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Prediction Markets Offer Tax-Efficient Alternative to Sports Gambling
7 Oct
Summary
- Prediction markets like Kalshi allow users to bet on real-world events
- Losses from prediction market wagers can be deducted without itemizing taxes
- Sports gambling earnings are taxed as ordinary income with limited loss deductions
As of October 2025, prediction markets have emerged as a tax-efficient alternative to traditional sports gambling. These platforms, such as Kalshi, allow users to bet on the outcomes of real-world events, including the results of sporting competitions.
Unlike sports betting apps, which treat winnings as ordinary taxable income, prediction markets are classified as commodity futures contracts under the Internal Revenue Code. This means that losses from prediction market wagers can be deducted against gains, even for taxpayers who do not itemize their deductions. This is a significant advantage, as the majority of U.S. taxpayers do not itemize their taxes.
Furthermore, commodity losses in excess of gains can be deducted against ordinary income up to $3,000 per year, with any additional losses carried forward indefinitely. This provides an opportunity for users to offset their tax liabilities, even if they experience net losses from their prediction market activities.
In contrast, the tax treatment of sports gambling earnings has remained largely unchanged, with winnings subject to ordinary income tax rates and losses only deductible to the extent of winnings. This asymmetry in tax treatment has made prediction markets an increasingly attractive option for sports bettors looking to maximize their after-tax returns.
