Introduction
<a href="https://cryptoz7.com/aventus-crypto-price-prediction-2026-2030-can-avt-recover-to-1/” title=”Aventus Crypto Price Prediction 2026–2030: Can AVT Recover to $1?”>Prediction markets such as Kalshi and Polymarket have grown rapidly in recent years, with billions of dollars’ worth of event contracts now traded annually. Along with that rapid growth have come questions about how these markets should be regulated and taxed.
Members of Congress have voiced concern over the ethics and legality of these markets’ activity. Lawsuits continue to challenge the legal status of prediction markets and the authority of the federal government to regulate them, leaving tax preparers, taxpayers, and prediction market operators uncertain as to exactly how the government will tax earnings from these markets.
This issue brief examines the regulatory history, tax treatment, and uncertainties currently surrounding prediction markets.
A Brief History of Event Markets
Futures markets—where participants buy and sell standardized contracts obligating them to purchase or sell an asset, commodity, or financial instrument at a predetermined price on a specified future date, regardless of what the market price turns out to be at that time—have existed in the United States for more than 150 years. Originally, they were primarily tied to physical commodities, such as agricultural goods. They arose as a means to hedge against price and supply uncertainties before delivery dates.
Most of the history of futures trading has taken the form of contracts on the delivery and sale of goods. In 1988, a singular event changed this: The University of Iowa created the Iowa Electronic Markets (IEM), then called the Iowa Presidential Stock Market. The focus of this market was to trade contracts placed on an event, such as a presidential election, instead of on physical commodities. The premise was that event markets could serve as better predictors of election outcomes than traditional polling.
In 1992, the U.S. Commodity Futures Trading Commission (CFTC) authorized the IEM to continue as a nonprofit organization. These swaps were then classified as “event contracts.”
What’s the difference between futures and event contracts?
Futures usually have an underlying commodity driving the value of the contract. For example, cherry farmers in Michigan may sell futures contracts to lock in a price, hedging against future price shocks.
Event contracts, on the other hand, use events as the underlying “commodity.” These types of trades occur with either “yes” or “no” contracts being bought and sold. They often take the form of $1 payouts, with the prices of “yes” and “no” contracts reflecting the outcome probability. Take event contracts on whether the United States will win the most gold medals at the Olympics. In this example, if “yes” contracts cost 85 cents, then “no” will cost 15 cents. This reflects the market’s implied probability that there is an 85% chance that the United States will lead in gold medals. If the United States wins, those who bought “yes” contracts will receive $1, or a gain of 15 cents, for the correct prediction. Those who bought “no” contracts will lose their 15 cents.
The Iowa market remained one of a few nonprofit prediction markets in the United States until 2018, when the development of digital, for-profit prediction markets broke into the mainstream.[1]
Rise of Prediction Markets and Regulatory Questions
Since the founding of Kalshi in 2018 and Polymarket in 2020, prediction markets have grown steadily in popularity. With their expansion into political and sports markets in the past few years, revenue has exploded. As of April 2026, monthly global trading volume for U.S. prediction markets was estimated at $24 billion. The overwhelming majority of prediction market trades in April occurred on Kalshi or Polymarket.
The Role of the Commodity Futures Trading Commission
The CFTC is the primary federal regulator of prediction markets in the United States. Created in 1974, the CFTC is tasked with regulating all commodity futures markets, not just agricultural ones. It acts as both a rulemaking and an enforcement body, similar to the U.S. Securities and Exchange Commission for securities markets.
Despite ongoing legal disputes over whether the CFTC’s authority preempts state gambling regulation of prediction markets, the CFTC continues to assert its jurisdiction, citing the Commodity Exchange Act as the legal authority for its regulatory oversight.
Major Prediction Market Platforms
Kalshi was the first legally allowed major prediction market to be established in the United States, and it uses event contracts with “yes” or “no” outcomes. Kalshi initially shared a similar purpose with the IEM—helping to aggregate information into predictive prices and offering event contracts as a hedge against real-world risks—but differed in that its initial focus was on economic, weather, and other nonelectoral indicators.
Shortly after launching, however, the company expanded into political elections. This led to legal challenges. In 2023, Kalshi and the CFTC entered a year-long battle over the legality of issuing event contracts on election outcomes. The CFTC first issued a ruling disapproving Kalshi from issuing event contracts, finding that election futures were contrary to the public interest and suggesting that they were more akin to gambling. Kalshi filed suit, and in September 2024 the U.S. District Court for the District of Columbia issued a ruling allowing Kalshi to proceed with election event contracts. By May 2025, the CFTC declined to pursue any further action against Kalshi, effectively opening the doors to for-profit political event contracts markets (as opposed to IEM, which operates as a nonprofit).
Polymarket is the other major prediction market used in the United States, although Polymarket started—and generally continues to do business—as an international, crypto-based platform. Under the Biden administration, the CFTC fined Polymarket $1.4 million and required it to block U.S. users after finding that it had operated an unregistered trading platform. Under the second Trump administration, the CFTC has since softened its position, and Polymarket has acquired a CFTC-licensed company to legally reenter the domestic market.[2]
Tax Questions
The legal and regulatory uncertainty facing prediction markets has also led to questions over how winnings on those platforms are taxed. Tax experts generally believe prediction market earnings and losses could fall into one of three categories.
Gambling Income
Some experts push for treating prediction markets like other forms of gambling, especially in sports, where prediction markets compete with sports gambling platforms like DraftKings and FanDuel. Gambling winnings are taxed at ordinary income rates and subject to tax withholding by the payer of the winnings. Currently, gambling winnings are withheld at a 24% rate if winnings are $5,000 or more. For example, if a person were to win $10,000, then the vendor would withhold $2,400 of the winnings when paying out. The gambler would also be required to file a tax return with winnings and losses.
The One Big Beautiful Bill Act amended the rules around loss deduction, only allowing for 90% of losses to be deducted against gambling winnings. As a result, if a prediction market trader won $10,000 on some contracts and lost $10,000 on others, they would end up with $1,000 of net taxable winnings even though they broke even. This treatment applies only if a trader’s activity is classified as gambling; if their contracts were instead taxed as capital gains or section 1256 contracts, the more favorable loss rules described below would apply instead.
BPC has also recommended that Congress consider a 5% excise tax on sports bets to bolster federal revenues and offset the negative social effects associated with gambling. If that is advanced, it would be important to consider whether and how such a tax would apply to prediction markets.
Section 1256 Contracts Income
Some have surmised that prediction markets qualify as “contract” income, since the CFTC treats prediction markets as a regulated contract. Section 1256 of the Internal Revenue Code dictates the rules around futures contracts and how they are taxed.
Under section 1256, the holder of mark-to-market contract income (contracts whose value adjusts in real time to changing market conditions) must report gains or losses to the IRS at year-end. These are unrealized, but once the contract has closed, these changes are factored into the amount of tax owed. Regardless of whether a contract is long- or short-term, it is always subject to a 60/40 split: 60% of the profit is taxed at the taxpayer’s long-term capital gains rate (up to a maximum of 20%), and 40% is taxed at the taxpayer’s ordinary income tax rate (up to a maximum of 37%).[3]
Net section 1256 contract losses follow the same 60/40 split as gains, but, unlike ordinary capital losses, a trader may elect to carry a net section 1256 loss back three years rather than only forward, offsetting section 1256 gains reported in those earlier years. Any loss not absorbed through this carryback follows the standard capital loss rules: It carries forward indefinitely and can offset up to $3,000 of ordinary income per year.
Capital Gains Income
Capital gains tax rates are dependent on the duration for which a taxpayer holds an asset.
Short-term assets are those typically held for under one year. For prediction markets, these may be contracts such as: “Will it rain tomorrow?” or “Will the home team win its game tomorrow?” After the resolution and payout of the event, those earnings are taxed as ordinary income.
Long-term assets are subject to preferential tax treatment. Typically, contracts that are realized more than one year after purchase are classified as long-term. A long-term event contract may be a question such as: “Will X candidate win the 2028 presidential election?” Once this contract is resolved and paid out, the earnings would be reported as capital gains and subject to a maximum 20% tax.
As with section 1256, a key difference between capital gains and gambling treatment is how losses affect a filer’s tax return. The IRS allows filers whose capital losses are greater than their capital gains to offset their ordinary income by a maximum of $3,000 and carry forward any remainder. Gambling losses, by contrast, can only offset a filer’s gambling winnings. State-level taxation of capital gains or gambling income may differ from federal treatment, which could further affect loss deductions.
Challenges Ahead
Legal Regulation
Currently, several states have issued cease-and-desist orders as they challenge the legal authority of the CFTC to regulate prediction markets such as Kalshi or Polymarket. The state gaming commissions contend that the activity on these markets constitutes gambling and thus falls under their jurisdiction. The CFTC, under the Trump administration, argues that prediction markets are strictly within federal regulatory purview and has sued several of these states to block these orders. (The companies themselves have also filed suits.)
How these cases are ultimately resolved could have two key implications. First, if the courts determine that these markets constitute gambling, then states will gain regulatory authority over the activities of Kalshi and Polymarket. This would particularly matter in states where gambling is still outlawed or restricted to designated gambling areas. Second, under such a ruling, the tax treatment would be clarified as akin to gambling. That determination would also affect the tax rates these establishments pay to state governments and the tax rates their participants pay on winnings.
Alternatively, if the courts determine that the markets are in fact distinct and fall under CFTC regulations, then there may still be some uncertainty about whether event contracts qualify for capital gains tax treatment or section 1256 treatment.
Taxation of Crypto-Based Trading
Polymarket operates differently from other prediction markets. As a crypto-native platform built on the Polygon blockchain since its founding, Polymarket allows users to place and settle bets using USDC, a U.S. dollar-pegged stablecoin. These tokens offer users faster settlement and lower transaction costs than traditional currency-based trading. But crypto also adds a layer of complexity to the taxation of winnings, potentially making it harder for the IRS to track and enforce taxable events.
As courts and regulators determine and define exactly how prediction markets are to be handled, traders on Polymarket may face additional complications. Since Kalshi and most other markets use U.S. dollars for trades, taxation may be relatively simple to handle after the conclusion of an event contract. In contrast, because the United States has determined that cryptocurrencies are to be taxed as property, users of Polymarket may face two or more taxable events when trading event contracts on the platform.
Multiple tax events and the current lack of clarity could lead to greater noncompliance among users of the platform. After the resolution of the regulatory questions around event contracts markets, the IRS and other agencies will need to identify ways that these non-dollar-based markets report earnings.
Treatment of Sports Gambling in Prediction Markets
One could argue that there are, in fact, two distinct types of wagers placed on these prediction markets. First, there are the traditional wagers that the IEM had in mind: public events, such as elections, where crowdsourced financial markets provide probabilistic forecasts. The second type, a more recent addition, is gambling on sporting events. Although event contracts are limited to yes and no wagers, many bets still mimic those of traditional sports gambling platforms, such as DraftKings and FanDuel.
The nature of how these wagers are regulated and taxed could distort behavior and create a more favorable tax treatment for one type of platform. If markets are indeed found to fall under CFTC guidance and have either capital gains or section 1256 rules applied to their winnings, this could create a tax advantage over identical bets placed on traditional sports gambling platforms.
Conclusion
Prediction markets will likely continue to grow, and with that growth more taxpayers will face genuine uncertainty over how their winnings should be taxed, whether as gambling income, capital gains, or section 1256 contracts. That ambiguity stems from unresolved questions about the CFTC’s regulatory authority, which courts are currently answering differently from state to state. Given the sums already at stake, resolving this uncertainty should be a priority for policymakers and regulators.
Footnotes
[1] The Iowa Market has expanded to universities across the United States since its creation in 1988. ⤴
[2] The bulk of Polymarket’s business still seems to be conducted through its international company, rather than the U.S.-based one. ⤴
[3] Section 1256 contracts are also subject to the Net Investment Income Tax. Due to this, the top marginal rates would be 23.8% and 40.8%, respectively, at the federal level. ⤴
