What's Happening?
Prediction markets, which allow users to wager on future events such as sports, elections, and weather, are creating tax uncertainties for participants. These markets, regulated by the Commodity Futures Trading Commission (CFTC), claim to be financial contracts rather than gambling platforms. However, the Internal Revenue Service (IRS) has not provided clear guidance on how these should be taxed, leaving taxpayers to navigate the complexities on their own. Under the One Big Beautiful Bill Act, gambling losses are deductible only up to 90% of gambling winnings, which complicates matters further for those using prediction markets. Taxpayers using CFTC-approved platforms like Kalshi and Polymarket may face different tax treatments compared to traditional
casino bets, as these platforms issue 1099s or 1099-Bs instead of W-2Gs.
Why It's Important?
The lack of IRS guidance on prediction market taxation could have significant financial implications for users. As these platforms gain popularity, the potential for large aggregate gambling amounts increases, potentially leading to unexpected tax liabilities. The distinction between financial contracts and gambling could affect how much tax users owe, impacting their financial planning and risk management strategies. This uncertainty may also influence the growth and regulation of prediction markets, as users and platforms navigate the legal and financial landscape without clear IRS rules.
What's Next?
Until the IRS provides definitive guidance, taxpayers and tax practitioners must decide how to report gains and losses from prediction markets. This decision will likely depend on individual risk tolerance and the interpretation of existing tax laws. The IRS is expected to address this issue eventually, but in the meantime, practitioners are advised to follow the 1099 forms issued by these platforms to avoid alienating clients. The resolution of this issue could lead to more consistent tax treatment and potentially influence the regulation and operation of prediction markets in the future.
