost of their personal entertainment from their taxable income.

“At their core, they are forms of entertainment, plain and simple,” Eyal-Cohen and Soled write. They argue that Congress should ultimately disallow losses associated with both prediction markets and gambling, putting the two on the same footing rather than allowing the tax system to favor one over the other.

Prediction Markets Are Making an Old Tax Distinction Harder to Draw

There is a bigger question running through all of this. What exactly counts as gambling when a bet can be bought, sold and displayed on a screen like a financial asset?

Prediction markets sit awkwardly between several familiar categories. They can be used for entertainment. They can be used to speculate. In some circumstances they can hedge genuine risks. And they can aggregate information in much the same way as other financial markets. Technology is making those boundaries even less obvious.

“Prediction markets promise to turn nearly every public controversy into a tradable event,” Eyal-Cohen and Soled write in their research. But they warn that putting a sophisticated trading interface around a wager does not necessarily change its underlying character. “Technological novelty should not obscure the familiar distinction between an investment and a wager.”

For Eyal-Cohen and Soled, that is ultimately the principle the tax system should follow. A business genuinely using an event contract to protect itself against commercial risk is one thing. Someone buying a contract on a sporting result, election or other event for the chance of making money and the entertainment of being right is another. The technology may have changed considerably. The tax question, the professors argue, is much more familiar: is the person investing, or are they betting?

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