Sports Prediction Market Taxes: Event Contracts vs Sportsbook Bets

Sports is where the prediction-market boom actually happened. Company-reported figures put Kalshi's monthly volume at roughly $16.8 billion in May 2026 and about $31.5 billion in June 2026 — an increase driven largely by World Cup markets — and Robinhood's event-contract business reached roughly 10% of the firm's net revenue in the first quarter of 2026, up from about 1% a year earlier. Somewhere in those numbers are millions of people who placed what felt like a bet and may have made a trade instead.

That distinction is not cosmetic. Sportsbook wagers have a settled tax home: they are wagering transactions, reported as other income with losses deductible only as an itemized deduction. Sports event contracts — the yes/no positions listed on CFTC-designated exchanges — have no settled tax home at all. Practitioners disagree openly about how to characterize them, courts across the country disagree about whether they are gambling as a regulatory matter, and the IRS has not answered the tax question. This page maps both worlds side by side, honestly, including the parts nobody can resolve yet.

Are Sports Prediction Market Contracts Taxed Like Sports Betting?

Nobody can say definitively, because the IRS has published no guidance on event-contract characterization. Sports contracts trade on federally regulated exchanges, which supports investment-style treatment, yet an all-or-nothing payout on a game outcome resembles a wager more closely than any other contract type. Practitioners hedge hardest here, and most traders confirm their approach with a CPA.

The asymmetry is worth stating plainly. On the sportsbook side, the law is old and clear enough that no serious practitioner argues about it: a wager is a wagering transaction, IRC §165(d) governs the losses, and Schedule 1 and Schedule A carry the numbers. On the event-contract side, four different treatments are genuinely in play, and two identical traders can file differently today without either of them doing anything improper.

What follows from that is the actual planning problem. A sportsbook bettor knows the rules and dislikes them. A sports event-contract trader does not yet know which rules apply — which means the honest output for that trader is a range, and the practical work is choosing a defensible position and documenting why.

How Is a Sports Event Contract Different From a Sportsbook Bet?

A sportsbook sets the odds and takes the other side of the bet. A sports event contract is a position priced between $0.01 and $0.99, bought from another trader on a CFTC-designated exchange that collects fees rather than taking the other side, and typically sellable before the game ends. That plumbing difference drives the entire tax debate.

Here are the structural differences that do not rot with every rule change — the ones that actually matter for taxes:

One nuance the table can't hold: the resale feature is doing real analytical work. A position that can be bought at 38¢ and sold at 61¢ before kickoff looks and behaves like a traded instrument, and that is a meaningful part of the capital-asset argument. A position simply held to resolution looks more like a stake on an outcome. Many sports traders do both in the same season, which is one reason practitioners describe a spectrum rather than a bright line. Traders coming from conventional markets may find it useful to see how futures and options are taxed — both far more settled areas, and both the analogies the debate keeps reaching for.

Where Do the Courts Stand on Sports Event Contracts?

Courts are split. The Third Circuit ruled for Kalshi on April 6, 2026, holding that sports event contracts are Commodity Exchange Act swaps and that state gambling law is preempted. Courts in Nevada, New York, Washington, Michigan, and Massachusetts have leaned or ruled the other way, two federal appeals are pending, and Supreme Court review is widely expected.

The scoreboard as of July 2026, with the important caveat that most of these are preliminary rulings rather than final merits decisions:

Roughly eleven states have issued cease-and-desist orders, and both Congress and the CFTC are working the underlying question of what counts as “gaming.” Several federal bills addressing prediction markets and sports event contracts were pending as of late July 2026 — all of them non-tax and none enacted.

Why Do Sports Contracts Carry the Highest Recharacterization Risk?

Because the underlying event is a game, not a market variable. Specialist analyses typically describe a contract-by-contract spectrum: sports-outcome contracts sit closest to wagering, macroeconomic and Fed-data contracts present the strongest capital-asset case, and election contracts fall in between. A sports-heavy year is therefore the hardest version of an already unsettled question.

Three factors stack up on the sports end of that spectrum:

• The subject matter reads like a bet to a non-specialist. A contract on whether a team covers is economically indistinguishable, to most observers, from the same position at a sportsbook — and the tax analysis of “wagering” has historically been driven by the character of the transaction rather than the venue's license.
• State regulators are on record calling it gambling. Thirty-eight state attorneys general joined an amicus brief supporting Massachusetts, and roughly eleven states have issued cease-and-desist orders. That is a regulatory position rather than a tax determination, but it is not nothing.
• Sports is where the volume is. Sports markets are widely reported to account for the large majority of activity on the biggest venue, though the precise share is hard to verify from outside. Where the money concentrates, examination attention tends to follow eventually.

Pointing this out is not a prediction that the IRS will treat sports contracts as wagering. It is the reason a sports-heavy trader typically wants the downside modeled and documented in advance — while a trader holding only CPI and Fed-funds contracts sits in a meaningfully different posture. Every situation varies. The broader four-treatment analysis lives in our prediction market taxes guide.

Do Sports Prediction Markets Issue a W-2G?

Generally no. Sportsbooks issue Form W-2G when a payout meets the reporting trigger, but no prediction-market platform appears to issue one for event contracts. Even under a wagering characterization, the generic trigger of roughly $600 at 300-to-1 odds almost never fires on a contract priced between one and ninety-nine cents.

The arithmetic is worth walking, because it explains why the form gap is structural rather than a loophole someone will close next season. Hitting 300-to-1 on a binary contract would require an entry price below about one third of a cent — outside the $0.01–$0.99 range these contracts trade in at all. So even a trader who accepted wagering characterization voluntarily would still generally receive no W-2G.

What that means in practice, and the myths it generates:

• “No W-2G” does not mean “not taxable.” IRC §61 reaches the income whether or not a form arrives. This is the single most expensive misunderstanding in the category.
• “No W-2G” also does not mean “not gambling.” The absence of a form is a reporting fact, not a characterization ruling. A platform's paperwork choices reflect the platform's reading of its obligations, not an IRS determination about the trader's treatment.
• Thresholds moved for 2026, which fuels the confusion. The OBBBA raised the W-2G threshold for slots, bingo, and keno to $2,000 effective January 1, 2026, and raised the 1099-MISC/NEC reporting threshold from $600 to $2,000 for payments made in 2026 (inflation-indexed from 2027). Higher thresholds mean fewer forms — not less taxable income. The same $600-to-$2,000 change hits prop-firm traders' 1099-NECs.
• Platforms don't appear to withhold on event contracts. That shifts the whole payment burden onto quarterly estimates, covered further down.
• Some forms may still show up. Interest paid on an idle cash balance, referral credits, and — on venues with a crypto funding rail — digital-asset forms can each arrive without describing contract profits at all. The platform-specific detail lives in our Kalshi taxes guide and Polymarket taxes guide.

What Happens If Sports Contracts Are Treated as Wagering?

Then the 2026 rules bite hard. The One Big Beautiful Bill Act amended IRC §165(d) to cap the wagering-loss deduction at 90% of losses, still allowed only up to winnings, itemizers only, with no carryforward. A break-even sports trader with $100,000 of wins and $100,000 of losses could deduct $90,000 and owe tax on $10,000 of phantom income.

Keep the conditional in view: this cap is law for tax year 2026 for wagering losses, and it reaches sports event contracts only if those contracts are characterized as wagering — a question the IRS has not answered. That conditional is the hedge. It is also why sports traders, more than any other group in this category, benefit from running the numbers both ways before filing season.

The phantom-income problem, in numbers

Sports traders churn. A season of two-sided activity can generate very large gross win and loss figures behind a small net result — which is exactly the shape the 90% cap punishes. Three illustrative scenarios for a single filer, holding everything else constant:

Figures are illustrative approximations, not a computation of anyone's return — 2026 bracket math varies with each trader's full picture. Two structural points survive the arithmetic:

• The 90% haircut only bites when losses run below roughly 111% of winnings. The heavy-loss row shows why: once 90% of losses exceeds total winnings, the winnings cap is doing the limiting and the haircut is invisible. Break-even and modestly profitable seasons are where the phantom income appears.
• The itemizing checkbox is the single biggest lever under wagering treatment. A standard-deduction filer gets no loss offset whatsoever, which turns gross winnings into the tax base. Under capital treatment, itemizing is irrelevant to the trading math.

There is a second-order effect worth flagging too. Wagering treatment puts gross winnings into adjusted gross income, with losses sitting below the line. Inflating AGI by six figures can ripple into Medicare premium surcharges, credit and deduction phase-outs, and state calculations that start from federal AGI — costs that never show up in a simple rate comparison.

How Do the Four Treatments Compare on the Same Sports Trades?

Very differently. Practitioners typically weigh four approaches: Section 1256 60/40 treatment (generally considered aggressive), short-term capital gain (the mainstream default), wagering under §165(d) (the harshest for 2026), and ordinary other income (the conservative consumer default). On identical trades the federal spread can approach 4x.

Two details in that table matter more than they look. First, the wagering row uses two lines — gross winnings land on Schedule 1 line 8b while losses go to Schedule A line 16 — which is precisely what makes the itemizing question decisive. Line 8z, by contrast, is the ordinary-income approach and a different treatment entirely; conflating the two is one of the most common errors in the consumer guides. Second, the Section 1256 argument is contested for these instruments: the CFTC — and Kalshi's own regulatory filings — classify event contracts as swaps, and §1256(b)(2)(B) excludes swaps from Section 1256. Kalshi itself takes no position on tax characterization, so anyone who tells you “these are 1256 contracts” is stating a filer's position, not the exchange's and not the IRS's.

Run one dollar figure through all four and the stakes become concrete. Take a single filer with about $100,000 of other ordinary income who ends 2026 with $30,000 of gross wins, $20,000 of gross losses, and $10,000 of real profit:

Approximations for illustration only; every situation varies. The takeaway isn't a number — it's that a nearly 4x federal spread on identical sports trades is decided by an unanswered legal question plus an itemizing checkbox. Our prediction market tax calculator models the branches side by side, including the 90% rule and the itemizing toggle, so the range is visible before filing season rather than during it.

Can Sportsbook and Exchange Legs Offset Each Other?

Unresolved, and it is the sharpest practical risk in this category. If both legs were wagering, losses would typically offset winnings within the §165(d) limits — itemizers only, 90% cap for 2026. If the exchange leg is instead capital, the two sit in different tax buckets, and a hedged pair can produce a taxable gain alongside a stranded loss.

This matters because cross-venue positioning is common. A trader holding one side at a sportsbook and the other on an exchange has, economically, one hedged position — but potentially two tax characterizations. Consider a simplified pair where the exchange leg wins $5,000 and the sportsbook leg loses $5,000:

• Both legs wagering: $5,000 of winnings, $5,000 of losses. An itemizer deducts 90% of the loss ($4,500) and reports $500 of income on a wash. A standard-deduction filer reports $5,000 of winnings with no offset.
• Exchange leg capital, sportsbook leg wagering: the $5,000 exchange gain is capital gain, while the $5,000 sportsbook loss is a wagering loss deductible only against wagering winnings — of which there may be none. The economic wash can become a fully taxable gain with a permanently stranded loss.
• Reverse the outcome and the mismatch flips: a capital loss on the exchange leg (limited to $3,000 a year against ordinary income) paired with fully taxable sportsbook winnings.

No authority resolves which of those pictures is right, and the answer may depend on facts specific to the trader. Two related questions are just as open: whether the §1092 straddle rules could reach offsetting positions on the same event, and what a gambling “session” even means for an exchange account that trades all season — per contract, per day, or per year. Platform P&L statements that net an entire year implicitly assume a full-year session the IRS has never blessed. If your activity spans both worlds, this is a conversation to have with a CPA before the season ends, not after.

Do States Tax Sports Prediction Market Winnings?

Individually, states have issued no guidance — no state revenue agency appears to have addressed prediction-market winnings for individual income tax as of July 2026. But states have not been idle: two have enacted prediction-market taxes at the operator level, and roughly fifteen considered bills during 2026. Federal characterization still drives most state outcomes.

The mechanical link is that most states start from federal adjusted gross income. Under wagering characterization, gross winnings enter AGI and losses sit below the line — if the state allows them at all. Under capital treatment, netting happens inside AGI before the state ever sees it. That single difference produces some brutal state outcomes for break-even sports traders.

The operator excises — new, and often reported wrong

Two states have now enacted prediction-market-specific taxes, and this is the part most coverage gets backwards: both are excises on operators rather than taxes on traders. Neither one puts a line on an individual return, and neither changes how a trader's winnings are characterized — but both take effect in 2027 and can reach traders indirectly.

• North Carolina SB 257, signed July 7, 2026 — the first state prediction-market-specific tax: 6% of operators' net trading-fee revenue apportioned to North Carolina residents, effective January 1, 2027. The same bill statutorily recognizes exclusive CFTC jurisdiction.
• Kentucky HB 757, from April 2026 — a 14.25% operator excise, also effective January 1, 2027. Litigation over it was active as of July 2026.

Neither is an individual income tax, and neither changes how a trader's winnings are characterized. What they can do is reach traders indirectly, through fees, if operators pass the cost along. Additional states — including Illinois and New Jersey — have advanced operator-level transaction or gross-revenue taxes, and roughly fifteen states considered prediction-market bills in 2026. Anyone telling you “states are starting to tax prediction-market winnings” has the story slightly wrong: states are starting to tax prediction-market operators.

And on the question that follows naturally from the litigation map: if sports event contracts are treated as illegal gambling where you live, the tax answer does not change. Taxability never turned on legality. IRC §61 reaches the income, and §165(d) applies to legal and illegal wagers alike if a wagering characterization holds.

Do Sports-Contract Traders Owe Quarterly Estimated Taxes?

Often, yes. No prediction-market platform appears to withhold tax on event-contract winnings, and no W-2G arrives — so profitable traders who expect to owe $1,000 or more typically make quarterly estimated payments. Practitioners commonly anchor those payments to the 100% or 110% prior-year safe harbor. Every situation varies.

Sports amplifies the timing problem. A profitable playoff run or World Cup stretch can create a meaningful liability inside a single quarter with zero withholding behind it, and — under wagering characterization — a liability that doesn't shrink just because the following quarter gives it all back. Many traders set aside a percentage of net profits as they go and true up quarterly; a CPA can size the percentage to the bracket, the state, and the characterization actually being used.

Can a Trader Hold a Defensible Position Under More Than One Treatment?

Frequently, yes — and that is the most important practical point on this page. Because the IRS has published no guidance, more than one characterization can be reasonable on the same facts. The emerging practitioner consensus is to pick one, apply it consistently year over year, document the reasoning, and keep complete records.

What “defensible” tends to look like in practice:

• The choice is reasoned, not reverse-engineered. A trader whose contracts are mostly economic-data markets, who holds positions for days and sells before resolution, has a very different capital-asset story than one who buys game-day binaries and holds to settlement. Writing down which facts drove the choice is the work.
• It is consistent across years. Flipping treatments to chase the best answer each season is the pattern practitioners warn about most, because it undercuts the reasonableness that made either position defensible.
• Aggressive positions get disclosed. Practitioners who file Section 1256 on event contracts commonly attach a Form 8275 disclosure statement.
• The records support the position taken. Per-position detail — dates, contract identifiers, prices, fees — supports capital treatment on Form 8949. Gross win and gross loss totals are what wagering treatment needs. Traders who may need to model both keep both.
• Mixed activity is separated. Sportsbook wagers and exchange contracts are tracked apart, so a single blended number never quietly assumes an answer to the open question.

Two frontier questions deserve honest flagging rather than a confident answer: whether event contracts are “securities or commodities” for a Section 475 mark-to-market election, and how trader tax status or an entity structure such as an LLC or S-Corp interacts with event-contract trading. Specialist practitioners are only beginning to analyze both. Related mechanics are covered in our trader deductions guide and, for the offshore crypto-settled venues, the crypto taxes guide. Whether the wash-sale rule reaches event contracts is likewise unsettled — §1091 applies to “stock or securities,” which event contracts are almost certainly not, but no authority confirms it.

How Do Sports-Contract Traders Typically Prepare for Tax Time?

The workflow most practitioners describe is unglamorous and effective: separate the venues, export everything, compute per contract, weigh the characterization against the contract mix, model the wagering downside, and confirm the approach with a CPA. Because sports is the highest-risk category, the modeling step earns its keep here more than anywhere else.

1. Separate exchange activity from sportsbook activity. Sportsbook wagers already have a settled treatment; exchange contracts do not. Combining them in one spreadsheet quietly assumes an answer to the open question.
2. Export complete records from every venue. Transaction histories, platform P&L statements, and any annual summaries. Watch units — exports denominated in cents rather than dollars are a documented source of hundred-fold errors.
3. Compute results per contract, not per deposit. Basis is what was paid plus fees; proceeds are the sale price or the $1.00/$0 settlement. Deposits minus withdrawals is not the taxable amount, and winnings left on the platform still count.
4. Weigh the characterization against your actual contract mix. Sports-heavy activity calls for heavier hedging than a book of CPI and Fed-funds contracts; write down which facts drove the choice.
5. Model the wagering downside before it's a surprise. Run the 90% cap scenario with and without itemizing, so the range is known in advance — and size quarterly estimates off the result.
6. Talk with a trader-specialist CPA. Sports contracts are the highest-risk category in an unsettled area, and more than one position can be defensible. Which one fits your facts, records, and risk tolerance is exactly the conversation a CPA who understands trader and prediction-market taxation is for.

Frequently Asked Questions

Are Kalshi sports contracts taxed like DraftKings sportsbook bets?

Not necessarily, and that is the whole issue. Sportsbook wagers are long-settled wagering transactions under IRC §165(d). Sports event contracts trade on CFTC-regulated exchanges, and the IRS has published no guidance on how they are characterized. Practitioners typically weigh several approaches and document the one they pick with a CPA.

Do I get a W-2G for sports prediction market winnings?

Generally no. Sportsbooks issue Form W-2G when a payout meets the reporting trigger, but no prediction-market platform appears to issue one for event contracts. Even under a wagering characterization, the generic trigger of roughly $600 at 300-to-1 odds almost never fires on a contract priced between one and ninety-nine cents.

Does the new 90% gambling-loss rule apply to sports event contracts?

Only if those contracts are characterized as wagering, which the IRS has not answered. The 90% cap in IRC §165(d), as amended by the OBBBA, is law for tax year 2026 for wagering losses. Sports contracts carry the highest recharacterization risk of any contract type, so most traders plan for the possibility.

Can my sports event contract losses offset my sportsbook winnings?

Genuinely unresolved. If both legs were wagering, losses would typically offset winnings within the §165(d) limits, itemizers only. If the exchange leg is instead capital, the two sit in different buckets and a hedged pair can produce a taxable gain alongside a stranded loss. A CPA conversation matters here.

Do I owe taxes on sports contract winnings I never withdrew?

Typically yes. The taxable event is generally settlement or sale of the contract, not the bank transfer, so profit sitting in a platform balance on December 31 usually counts for that year. Deposits minus withdrawals is not the taxable amount under any of the candidate treatments.

If sports event contracts are illegal gambling in my state, do I still owe tax?

Yes. Taxability does not turn on whether an activity is legal where you live. IRC §61 reaches the income either way, and §165(d) applies to legal and illegal wagers alike if a wagering characterization holds. The state-court fights change access to the market, not the tax obligation.

Can I owe tax in a year I broke even trading sports contracts?

Under a wagering characterization, yes. A trader with $100,000 of gross wins and $100,000 of gross losses could deduct only $90,000 for 2026 and owe tax on $10,000 of phantom income. Under capital treatment the same year typically nets to zero. Non-itemizers fare worse still.

Do sports prediction market traders owe quarterly estimated taxes?

Often. No prediction-market platform appears to withhold tax on event-contract winnings, so profitable traders who expect to owe $1,000 or more typically make quarterly estimated payments. Practitioners commonly anchor those payments to the 100% or 110% prior-year safe harbor. Every situation varies, and a CPA can size it.