NYU Tax Law Center Study Urges IRS to Apply Gambling Tax Rules to Prediction Market Contracts
NYU tax experts argue that sports event contracts on prediction markets are gambling and should be taxed under federal gambling rules.Summary
A group of experts at New York University School of Law's Tax Law Center has concluded that sports event contracts on prediction market platforms should be taxed under the same federal rules that govern sports gambling. Their study, published in Tax Notes, recommends that the IRS issue formal guidance, warning that without it taxpayers, businesses, and accountants may apply inconsistent treatments, leading to filing errors and unequal burdens. The authors—Seth Hanlon, Miles Johnson, Michael A. Kaercher, Kyle Sweeney, and Sophia Yan—determine that winnings from these contracts are taxable as ordinary income, that gambling-loss deduction limits apply (with only 90% of wagering losses deductible beginning in 2026), and that federal excise taxes apply: 0.25% on state-authorized bets and 2% on unauthorized ones, levied on the amount wagered plus fees regardless of outcome. The study argues that labels do not control tax consequences when they conflict with economic realities, so calling an arrangement an "event contract" traded on an "exchange" rather than a bet changes nothing, and peer-to-peer betting is no less gambling than betting against a house. CFTC registration as a designated contract market is irrelevant to tax treatment. CPA Robert Raiola of PKF O'Connor Davies agrees that clear IRS guidance would provide a more consistent framework. The tax questions arise while federal appeals courts remain split on the underlying regulatory classification: the 3rd Circuit has treated the contracts as CFTC-regulated swaps shielded from state gambling laws, while the 9th and 6th Circuits view them as sports bets subject to state licensing and prohibition rules. Kalshi only began offering sports event contracts in January 2025, and the products' novelty has amplified both their popularity and the surrounding legal uncertainty.
(Source：Sccg Management)