IRS Still Won't Say Whether World Cup Prediction-Market Bets Are Gambling or Investing

A tax question nobody in Washington will answer

Argentina and England are set to meet in the World Cup semifinal, and millions of Americans have money riding on the tournament through prediction platforms like Kalshi and Polymarket. What almost none of them know: the IRS has not said whether those winnings count as gambling income or investment gains, according to Thomson Reuters. This distinction determines whether a bettor owes tax on the full amount won or gets to deduct losses first.

James Creech, a principal in the specialty tax practice at Baker Tilly, told Thomson Reuters the gap matters most for foreign fans in the U.S. for the tournament. If the platforms are treated as gambling, a foreign visitor's winnings are U.S.-sourced income subject to 30% withholding. A $1 million jackpot becomes a $700,000 check. If the same contracts are treated as financial products instead, Creech said, the gain is sourced to wherever the bettor lives and carries no U.S. tax obligation at all. "I can make the same bet at the same time in the same location," he said, "but my tax filing obligations in the U.S. are completely different."

Why the IRS hasn't ruled

The platforms themselves reject the gambling label. Kalshi and similar operators argue they sell futures contracts regulated by the Commodity Futures Trading Commission, not sports bets, according to Cryptonews. Courts and the IRS have historically looked past labels to substance, and the law firm White & Case has noted gambling proceeds are taxed as ordinary income under IRC Section 61, with losses deductible only up to winnings under Section 165(d).

The accounting firm BRC told Cryptonews the contracts could instead qualify for IRC Section 1256 treatment, which taxes 60% of gains as long-term regardless of how briefly the position was held, a favorable rate. But another firm, Monaco CPA, pointed out that CFTC registration alone doesn't guarantee that status. The CFTC has classified these contracts as binary options that are swaps, a designation that could trigger a specific exclusion Congress wrote into Section 1256(b)(2)(B) to keep swaps from getting the preferential rate.

For U.S. residents, the stakes just went up. Starting with the 2026 tax year, the One Big Beautiful Bill Act caps gambling-loss deductions at 90% of losses, according to Cryptonews. Someone who wins and loses the same total dollar amount over the year could still owe tax on part of it, purely because of how the activity gets classified.

States are done waiting on Washington

While the IRS stays silent, states are moving fast and not in the same direction. North Carolina Governor Josh Stein signed a $34 billion budget on July 7 that taxes prediction market platforms at 6% of net trading fee revenue starting January 1, 2027, while raising the tax on licensed sportsbooks from 18% to 23% of gross wagering revenue, effective immediately, according to Bitcoin News. Critically, North Carolina is not requiring prediction platforms to hold a state gambling license at all, effectively conceding the regulatory question to the CFTC.

Gaming analyst Dustin Gouker called it the first state law to explicitly recognize CFTC-registered prediction markets as lawful under federal authority while declining to impose its own licensing rules, according to Bitcoin News. He predicted other states will want to copy the low tax rate.

North Carolina's approach is not the norm. Kentucky passed a 14.25% excise tax in April paired with enforcement actions, drawing a lawsuit from the CFTC. Illinois folded prediction markets into its state sports-wagering scheme in June, and Kalshi immediately sued to block it. Kalshi has won injunctions in New Jersey, upheld by the Third Circuit in April, and in Tennessee, but lost in Maryland, Nevada, Arizona, Ohio, and this week in the Southern District of New York, where Judge Analisa Torres ruled Kalshi had not shown it was likely to win its federal-preemption argument.

Sportsbook operators and several state gambling regulators argue prediction markets are functionally identical to sports betting, taking money on the same games with the same win-or-lose structure, yet Kalshi pays a fraction of the tax rate and skips licensing requirements that sportsbooks spent years and real money satisfying. This is the same argument the CFTC is now fighting in court against at least nine states, including Kentucky, Rhode Island, and Minnesota, where a federal judge heard arguments this month, according to Bitcoin News.

Whether the CFTC's jurisdiction actually preempts state gambling law is an open legal question the courts have not resolved consistently, and it will likely take an appellate ruling or Supreme Court review to settle nationwide. Until then, and until the IRS issues guidance, a fan in Charlotte and a fan in Newark can win the identical bet on the same Argentina-England match and owe wildly different taxes, or none at all.