In 2025, prediction markets have become a major player in the U.S., boasting a trading volume surpassing $50 billion. A substantial portion of these predictions is tied to sports wagers, closely resembling traditional sports bets on games. While it may appear inconsequential to users whether they place their bets through sports betting platforms like FanDuel and DraftKings or prediction market apps such as Kalshi, Polymarket, and Underdog, significant legal distinctions, both tax-related and otherwise, are at the heart of ongoing legal disputes nationwide.
The primary difference between sports betting and prediction markets lies in their regulation. Prediction markets fall under the jurisdiction of the Commodity Futures Trading Commission, a federal body, granting them nationwide reach. On the other hand, the 2018 Supreme Court ruling in Murphy v. NCAA shifted the power to regulate sports betting to individual states. As a result, while some states have embraced sports betting, others have opted out.
Key Tax And Non-Tax Differences Between Prediction Markets And Sportsbooks
Since the landmark decision in 2018, sports betting has been legalized in various forms across 39 states, according to a Forbes article I contributed to. However, major states like California and Texas remain absent from this list. Despite legal sports betting being available in approximately 80% of U.S. states, a smaller percentage of the population can access it. The absence of sports betting options in these populous states may have contributed to the rising popularity of platforms like Kalshi.
Amidst the legal uncertainties surrounding where and how gamblers can place their bets are the tax implications. In a Forbes article I authored, I highlighted that sports bets and prediction wagers face different tax treatments.
Some bettors prefer prediction markets due to their tax benefits. Losses from unsuccessful predictions can offset gains, reducing overall tax liability. If a bettor ends the year with more losses than wins, they can deduct up to $3,000 of these losses against ordinary income. In contrast, sports bettors can only deduct losses up to their winnings, and only if they itemize deductions, which many Americans do not. Furthermore, starting in 2026, the ability to deduct sports betting losses will be limited, as discussed in another Forbes article I wrote.
While prediction markets offer tax advantages, all transactions are documented and reported using tax forms, particularly the 1099-B for broker and barter exchange transactions. This form is sent to both the taxpayer and the IRS. On the other hand, sports betting tax forms, such as the W-2G, are only issued when earnings exceed $600 and are 300 times the wager amount, meaning most sports bets do not generate tax forms. Consequently, taxpayers must voluntarily report this income on their returns. Although all gambling income, whether from sportsbooks or prediction markets, is taxable, those who underreport prediction market earnings are more likely to be detected than those who underreport sportsbook winnings.
While the prediction markets carry a clear tax advantage, all activity from prediction markets gets recorded and presented within tax forms, notably the 1099-B: proceeds from broker and barter exchange transactions for most platforms. This tax form gets provided to the taxpayer and the IRS. Conversely, sports betting tax forms – the W-2G – only get issued when the taxpayer earns over $600 and 300 times the size of the wager, meaning that the vast majority of sports bets do not trigger a tax form. Instead, taxpayers must voluntarily provide this information to the taxing authority when filing their tax returns. While all gambling income, whether earned from a sportsbook or a prediction market, is subject to tax, taxpayers who fail to disclose their earnings from a prediction market are more likely to get caught than those who fail to disclose their earnings from a sportsbook.
Are Prediction Markets Really Just Sportsbooks?
Even though Kalshi and Polymarket offer predictions on a vast number of different types of events, the sports-related outcomes have come to dominate their market. For instance, Keyrock estimates that 85% of Kalshi’s trading volume is generated 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 of sports-related predictions for these companies coincides with Kalshi partnering with golf superstar Bryson DeChambeau. DeChambeau is the first pro athlete to have a partnership with a prediction market. However, sponsorships like this are not new to the gambling world, as players like Lebron James (DraftKings), Rob Gronkowski (FanDuel), Derek Jeter (BetMGM), and Shaquille O’Neal (WynnBET) have been partnering with sportsbooks for years.
Further blurring the lines of whether these prediction markets are really just sportsbooks is that several of the sportsbooks now offer prediction markets. New to the scene in the past several months are the introduction of FanDuel Predicts and DraftKings Predictions. In fact, Underdog has left the traditional sportsbook market for prediction markets in the state of North Carolina.
What Is Next For The Tax Rules For Prediction Markets?
Given the size of their sports prediction market, the way the companies are advertising to their users, and the mere fact that many sportsbooks are now entering the prediction market space, it is less clear than ever whether prediction markets are really just sports betting apps.
While the average user may care very little about placing a wager on a team to win via Underdog versus FanDuel, the truth of the matter is that choice has key implications for the state. For instance, sportsbooks are regulated by the state, and each state has its own process for authorizing and taxing the sportsbooks. In many states, like North Carolina, the licenses and revenues go toward funding state enterprises. Furthermore, when states authorize sports betting in their state, they form expectations for future revenue streams based on expected gambler activity. As prediction markets offer a more tax-advantaged means for making their bets, this revenue stream, as well as the direct funding from the providers, will potentially be less than expected.
Potentially more of an issue are the regulations governing prediction markets. According to the AP, a prediction that Venezuelan President Nicolas Maduro would be out of office was made on Polymarket shortly before his ousting, and the wager paid out over $400,000. While this prediction is not indicative of normal activity, it has prompted intense scrutiny over the rules and regulations governing prediction markets due to the potential for corruption via insider trading. This scrutiny stands in stark contrast to what is exhibited with sports betting, where states have strict rules governing the bets, and they have significant power and authority to prosecute bad actors.
Given some of the tax and non-tax concerns over prediction markets, many states have made attempts to have the sports-related predictions reclassified as sports gambling and regulated by the state. As reported by NexusPredict, Illinois, Maryland, Nevada, New Jersey, New York, Ohio, Montana, Connecticut, and Tennessee have all issued cease-and-desist letters to prediction market companies claiming that companies like Kalshi and Polymarket are unlicensed sportsbooks and their activities for sports-related predictions are illegal.
States have also attempted to directly appeal to federal regulators and filed lawsuits against the prediction market companies, arguing that it is truly just gambling and not under the jurisdiction of the CFTC. While states might attempt to highlight low regulatory oversight over the markets, the real concern from the states might come down to the bottom line, according to InsideBitcoins, which cites Tennessee’s complaints that prediction markets are siphoning off tax dollars to the state.
Whether prediction markets should be treated as sportsbooks is an open question that is unlikely to be resolved in the immediate future. While there is a vast amount of uncertainty whether or not a change will be made, if it does, taxpayers may potentially be caught in the crosshairs, as they will be subject to vastly different rules governing their wins and losses from their wagers.
