Two American tax academics have put a question to the IRS that millions of prediction market users have been quietly dodging: when you cash out a contract on who wins an election or whether a central bank cuts rates, is that a bet or a trade? Jay A. Soled of Rutgers Business School and Mirit Eyal-Cohen of the University of Alabama School of Law argue in a forthcoming Tax Notes article, “Betting on Tomorrow”, that most participants are essentially gambling, and that gains should be taxed as ordinary income while losses face the same restrictions as traditional gambling losses. Their pointed line: the issue “is too significant to ignore”, and the IRS “should take a formal position and lift the veil of uncertainty”.
That uncertainty is the whole story. There is no settled prediction market tax rule in the US, and nothing specific in Indian tax law either. The label you (or your platform) attach to your profits changes your rate, your paperwork, and whether a losing month is worth anything at all on your return.
The tax classification problem
Prediction markets sit awkwardly between two tax regimes that were built for very different things. Buy a contract at 40 cents that settles at $1 if an event happens, and the mechanics look like trading: an order book, a bid-ask spread, a position you can exit early at a market price. Hold it to settlement and the economics look like a wager: a binary event, a fixed payoff, no underlying asset producing anything.
Scale is what turned an academic curiosity into a live problem for IRS prediction markets guidance. Soled and Eyal-Cohen cite global monthly trading volume across leading platforms rising from under $5 billion in September 2025 to roughly $24 billion by April 2026. At that size, an unresolved classification is not a footnote. It is a competitive distortion, and the professors warn it risks handing prediction market platforms an advantage over regulated sportsbooks, which operate under well-defined gambling tax treatment.
Several readings of the law are defensible right now. Gains could be ordinary income from wagering. They could be capital gains, if a contract is treated as a capital asset held for investment. Some argue that because leading US venues operate as exchanges regulated by the Commodity Futures Trading Commission, their contracts should be treated like regulated futures contracts, which carry a blended long-term and short-term split regardless of holding period. Each route produces a different tax bill from identical trades. Until a regulator picks one, taxpayers are guessing.
Gambling vs investment: why it matters for your tax bill
The betting tax classification question is not academic hair-splitting. Here is what actually changes, using the US framework the professors are arguing about.
| Issue | If treated as gambling | If treated as investment |
|---|---|---|
| Rate applied | Ordinary income rates | Capital gains rates, often lower for longer holds |
| Losses | Only against winnings, only if you itemise | Offset capital gains; limited excess against other income, with carry-forward |
| Netting | Session-by-session, gross winnings reported | Position-by-position, net gain or loss |
| Typical form | W-2G or 1099-MISC, or nothing at all | Broker-style 1099-B with proceeds and basis |
| Withholding | Possible withholding at source on large payouts | Generally none |
Tax rate differences
Ordinary income treatment means your prediction market profit stacks on top of salary and gets taxed at your marginal rate. Capital asset treatment can mean a lower rate, and in some cases a meaningful one. The gap is why traders would prefer the investment label and why tax authorities, looking at the activity’s substance, tend to resist it.
In India the gap is wider still. Net winnings from online games are taxed at a flat 30% under Section 115BBJ, plus the 4% health and education cess, with no slab benefit, no standard deduction and no allowance for expenses. Compare that with listed equity, where short-term capital gains are taxed at 20% and long-term gains at 12.5% above the ₹1.25 lakh annual exemption. Same ₹1 lakh of profit, materially different tax liability, purely because of what the activity is called.
| Feature | Online gaming winnings (India) | Listed equity gains (India) |
|---|---|---|
| Headline rate | 30% flat plus cess | 20% short-term / 12.5% long-term |
| Slab or exemption benefit | None | ₹1.25 lakh long-term exemption |
| Expense deduction | Not allowed | Transaction costs adjust gain |
| Loss set-off | Not permitted against winnings | Permitted, with carry-forward rules |
| TDS mechanism | Section 194BA on net winnings | No TDS for resident equity investors |
Reporting requirements
Gambling reporting is gross and event-driven. A platform issues a form when a payout crosses a threshold, and the number on it may bear little resemblance to your actual annual profit, because losing wagers do not reduce it. Investment reporting is net and position-based: proceeds minus cost basis, per trade, consolidated for the year.
That difference matters for Indian users dealing with offshore platforms. No overseas prediction market is issuing you a Section 194BA TDS certificate or a Form 26AS entry. The reporting burden falls entirely on you, and income or assets held abroad bring their own disclosure obligations on the return. Getting that wrong is far more expensive than paying the tax.
Loss deduction rules
This is the harshest asymmetry. Under Indian law, losses from gambling, betting and online games cannot be set off against winnings or any other head of income, and cannot be carried forward. You are taxed on gross net winnings as computed under the rules, not on your economic result for the year. A year where you won ₹5 lakh and lost ₹4.5 lakh does not mean you are taxed on ₹50,000 under a gambling characterisation.
The US position is only slightly kinder: gambling losses are deductible only up to the amount of winnings, and only by taxpayers who itemise. A change in US law applying from the 2026 tax year tightens that further by capping the deductible portion of losses, so anyone filing a US return should confirm the current limit with a preparer. Capital loss rules, by contrast, allow netting and carry-forward. Soled and Eyal-Cohen’s recommendation lands squarely on the restrictive side: ordinary income on the way up, gambling-style limits on the way down.
Current prediction market tax practice
Practice is inconsistent, and that is the honest answer about prediction market winnings today. Some users receive a 1099-MISC showing payouts as other income. Some receive nothing. Some platforms, positioning themselves as regulated exchanges, lean toward broker-style reporting with proceeds and basis. The form you get is effectively your platform’s legal opinion on an unsettled question, and it is not binding on any tax authority.
Three practical consequences follow. First, the absence of a form is not the absence of taxable income. Second, a form you do receive may overstate your economic gain, especially a gross-payout form. Third, two users with identical trading records on different platforms can end up filing in completely different ways, which is precisely the inconsistency the professors want the IRS to end.
Indian users face an additional layer. Alongside income tax, GST at 28% applies on the full deposit value for online money gaming supplied in India, a cost that sits inside the platform’s pricing rather than on your return. And India’s regulatory treatment of real-money online gaming has been shifting, so the question of whether a given platform may lawfully serve Indian residents is separate from, and prior to, the tax question.
What users should do now
Given unresolved gambling tax rules for this product, the defensible approach is conservative and well documented. None of this is tax advice; it is the record-keeping a professional will ask you for.
- Export everything, every month. Trade-level data: date, market, contract, quantity, entry price, exit or settlement price, fees, and the deposit or withdrawal that funded it. Platforms change, close markets and lose history. Your own archive is the only reliable version.
- Track in rupees at the transaction date. If you fund in USD or stablecoins, record the conversion rate used. Currency movement can create a separate gain or loss that has nothing to do with whether your prediction was right.
- Compute your position both ways. Work out the liability under flat-rate winnings treatment and under capital gains treatment. Knowing the gap tells you how much exposure you are carrying if a tax officer disagrees with your filing.
- Reconcile against any form you receive. If a platform reports a figure that differs from your records, keep the reconciliation. Unexplained mismatches are what trigger notices.
- Set money aside at the higher rate. Assuming the 30%-plus flat treatment and being pleasantly surprised is cheaper than the reverse. Winnings taxed at source still need reconciling at filing.
- Get a qualified chartered accountant or tax attorney involved before you file, especially if you use offshore platforms or if the amounts are material. Foreign asset disclosure and FEMA questions sit alongside the income tax treatment, and those are not DIY areas.
For official positions, work from primary sources rather than forum consensus: the Income Tax Department’s portal at incometax.gov.in for Indian provisions, and the IRS for US guidance if a formal position eventually lands.
Frequently asked questions
How are prediction market winnings taxed?
There is no rule written specifically for prediction markets. For Indian residents, net winnings from online games are taxed at a flat 30% plus 4% cess, with no deductions and no loss set-off, and that treatment is the most likely fit for event-contract profits. A capital gains characterisation is arguable for exchange-traded contracts but is not established. Treat the higher-tax outcome as your planning assumption until you have professional advice on your specific facts.
Are prediction markets gambling or investing?
Legally unsettled, which is the point of the professors’ petition to the IRS. The platforms describe themselves as regulated exchanges; the activity for most retail users, betting on a discrete event with a binary payoff, looks like wagering. Soled and Eyal-Cohen argue the substance is gambling and the tax code should say so.
What tax forms apply to prediction market profits?
In the US, users variously report a 1099-MISC, a broker-style 1099-B, a W-2G, or no form at all, depending on the platform and payout size. In India, a domestic operator would deduct TDS on net winnings under Section 194BA, which you would see reflected in your tax credit statement; offshore platforms deduct nothing, leaving you to declare the income yourself.
How does this compare with traditional betting tax rules?
Traditional betting is the clearer case. Indian law has long treated winnings from betting, gambling and lotteries as taxable at a flat 30% with TDS at source and no loss relief, and regulated US sportsbooks operate under established gambling reporting thresholds. Prediction markets deliver a similar economic outcome without inheriting that clarity, which is exactly the gap critics say gives them an unearned advantage.
One last practical note: tax is a cost of participation, not an afterthought. A 30% flat charge on winnings with no credit for losses means the break-even bar is higher than the raw market price suggests. Prediction markets, like any form of wagering, carry a built-in negative expectation for most participants over time. Stake only what you can afford to lose, use deposit and loss limits where a platform offers them, and keep gambling separate from how you fund your life. If it stops feeling like a considered decision, stop and seek support.