Prediction markets are gaining attention as an alternative to traditional sports betting, particularly for events like the World Cup. Unlike sportsbooks that act as "the house" and set odds, prediction platforms like Kalshi operate as intermediaries, matching users who take opposing positions on an event. This distinction is crucial for taxation, as sportsbooks' revenue is tied to users losing bets and is typically taxed based on gross gaming revenue at the state level (as seen in existing state-level sports betting frameworks).
Prediction markets, however, earn revenue from transaction fees rather than the outcome of the event itself. This fee-based model means there's no "gross gaming revenue" in the traditional sense. Consequently, taxing prediction markets under existing sports betting frameworks, which assume the operator bears risk and profits from user losses, is problematic. States might misidentify the tax base if they conflate the total value of contracts traded (which can be over $20 billion monthly) with the platforms' actual revenue from fees.
Regulators and lawmakers are grappling with how to classify prediction markets. The Commodity Futures Trading Commission (CFTC) asserts jurisdiction, viewing them more akin to derivatives exchanges—financial instruments whose value derives from an underlying asset or event. This federal-level classification suggests a tax system based on platform fees would be more appropriate and durable. Conversely, many states initially view them as an extension of legalized sports wagering, aiming to impose taxes based on gaming revenue.
The lack of a clear, consistent definition creates regulatory confusion and potential legal challenges, with the CFTC already suing over state efforts to regulate the space. A federal regulatory and tax approach, consistent with their borderless digital nature, is argued to be more suitable than fragmented state-by-state regulation. This clarity is essential to avoid policy mistakes and ensure appropriate taxation, distinguishing prediction markets from both traditional gambling and ordinary brokerages.
