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Professors Urge IRS to Clear Up Prediction Market Tax Confusion

By jili tutorial · September 29, 2026

Betting on Tomorrow: A Comprehensive Guide to the Tax Debate Over Prediction Markets

Prediction markets are booming. Every month, billions of dollars change hands on platforms that let users bet on everything from election outcomes to interest-rate decisions, inflation prints, and even weather patterns. The platforms look and feel increasingly like financial exchanges, complete with order books, price tickers, and the ability to buy and sell positions at any moment before an event resolves.

But there is a gnawing question hanging over it all: when you make money on a prediction market, what kind of income is that, exactly? Is it a capital gain from an investment? Ordinary wage-like income? Or is it simply gambling income, no different from hitting a parlay at a sportsbook?

Two prominent U.S. tax scholars say the answer should be clear — and they want the IRS to say it out loud. Jay A. Soled, Distinguished Professor of Taxation at Rutgers Business School, and Mirit Eyal-Cohen, Joseph D. Peeler Professor of Law at the University of Alabama School of Law, are pushing the IRS to end what they describe as a significant gray area. In a forthcoming article for Tax Notes (shared publicly with Gambling Insider), the pair lay out a detailed legal and economic case for why prediction market gains should generally be treated as ordinary income, with losses subject to the same restrictions that apply to traditional gambling.

This guide unpacks their argument, explores the competing tax theories, and looks at what the outcome could mean for everyday users, platforms, and traditional sportsbooks.

Why the Tax Question Has Become Impossible to Ignore

For most of their short modern history, prediction markets were a niche curiosity. That is no longer the case. The professors cite striking growth figures: global monthly trading volume across leading prediction-market platforms rose from less than $5 billion in September 2025 to roughly $24 billion by April 2026.

That surge has outpaced the traditional sports-betting industry. For context, legal U.S. sportsbooks handled an average of about $14 billion per month in wagers during 2025. Prediction markets, in other words, have grown from a sideshow into a genuine force in the world of event-based finance — which is precisely why the professors argue that the tax treatment can no longer remain an open question.

“The issue of the taxation of gains and losses associated with prediction market participation is too significant to ignore,” Soled and Eyal-Cohen write. “Given the gravity of the stakes, the IRS should take a formal position and lift the veil of uncertainty surrounding this issue.”

The Core Question: Are Prediction Markets Gambling or Investing?

At its heart, the debate comes down to a single conceptual issue: what are users actually doing when they buy and sell prediction-market contracts?

There is no shortage of possible tax characterizations. Depending on how one reads the facts, gains could theoretically be treated as:

The professors argue that, for most everyday users, the correct answer is the first one: ordinary income, with gambling-style loss restrictions. Their longer paper, Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts, concludes that there are currently “no clear answers” over the tax consequences of buying and selling event contracts — even though the underlying economic activity is, in their view, fundamentally gambling.

Looking Like a Financial Market Does Not Make It an Investment

How Prediction Markets Actually Work

Part of the reason the tax question is even debatable is that prediction markets do not operate like traditional sportsbooks.

When you bet at a sportsbook, you are wagering against the bookmaker. The bookmaker sets odds, takes the other side of your bet, and profits from the margin built into the line. Your bet settles when the event is over — win or lose — and that is the end of the story.

Prediction markets are structurally different. Users generally trade event contracts against one another on an open order book (on certain regulated exchanges, or via smart contracts on blockchains). Prices fluctuate continuously based on the market’s changing view of the likelihood of an outcome. Crucially, a user does not have to wait for the event to resolve. Someone who buys a contract for $0.62 can sell it ten minutes later for $0.80 and pocket a $0.18 profit, all before the underlying event has concluded.

This tradability makes a prediction-market position look a lot like a marketable security or a futures contract. If a user can point to the fact that they bought a transferable piece of intangible property that rose in value and was sold before the event occurred, the argument for capital-gains treatment begins to take shape.

Why That Argument Fails (for Most Retail Users)

Eyal-Cohen and Soled acknowledge this is the strongest argument in favor of capital treatment. But they argue that it misses the forest for the trees. Strip away the financial-market terminology, they say, and prediction markets have far more in common with a casino than with the New York Stock Exchange.

Consider the characteristics they highlight:

Based on these characteristics, the professors conclude that most retail prediction-market activity amounts to “consumption-oriented wagering rather than profit-seeking investment.”

They also point to a fundamental equity concern. The tax code treats gambling income and investment income very differently. If two people take what is essentially the same economic position — say, betting on whether a candidate will win an election — they should not end up with dramatically different tax bills simply because one placed the bet on a sportsbook app and the other traded a contract on a CFTC-regulated prediction exchange. In both cases, someone wins and someone loses. In both cases, the money is at risk based on the outcome of a future event. The professors see no principled basis for treating the two situations differently.

Selling Before Settlement Does Not Settle the Tax Question

Even if one accepts that prediction markets feel like financial markets, there are still some fairly serious technical hurdles to treating event contracts as capital assets.

The “Sale or Exchange” Requirement

Under Section 1222 of the Internal Revenue Code, capital gains generally arise only when there is a “sale or exchange” of a capital asset. If a user buys an event contract and holds it all the way to resolution — meaning the event happens, the contract settles at either $1.00 or $0.00, and the platform pays out — no sale or exchange has occurred. The contract simply matures. According to Eyal-Cohen and Soled, that means there is no qualifying disposition to trigger capital treatment.

This is not a minor technicality. Many, if not most, prediction-market users hold their contracts to resolution rather than trading in and out. If those contracts are not capital assets, then the gains (or losses) must be treated as something else — and under the professors’ framework, that something else is ordinary income (or a gambling loss).

The “Personal Effort” Problem

There is another wrinkle. The tax code excludes from the definition of a capital asset any property that is created by the taxpayer’s “personal efforts” or acquired through their “intellectual effort.” If a user does research, analyzes polls, studies economic data, or otherwise forms a view about a future event before purchasing a contract, the contract could be seen as a product of that intellectual effort. That would disqualify it from capital-asset treatment on its own.

The argument is intuitive: if you spend twenty hours researching which candidate is likely to win a primary, then buy a contract based on that research, the resulting gain looks a lot more like compensation for your labor (ordinary income) than a return on invested capital (capital gain).

What About Section 1256?

Another possible escape route for prediction-market users is Section 1256, which applies to “regulated futures contracts” and certain other exchange-traded instruments. Section 1256 treatment is generally considered favorable because it mixes long-term and short-term capital gain rates (the 60/40 split) and requires gains to be recognized on a mark-to-market basis each year.

The professors, however, reject the application of Section 1256 to event contracts. While some CFTC-regulated prediction platforms may satisfy one part of the statutory test for a regulated futures contract, event contracts, they argue, do not meet the required mark-to-market element in the way the statute contemplates. In essence, just because a contract could be traded on a regulated exchange does not make it a Section 1256 contract.

The Loss Problem: You Can’t Have It Both Ways

There is an additional catch for users who might prefer capital-gains treatment when they win. If gains are capital, then losses must be capital too. That cuts both ways, and for many prediction-market participants, it could be a harsh discovery.

Capital losses come with significant restrictions. They must first be used to offset capital gains. If there are no capital gains, only $3,000 of excess capital losses can be deducted against ordinary income in any given tax year, with the remainder carried forward to future years.

Gambling losses, by contrast, are not subject to the $3,000 cap in the same way — but they are subject to their own hostility. Under Section 165(d), gambling losses are deductible only to the extent of gambling winnings, and only if the taxpayer itemizes deductions. You cannot use gambling losses to shelter your salary, your wages, or any other “ordinary” income.

The professors argue that you cannot pick and choose which regime you want depending on which side of the ledger you are on. A taxpayer cannot claim that their prediction-market winnings are eligible for favorable capital-gain rates while simultaneously trying to deduct their losses as ordinary gambling losses. The code does not allow that kind of asymmetry — and any attempt to frame it that way would essentially constitute a one-way bet at the expense of the treasury.

Tax Uncertainty Could Tilt the Playing Field Against Sportsbooks

The stakes here are not limited to an individual user’s April 15 calculations. Soled and Eyal-Cohen argue that the tax treatment of prediction markets could have a direct impact on competition between prediction platforms and traditional sportsbooks.

Imagine two people making the same exact bet. One uses a sportsbook and is subject to the restrictive gambling-loss rules. The other uses a prediction market and is able to treat their wins as capital gains and their losses as ordinary deductions against wage income. All else being equal, the prediction-market user now enjoys a significant after-tax advantage. Over time, the professors argue, that could steer a meaningful share of betting activity toward prediction platforms.

“If the IRS grants prediction market participants the unlimited use of their losses and enables them to shelter their other taxable income (including their salaries and wages), it would ring a death knell for traditional gambling,” they write.

That is a strong statement — and one that is highly relevant to the current competitive landscape. With prediction markets already handling nearly double the monthly volume of legal U.S. sportsbooks by April 2026, any favorable tax differential could accelerate the shift. The professors’ research suggests this is not merely a theoretical concern: favorable tax treatment could make event contracts relatively more attractive than both traditional investments and other forms of wagering, changing user behavior and reshaping the competitive dynamics of the gambling and investing industries.

A Genuine Commercial Hedge Is a Different Proposition

It would be too easy to lump every prediction-market user into a single bucket, and the professors are careful not to do so. Their central argument is that most retail users — the people buying contracts because they have a hunch about an election or a game — are gambling. But they acknowledge a narrow and important exception: bona fide commercial hedging.

Consider a company whose revenue is heavily dependent on the weather. An energy utility, for example, earns far less during a mild winter because customers use less heat. That utility could buy weather-event contracts to offset the financial damage of an unusually warm season. Buying those contracts is not entertainment; it is a prudent business decision designed to reduce exposure to a genuine commercial risk.

Similarly, a multinational corporation with significant exposure to inflation or exchange-rate movements could use macroeconomic-event contracts to hedge against adverse economic developments. In both cases, the contract provides “more business value and less entertainment value” to the user — which, in the professors’ view, makes the activity fundamentally different from a casual wager.

Their proposed framework would therefore preserve a narrow exception for:

The key takeaway is that any determination of tax treatment should be based on what the contract is actually being used for, not on the structure of the platform on which it is traded.

The IRS Does Not Need to Wait for Congress

One of the most significant conclusions in the professors’ paper is that the IRS does not need new legislation to resolve this issue. Congress, the Treasury Department, the IRS, and the courts could each step in theoretically. But Eyal-Cohen and Soled argue that the IRS can act on its own — and should.

“In a simple notice, the IRS could readily dispel taxpayer uncertainty and offer clarity.”

Why does that matter? Because without guidance, taxpayers are left to guess. Some will report gains as ordinary income. Others will take capital-gains treatment. Still others may be tempted to wait and see what uncertainty yields on audit. This lack of a consistent framework creates inefficiencies, encourages aggressive positions, and leaves ordinary Americans in an impossible position when all they wanted was a clear answer on how to report their activity.

A simple IRS notice — stating that prediction-market gains are generally gambling income and that losses are subject to Section 165(d) restrictions — would, in the professors’ view, resolve the overwhelming majority of uncertainty at minimal administrative cost.

What This Could Mean for the Future of Prediction Markets

There are three possible futures for prediction-market tax treatment, and the professors’ analysis makes a strong case for which one is most likely to emerge:

1. IRS Issues Guidance (Most Likely)

The IRS could release a notice, revenue ruling, or proposed regulation establishing that event contracts held by retail investors are gambling instruments. This would settle the current ambiguity, bring prediction markets into the same tax framework as sports betting and other fixed-odds wagering, and eliminate the possibility of a competitive advantage derived solely from the tax code.

2. Congress Steps In

Congress could amend the tax code to create a specific regime for event contracts. It could decide that event contracts should be treated as capital assets, or it could create a new category of “exchange-traded wagers” with its own set of rules. Given how partisan and slow-moving the legislative process tends to be, this is the least likely near-term fix.

3. Courts Decide

Taxpayers who take aggressive positions on their returns may eventually find their cases before the Tax Court. A court decision could establish precedent that either reconciles or deepens the confusion. The problem with this approach is that it is reactive, expensive, and often takes years to resolve. By then, the market may have changed again.

The Bottom Line for Users, Platforms, and Advisors

For the ordinary user, the practical takeaway is this: do not count on capital-gains treatment. The arguments in favor of treating prediction-market gains as ordinary income — backed by the textual language of the tax code, the IRS’s historical treatment of similar instruments, and the economic substance of what is happening in a typical event-contract trade — are strong. And even if a court were to reject the professors’ specific framework, the kinds of losses you might want to claim as an offset to your wages are almost certainly not allowable under current law.

Until the IRS formally settles the question, the safest course of action for any prediction-market participant is to:

The professors’ forthcoming article adds significant weight to the argument that the taxation of prediction markets is no longer an intellectual curiosity — it is a question of fairness, competition, and basic administrative logic. As monthly volume continues to climb toward and beyond $25 billion, the IRS will eventually have to respond. The only question is whether it does so proactively, or after years of confusion, conflict, and costly litigation.