Prediction markets boom, but tax rules for winnings remain unclear

Prediction markets have seen rapid growth, drawing retail traders, political bettors and crypto natives to platforms that let users stake money on future events. That rise is exposing a knot of tax questions: how should winnings be reported, are losses deductible, and when do payouts trigger capital gains or ordinary income taxes?

Tax treatment depends on the platform and payment method. Bets placed and paid out in fiat on regulated exchanges are most likely to be treated like gambling or miscellaneous income. U.S. taxpayers generally must report gambling and similar winnings as income, and may receive information returns (such as Form W-2G) when thresholds are met. Losses can often be deducted only against winnings and only if the taxpayer itemizes.

Decentralized markets that settle in cryptocurrency add another layer of complexity. Receiving crypto as a payout creates an immediate taxable event if you later sell or exchange those tokens — potentially generating capital gains or losses based on the token’s cost basis and the value at disposition. Converting crypto payouts to fiat can itself trigger taxable gains if the crypto appreciated since acquisition.

For active traders who treat prediction trading like a business — repeatedly trading, keeping organized records and relying on it for income — the IRS could view profits as self-employment or business income. That classification brings different reporting rules and potential self-employment tax liabilities but may also enable business expense deductions unavailable to casual bettors.

Regulators and tax authorities have not issued comprehensive, prediction-market-specific guidance, leaving participants and preparers to apply existing tax principles to a new product. The result: varying interpretations among platforms, tax professionals and taxpayers.

Practical steps for market participants include keeping meticulous records of buys, sells, payouts and fees; tracking the currency and timestamps of transactions; and consulting a tax advisor familiar with gambling rules, securities, and crypto taxation. Until regulators provide targeted guidance, reporting conservatively and documenting rationale for tax positions will help taxpayers reduce the risk of unexpected adjustments or penalties.