Prediction markets are booming. Taxing them is a mess

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Prediction markets are booming, with monthly trading in the billions and a recent estimate from a consulting firm saying that the relatively new phenomenon could grow to $1 trillion by the end of the decade. That’s a lot of money to tax, and the government hasn’t exactly figured out how to account for it.

While activities on prediction markets resemble gambling, these platforms claim a major distinction. They say they’re offering financial contracts regulated by the Commodity Futures Trading Commission, whereas gambling is state-regulated. This is a distinction can be meaningful for taxpayers, and because they are so new, the IRS hasn’t issued specific guidance, which tax practitioners say is leaving things open to interpretation.

Fundamentally, predictions made on apps aren’t different from bets at a casino, yet the treatment could be completely different, according to James Creech, principal with Baker Tilly’s specialty tax practice. And even if someone is making many small bets, tax treatment differences can be meaningful over time. “It feels like people are taking tax risks that they don’t know they’re taking,” he said.