Tax Advantage Ambiguity for Prediction Markets vs. Traditional Sportsbooks

On December 27, 2025, Barrons reported that prediction markets like Kalshi and Polymarket may offer a tax advantage over traditional sportsbooks until the IRS clarifies tax treatment rules [1]. The core distinction lies in IRS classification ambiguity: traditional sports betting winnings are categorized as “gambling income,” where losses can only offset gambling gains (and starting in 2026, only 90% of losses under The One Big Beautiful Bill Act) [2]. In contrast, prediction market winnings could be treated as capital gains/losses (similar to stocks), allowing losses to offset gains and up to $3,000 of ordinary income annually [2].

Prediction markets have grown exponentially in 2025: Kalshi achieved $50 billion in annualized volume (up from $300 million in 2024) with 60% global market share, while Polymarket facilitated ~$18 billion in cumulative volume [4][5]. The sector also attracted $2.7 billion in funding (87% of all-time funding), including a $2 billion investment from ICE (NYSE parent) in Polymarket [4]. Traditional sportsbook stocks (DKNG, MGM) showed mild pre-event gains on December 26, 2025 (DKNG: +1.45%, MGM: +1.18%), likely due to broader market conditions rather than anticipation of the article [0].

However, regulatory pushback from the AGA—lobbying for traditional sportsbooks—poses a counterforce. The AGA has launched ad campaigns framing prediction markets as unregulated or risky [3].

1. Tax Policy as a Disruption Driver
   : Ambiguous IRS rules create a short-term structural advantage for prediction markets, potentially shifting bettor behavior and revenue from traditional sportsbooks.
2. Institutional Validation
   : Major investments (ICE’s $2B in Polymarket) signal growing institutional confidence in prediction markets despite regulatory uncertainty.
3. Lobbying Power Balance
   : The AGA’s efforts to restrict prediction markets highlight the traditional sports betting industry’s ability to influence regulatory outcomes, which could mitigate long-term disruption.

• Risks for Traditional Sportsbooks
  : A significant bettor shift to prediction markets could reduce revenue growth; publicly traded stocks (DKNG, MGM) may experience short-term volatility [0].
• Risks for Prediction Markets
  : The IRS could reclassify winnings as gambling income, eliminating the tax advantage; AGA lobbying may lead to stricter regulations [3].
• Opportunities for Prediction Markets
  : Sustained tax advantages could accelerate market share gains and funding, solidifying their role in sports betting alternatives.

The tax ambiguity between prediction markets and traditional sportsbooks creates a dynamic market scenario. Decision-makers should monitor:

1. IRS communications regarding prediction market tax classification [1]
2. AGA lobbying efforts and potential regulatory changes [3]
3. Prediction market volume growth and bettor adoption rates [4][5]
4. Market reactions of traditional sportsbook stocks in the post-event trading session

No prescriptive investment recommendations are provided; this summary aims to present objective context for informed decision-making.