Prediction Markets Offer World Cup Bettors Tax Edge Over Sportsbooks
Americans betting on the World Cup through federally regulated prediction markets may secure lighter tax bills than traditional sportsbook users by classifying their wagers as financial instruments, creating a high-risk tax arbitrage opportunity.
Americans wagering on the World Cup through prediction markets face a potential tax advantage over peers using traditional sportsbooks, driven by the platforms' structure as financial contracts rather than gambling wagers. This distinction allows prediction market users to claim investment tax breaks, including full loss deductions and potentially lower capital gains rates. The divergence hinges on whether the Internal Revenue Service treats these event contracts as gambling or derivatives.
Traditional sports gambling income, such as payouts from DraftKings and FanDuel, faces strict limitations. Gamblers must itemize deductions to claim losses, forgoing the standard $16,100 deduction, and can only write off a maximum of 90% of their losses against winnings. Prediction market users are arguing their trades qualify for more favorable capital gains treatment, where losses can fully offset gains and up to $3,000 in excess losses can reduce other taxable income.
A more aggressive strategy invokes Section 1256 of the tax code, a regime typically reserved for specific derivatives. Under this provision, 60% of a payout could be taxed at the lower long-term capital gains rate regardless of holding period, with the remainder taxed as ordinary income. “Everyone would like them to be able to qualify” for that treatment, said Loren Lembo, a partner at Katten Muchin Rosenman LLP, though she noted sports event contracts may not meet the provision's strict parameters.
The tax uncertainty is reshaping the competitive landscape of a booming industry. State-regulated sports gambling revenue hit a record $16.96 billion last year, but federally regulated prediction markets like Kalshi and Polymarket US are rapidly capturing market share. Recognizing the structural and potential tax benefits, legacy sportsbooks DraftKings and FanDuel have launched their own prediction market products, while technology firms like Meta Platforms have experimented in the space.
Proponents of the investment classification point to the market mechanics. “When you go to a casino, it’s just you and the casino... There’s no third party. There’s no clearinghouse,” said Carl Kennedy, co-chair of Financial Markets and Regulation at Katten Muchin Rosenman. “These are no longer sports bets,” added Nathan Goldman, an accounting professor at NC State University, citing the contracts' structure and Commodity Futures Trading Commission oversight.
Critics and tax historians warn that the IRS and courts historically look past legal structures to examine the underlying economics. “There are cases where the taxpayers have argued that whatever they’re doing is not gambling and the courts have essentially said if it looks like gambling and smells like gambling, it’s gambling,” said Seth Hanlon, a senior fellow at the NYU School of Law’s Tax Law Center.
The IRS has remained silent on the issue, a pause some experts attribute to the politically charged environment surrounding prediction markets. “This is kind of the Wild West right now. We don’t know who the sheriff in town is,” said Andrew Lautz, director of tax policy for the Bipartisan Policy Center. Until formal guidance arrives, bettors must weigh potential tax savings against the risk of owing back taxes and penalties, a gamble that KPMG tax partner Robert Stoddard said comes down to an individual’s “risk tolerance here in the absence of clear definitive guidance.”
