The distinction between gambling and investing is becoming increasingly blurred, with federally regulated prediction markets resembling sportsbooks. The IRS is advising Americans to use state-licensed betting platforms for gambling activities. This directive raises questions about the nature of these prediction markets: are they gambling or not?
As the football season approaches, the busiest time for sports betting, the IRS is emphasizing that illegal gambling activities are often linked to other criminal acts, such as money laundering.
IRS Criminal Investigation Chief Jarod Koopman stated, “Illegal gambling is not just about placing unlawful bets. Our investigations frequently uncover money laundering and tax crimes associated with illegal gambling operations. Following the money enables us to dismantle larger criminal networks.”
Attorneys General: Prediction Markets Are Illegal Gambling
The IRS advisory cautions taxpayers to avoid illegal gambling operations. Several state attorneys general argue that sports prediction markets are conducting unlicensed, illegal gambling activities.
“No matter how they are labeled, prediction markets are gambling platforms, plain and simple. By disregarding our laws, prediction markets are engaging in illegal operations,” stated New York Attorney General Letitia James.
Despite this, the Commodity Futures Trading Commission (CFTC), under the federal government, maintains its authority over sports trading on prediction markets. The CFTC considers sports trading to be an “innovative” financial product rather than gambling.
The IRS advisory discusses the risks associated with offshore sportsbooks, not prediction markets. However, it includes information about the dangers of “crypto-based gambling platforms” that attract users seeking anonymity by circumventing Know Your Customer protocols and financial reporting obligations.
Since some major prediction markets are crypto-based, they offer traders a level of anonymity.
Winnings Must Be Reported
Regardless of the type of betting involved, the IRS requires all winnings to be reported for tax purposes.
The notice emphasizes, “Ensure that all gambling winnings are reported as taxable income to avoid civil and criminal penalties from the IRS. Sports enthusiasts who are uncertain about their tax obligations or have inquiries about reporting gambling income are urged to consult tax professionals or visit the official IRS website for guidance. Ignorance of tax laws does not excuse individuals from their responsibilities.”
Under a tax change introduced through the Republicans and President Donald Trump’s One Big Beautiful Bill, gamblers can now only deduct up to 90% of their losses against their winnings for federal tax purposes. This means that even if a bettor loses $100,000 but also wins $100,000, they would still owe federal taxes on $10,000.
The IRS has not provided official guidelines on reporting procedures for earnings from prediction markets. Tax professionals are unsure whether such income should be reported as gambling winnings, capital assets, or earnings from financial derivatives.
There is a lot of conflicting guidance for users of prediction markets, which can be extremely confusing,” said Ryan Schutz, a former IRS special agent.
Schutz suggested that for most individuals, reporting prediction market earnings on Form 6781—gains and losses from non-equity options, foreign currency contracts, and futures contracts—would likely result in the lowest tax burden.