Two tax professors from the United States are advocating for the Internal Revenue Service (IRS) to classify earnings from prediction markets as ordinary income, arguing that the current ambiguity in tax regulations could favor these platforms over traditional sportsbooks.
Jay A. Soled, a Distinguished Professor of Taxation at Rutgers Business School, and Mirit Eyal-Cohen, the Joseph D. Peeler Professor of Law at the University of Alabama, emphasize the need for clarity in a recent article published in Tax Notes, which was shared with Gambling Insider.
They contend that while prediction markets may resemble financial trading, the gains derived from them should be treated like regular income, and losses should be subject to the same rules as traditional gambling losses.
“The taxation of gains and losses from participation in prediction markets is too important to overlook,” they state. “Given the stakes involved, the IRS should formally address this issue and eliminate the uncertainty surrounding it.”
The growing popularity of prediction markets has made this topic increasingly relevant. The professors note that the monthly trading volume on major platforms surged from under $5 billion in September 2025 to approximately $24 billion by April 2026. However, many individuals remain uncertain about how to report these transactions on their tax returns.
Interpretations of how these earnings should be taxed vary, with possibilities ranging from ordinary income to capital gains. In their detailed paper titled Betting on Tomorrow: Prediction Markets and the Tax Treatment of Event Contracts, Eyal-Cohen and Soled highlight the absence of clear guidelines regarding the tax implications of buying and selling event contracts.
One of the challenges in defining prediction markets is that they do not function exactly like traditional sportsbooks. Unlike betting against a bookmaker, participants trade contracts with each other, and prices fluctuate based on market perceptions of outcomes. Notably, users can sell their contracts before the event concludes, which gives a more tradeable asset appearance compared to standard sports betting.
While proponents of prediction markets may argue they are akin to investments, the professors assert that their fundamental nature is still gambling, where one party wins and the other loses. They acknowledge that the argument for capital gains treatment exists, as users can acquire a transferable piece of intangible property that fluctuates in value. However, they maintain that this perspective overlooks the reality of what most users are doing.
When stripped of financial jargon, prediction markets share many similarities with traditional gambling: both result in a binary win-or-lose outcome, are priced based on probabilities, do not yield dividends or physical products, and can evoke similar excitement.