Prediction-market World Cup bets raise tax questions
Tax experts say World Cup event contracts could receive investment-style treatment, but the IRS has not said whether it views them as gambling.
By Sofia Marchetti · World Affairs Correspondent
3 min read
Americans betting on the World Cup through prediction markets could face a lighter tax burden than people using sportsbooks, Bloomberg reported. The difference turns on whether event contracts are treated as gambling wins or as investment proceeds under U.S. tax law.
Tax experts told Bloomberg that the answer could affect how much bettors owe and how much they can deduct when they lose. The IRS has not issued guidance on the issue, and Bloomberg reported that the Treasury Department and IRS did not respond to requests for comment.
Why the tax treatment matters
Sportsbook wagers are taxed under rules that apply to gambling income. Bloomberg reported that users of state-regulated betting apps, including platforms operated by DraftKings and FanDuel, face limits on loss deductions and may also be affected by state taxes and a federal excise tax applied to gambling operators.
Under gambling rules described by Bloomberg, bettors can deduct losses only if they itemize deductions, which means giving up the $16,100 standard deduction. They also cannot deduct more than their winnings and are limited to deducting no more than 90% of losses.
Prediction-market users may try a different approach because their trades are structured as standardized event contracts. Bloomberg reported that platforms such as Kalshi and Polymarket US are regulated at the federal level by the Commodity Futures Trading Commission, and DraftKings and FanDuel have also moved into prediction-market products.
Some supporters of investment-style tax treatment argue that these markets differ from sportsbooks because customers buy and sell contracts through financial-market infrastructure. Critics told Bloomberg that the economic activity still resembles gambling because participants risk money on uncertain outcomes in search of payouts.
Possible tax approaches
Bloomberg reported that one approach would treat prediction-market payouts as capital gains. That could allow taxpayers to fully offset gains with losses, use up to $3,000 of excess losses against other income in a year and carry additional losses into future years.
A more aggressive approach would seek treatment under Section 1256 of the tax code, Bloomberg reported. If the contracts qualified, 60% of gains could receive the lower long-term capital gains rate regardless of how long a user held the contract, while the remaining 40% would be taxed at ordinary short-term rates.
Several tax experts told Bloomberg that Section 1256 treatment for sports event contracts is uncertain. Loren Lembo, a partner at Katten Muchin Rosenman LLP, said many people would like that outcome, but the provision has specific requirements.
Nathan Goldman, an accounting professor at North Carolina State University’s Poole College of Management, told Bloomberg that prediction-market contracts are no longer sports bets, pointing to their structure, CFTC regulation and the tax forms customers receive. Seth Hanlon, a senior fellow at the Tax Law Center at New York University School of Law, told Bloomberg that past court cases suggest courts may still view the activity as gambling if it functions that way.
IRS silence leaves risk with users
Andrew Lautz, director of tax policy for the Bipartisan Policy Center, told Bloomberg the area remains unsettled. Robert Stoddard, a KPMG LLP tax partner who works on gaming issues, said users must decide their own risk tolerance without clear guidance.
The question is gaining attention as sports betting and prediction markets grow. The Research Institute at Siena University found that more than a quarter of Americans have an active online sports betting account, and the American Gaming Association said state-regulated sports gambling revenue reached $16.96 billion last year.
This story draws on original reporting from Fortune.