Prediction Markets May Give World Cup Bettors a Tax Edge
American bettors who trade contracts tied to World Cup outcomes could face a lighter tax bill than sportsbook customers, according to Fortune. The difference depends on whether the Internal Revenue Service treats prediction-market payouts as gambling income or as proceeds from financial contracts. Neither the IRS nor the Treasury Department has issued guidance on the question.
Sportsbook winnings fall under standard federal gambling tax rules. Customers can deduct losses only if they itemize their returns, cannot claim more than they won, and face a cap of 90% on loss deductions.
Prediction markets such as Kalshi and Polymarket US answer instead to the Commodity Futures Trading Commission. DraftKings and FanDuel have both launched event-contract products of their own, and now sit on both sides of the divide.
James Creech, a principal at Baker Tilly’s specialty tax practice, put the core question simply: “Is it gambling or not?”
A Capital-Gains Path Could Widen Deductions
Supporters of investment-style tax treatment argue that traders buy standardized contracts through market infrastructure built for financial products, not wagers placed directly with a bookmaker. Critics respond that the economic substance stays the same, since customers risk money on an uncertain sports outcome either way.
Nathan Goldman, an accounting professor at North Carolina State University’s Poole College of Management, put it plainly: “These are no longer sports bets.”
One approach would tax event-contract profits and losses as capital gains and capital losses. That would let customers offset gains with the full value of their losses, plus deduct up to $3,000 against other income and carry the remainder forward to future years.
A more aggressive path would apply Section 1256 of the tax code. Contracts that qualify receive a blended rate under which 60% of gains count as long-term capital gains and 40% as short-term gains, regardless of how long the trader held the contract.
Loren Lembo, a partner at Katten Muchin Rosenman LLP, said the appeal is obvious, but the fit is not: “Everyone would like them to be able to qualify” for that treatment. Carl Kennedy, a partner and co-chair of Financial Markets and Regulation at the same firm, pointed to a structural gap between the two products: “There’s no third party. There’s no clearinghouse.”
IRS Inaction Raises Penalty Risk
A gambling classification from the IRS would leave little room to maneuver. Customers who reported payouts as capital gains could then owe additional tax, interest, and penalties.
Seth Hanlon, a senior fellow at the Tax Law Center at New York University School of Law, pointed to past rulings on the issue. Courts, he said, have often applied a substance-over-form test: “It looks like gambling and smells like gambling, it’s gambling.”
Robert Stoddard, a tax partner at KPMG LLP with gaming expertise, framed the decision as a matter of appetite for risk: “It’s up to an individual to determine what is their risk tolerance here in the absence of clear definitive guidance.”
The issue carries more weight as prediction markets expand into sports and draw established betting operators, cryptocurrency firms, and technology companies. Fortune cited American Gaming Association data that put state-regulated sports-betting revenue at a record $16.96 billion last year.
💡TGJ Take
Tax treatment could become a real edge for prediction markets if traders can deduct losses more freely than sportsbook customers. Operators should not treat that edge as settled law, since the IRS has endorsed neither capital-gains nor Section 1256 treatment. The bigger risk sits with users. A favorable filing position today could turn into back taxes and penalties tomorrow, once the IRS acts. Sportsbooks that track the prediction-market push into sports should treat this tax question as a genuine threat, not a temporary quirk.
