POLAND – 2025/10/29: In this photo illustration, a Polymarket logo seen displayed on a smartphone. (Photo Illustration by Mateusz Slodkowski/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images
Prediction markets have taken the U.S. by storm with over $50 billion in trading volume in 2025 alone. However, a significant amount of their predictions comes from sports-related wagers, which just so happen to resemble a sports bet on the outcome of the game. While it may seem trivial to a user as to whether it matters if they bet on the College Football Championship game via a sports betting app like FanDuel and DraftKings or a prediction market app like Kalshi, Polymarket, and Underdog, there are important tax and non-tax differences that are leading to legal battles throughout the country.
Key Tax And Non-Tax Differences Between Prediction Markets And Sportsbooks
When it comes down to disentangling these two providers for sports wagers, a key difference between the two is where you can use them. Prediction markets are governed by the Commodity Futures Trading Commission, which is a U.S. Federal regulator, meaning that it has the authority to allow prediction markets nationwide. Meanwhile, following the Murphy v. NCAA 2018 Supreme Court decision, the power to license and regulate sports betting was given to the states, which some have decided to allow, and others have not.
Since 2018, 39 states have legalized sports betting in some form, as I discussed in a Forbes contributor article. However, notably missing from those allowed to make sports bets are California and Texas. In fact, despite sports gambling being legal in some form in approximately 80% of the U.S. states, it is available to a much smaller portion of the population. The lack of sports betting options in these highly populated states is potentially a key reason why Kalshi has risen to popularity.
Potentially caught in this legal crossfire over how and where gamblers can make their sports bets are the tax implications. As I reported in a Forbes contributor article, sports bets face different tax treatment than prediction wagers.
Some bettors will prefer to make their wagers via prediction markets because unsuccessful predictions can be netted against successful predictions to lower their overall tax liability. In fact, if the taxpayer has a net position – more losses than wins – throughout the year, the tax code allows the taxpayer to deduct up to $3,000 of those losses against their ordinary income. Meanwhile, sports bettors can only deduct their losses to the extent of their wins, and these deductions only occur if the taxpayer itemizes their taxes, which most Americans do not. Lastly, sports betting loss deductions will be limited starting in 2026, as I discuss in a Forbes contributor article.
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.