As federal appeals courts reach conflicting decisions about whether sports event contracts traded on prediction market platforms can be regulated under states’ gambling laws, a group of experts at NYU School of Law’s Tax Law Center says these contracts should face the same federal tax rules that apply to sports gambling.
The study, “Are Sports Event Contracts on Prediction Markets Gambling for Federal Tax Purposes?” was published this month in Tax Notes, a tax law and policy journal. The authors—Seth Hanlon, Miles Johnson, Michael A. Kaercher, Kyle Sweeney and Sophia Yan—conclude that winnings from sports event contracts are taxable as ordinary income, that limits on deductions for gambling losses apply and that the contracts are subject to the federal excise tax on sports wagers.
The authors recommend that the IRS issue guidance on sports event contracts. Without guidance, taxpayers, businesses, accountants and other stakeholders might treat these contracts differently. That could lead to filing errors and fairness problems, since some taxpayers could pay more to Uncle Sam than others.
The tax code has specific rules about gambling. In general, gambling winnings are taxable as ordinary income, and gambling losses can be deducted only to the extent of winnings. Starting in 2026, only 90% of wagering losses are deductible, and the deduction remains limited by wagering gains.
Federal law also imposes an excise tax on certain wagers. The rate is 0.25% for wagers authorized under state law and 2% for unauthorized ones. The tax applies regardless of whether the gambler or the house wins or loses. It’s based on the amount wagered, plus any charges and fees.
As the authors point out, the excise tax applies to “sports events,” which IRS regulations define to include “every type of sports event, whether amateur, scholastic or professional.”
The authors acknowledge the tax code doesn’t clearly define wagering, and neither courts nor the IRS have stated a position on whether sports event contracts count as wagers under tax law.
But in discussing the excise tax, the authors also stress that the tax code defines “wager” to include bets on “sports events.” In the absence of a specific tax definition of wagering, the authors maintain the term’s “ordinary and plain meaning” should apply.
Judges, for their part, have defined wagers and wagering as involving money “risked on the outcome of a specific, uncertain event, with that outcome determining a payout to the bettor.”
That expansive definition appears to capture sports event contracts, the study asserts. After all, in both conventional sports bets and sports event contracts, “the underlying activity still consists of risking money for a potential payout on the resolution of an uncertain sports event.”
The authors further argue that courts addressing tax issues focus more on substance than labels. As a result, calling a bet an “event contract,” saying it is “traded” rather than “bet” on an “exchange” instead of at a “sportsbook,” or referring to the chance for “combos” rather than “parlays” won’t, they argue, overcome precedent holding that “labels do not determine tax consequences when they are inconsistent with economic realities.”
The authors regard the fact that prediction market users bet against one another, rather than against a house as in traditional sports gambling, as a distinction without a meaningful difference under tax law.
“Gambling on sports with one’s peers,” the authors write, “is no less gambling than gambling on sports against a bookie or house, and peer-to-peer betting on sports is unquestionably wagering for federal tax purposes.”
The authors are similarly unmoved by prediction-market platforms registering with the CFTC as designated contract markets, since registration involves areas of law other than tax law.
“Tax treatment does not turn on nontax regulatory treatment,” the study states.
Robert Raiola, CPA, the director of sports and entertainment group at PKF O’Connor Davies, believes the NYU study raises crucial issues for the sports industry as prediction markets become more prevalent. Raiola, who represents athletes and sports franchises in tax matters, agrees that “clear IRS guidance would give taxpayers and the industry a more consistent framework.” He adds that whenever “someone risks money on the outcome of a game for a potential payout, the tax consequences deserve careful attention.”
The unsettled tax treatment of sports event contracts isn’t surprising since they are so new; Kalshi only began offering them in January 2025. The relative newness of sports event contracts, coupled with their popularity, has generated disagreement among courts over how they fit into existing legal categories.
In Kalshi v. Flaherty, the U.S. Court of Appeals for the 3rd Circuit reasoned that the Commodity Exchange Act of 1936 (CEA) blocks state laws that interfere with swaps. Swaps are derivative contracts in which parties exchange payments or assume risks based on another variable, and they arguably include sports event contracts.
Although the CEA originated as a commodities law, Congress substantially expanded the federal regulation of swaps and other derivatives through the Dodd-Frank Act in 2010. Swaps are regulated by the CFTC or the Securities and Exchange Commission. The CFTC under the Trump Administration believes the agency has the legal authority to govern prediction markets.
The U.S. Courts of Appeals for the 9th and 6th Circuits diverged from the 3rd Circuit. They reasoned that sports event contracts are better understood as sports bets, because, like sports bets, they involve placing a monetary wager on a potential outcome in a sports contest. That interpretation empowers states to use gambling and sports betting laws to block or restrict Kalshi, Polymarket and similar companies from offering sports event contracts.
Sports betting is legal in 39 states, but those states regulate it and require gaming operators to obtain licenses. Eleven states prohibit sports betting, including California and Texas—the states with the largest and second-largest economies.
It’s a turbulent time for prediction market users and operators, and tax questions only add to the complexity.