Unclear IRS rules could let some bettors treat event contracts as investments, unlocking fuller loss deductions and potentially lower rates than sportsbooks.
Americans using prediction markets to bet on the World Cup could face a lower tax bill than sportsbook users because event contracts may be treated as investments rather than gambling. The distinction matters because U.S. tax law is harsher on gambling income, limiting how losses can be deducted, while investment treatment could allow full loss offsets and, under a more aggressive reading, a lower tax rate under Section 1256 (tax rule for certain derivatives). The uncertainty stems from the rise of federally regulated prediction markets such as Kalshi and Polymarket US, which offer standardized event contracts cleared through financial-market infrastructure instead of traditional bookmaker wagers. Supporters say that structure, along with oversight by the CFTC (U.S. derivatives regulator), makes them different from state-regulated sportsbooks like DraftKings Inc. and FanDuel Inc. Critics argue the economics are essentially the same because users still risk money on uncertain outcomes for a payout, and courts and the Internal Revenue Service have often looked past legal form to substance. The IRS has not issued guidance, leaving taxpayers to decide how much risk to take. A conservative approach would treat payouts like gambling winnings, where losses are deductible only for taxpayers who itemize, cannot exceed winnings, and are capped at 90% of losses. A more favorable capital-gains approach would allow full write-offs, up to $3,000 of net losses against other income in a year, and carryforwards. The most aggressive strategy would seek Section 1256 treatment, letting 60% of gains qualify for long-term capital gains rates regardless of holding period, though several tax experts said qualifying sports event contracts under that provision is doubtful.