Prediction markets are another new phenomenon. Kalshi, PolyMarket, and others offer predictions on things like, “Will the Epstein Files be released by the end of 2025?” They also offer sports predictions which I believe are clearly sports betting by any other name.
In tax (which I’m qualified to talk about) and law (which I’m not qualified to talk about, except for tax law) there is a doctrine called substance over form. Here’s an example we can all agree on: I pay you $10,000 for consulting work. I wrongly issue you a Form 1099-INT (showing interest income) instead of a Form 1099-NEC (which shows non-employee compensation). You should report the income on your tax return as non-employee compensation.
I’ve discussed this doctrine before in the context of Daily Fantasy Sports (DFS) and concluded that DFS is gambling; it’s yet another instance of the Duck Test. For those who don’t remember, the Duck Test is that if something looks like a duck, walks like a duck and quacks like a duck, it just may be a duck. Prediction market sports predictions look, walk, and quack like sports betting. I have bad news for those who partake in sports prediction markets: it’s sports betting by any other name, and I believe the courts will force such prediction markets to obtain licenses from states in order to offer these products.
The problem for the prediction market companies is that gambling has historically been regulated by states, not the federal government. Currently, several states have filed lawsuits against prediction market companies for offering sports predictions; the prediction market companies initially won in Nevada but lost in Maryland. Both cases have been appealed, and this looks to me to be headed to the Supreme Court. Given how this has historically been treated I think the prediction market companies face an extremely uphill battle in the long-term.
I’ve been asked by clients how the IRS will look at sports prediction income (from prediction markets). I believe the IRS will conclude it’s gambling winnings. For there to be wagering (aka gambling) income, there must be a prize, consideration, and an element of chance (and not be defined by the Tax Code as something else). Sports predictions meet this definition and have not been defined by the Tax Code as something else. Yes, the Commodities Futures Trading Commission (CFTC) treats sports predictions as contests; however, the IRS is in no way bound by the CFTC’s actions.
Now, it may take a couple of years for this to all play out (courts do not move quickly and the IRS is known for being inefficient). Unfortunately, the long-term future for sports predictions within the prediction companies looks poor.
