Except it’s repealed, a brand new tax provision capping the losses gamblers can deduct at 90% takes impact on Jan. 1, 2026. In the meantime, prediction markets are rising in prominence.
A possible results of this dynamic: A migration of massive gamblers — professionals and whales, alike — from regulated sportsbooks to prediction markets within the new 12 months.
Whereas debate intensifies about whether or not buying and selling on prediction markets is betting or investing, many gamblers intend to lean on the latter notion, which, if it holds, means such buying and selling shall be handled as another CFTC-regulated monetary instrument, not like sports activities wagers, and 100% of losses can be utilized to offset positive factors.
Beneath the 90% rule, snuck into the One Huge Stunning Invoice Act signed into legislation by President Trump on July 4, it’s attainable to lose cash playing and nonetheless owe cash in taxes. A break-even gambler who places $2 million into play in 2026 (wins $1 million, loses $1 million) will owe $37,000 in playing tax (safely assuming he’s within the high federal tax bracket).
For professional gamblers, the rule makes their careers untenable.
“Eighty p.c of the deal with within the [regulated sports betting] market is generated by skilled syndicate play and whale VIP play,” American Bettors’ Voice board member Adam Robinson instructed DeFi Charge. “I imagine this tax loss provision goes to incentivize those that are liable for 80% of regulated deal with to look elsewhere. …
“Subsequent 12 months is a do-or-die second,” Robinson pressured. “If the tax loss provision just isn’t repealed, prediction markets would be the place people go.”
For what it’s value, there’s only a 12.5% likelihood the legislation shall be repealed earlier than the calendar flips to 2026, in line with Kalshi odds as of this writing.
“[Much of my day is] telling my shoppers how they need to be monitoring their revenue and losses and bills in order that they’re able to go on 1-1-26,” stated Gary Kondler, a Las Vegas-based accountant who handles taxes for skilled and leisure bettors.
Pay Me Now or Pay Me Later?
The IRS has but to make a ruling or situation steering on how prediction markets shall be handled. However understanding what we all know now – betting with sportsbooks means the 90% cap undoubtedly applies, whereas buying and selling on prediction markets means it could not apply — it’s clear to Robinson which path bettors ought to take.
“Anybody who understands the tax danger of regulated sportsbook play in the USA, if this isn’t repealed, is determining the way to transfer all of their motion to federally licensed merchandise the place nothing is settled,” Robinson stated. “Accountants will not be by and enormous recommending their shoppers observe the OBBB’s tax legal guidelines provisions for occasion contracts.”
This may very well be, nevertheless, a ‘pay-me-now or pay-me-later’ state of affairs. A number of years from now, after gamblers transfer their motion to prediction markets, the IRS could determine that such “buying and selling” is “playing” in spite of everything.
“There’s a solution, nevertheless it’s sooner or later,” cautions Captain Jack Andrews, a professional gambler, participant advocate and founding father of Unabated. “You’ll be able to guess nevertheless you suppose it ought to go, and when you’re fallacious, you pay penalties and curiosity on being fallacious on reflection.
“It’s one among these offers the place you’re proper till you’re fallacious, and whenever you’re fallacious, you’re gonna pay for it.”
The timeframe for a dedication might be prolonged. Tax returns for 2026 will not be due till April 2027. From there, an audit continues to be 12 to 18 months away, and after some back-and-forth between a taxpayer and his accountant and the IRS, an enchantment and a listening to in tax court docket may very well be subsequent.
“We is probably not a ruling till 2029, 2030,” Kondler commented, “and that’s an enormous form of headache for me to attempt to navigate proper now. That’s three or 4 years of me placing in tax returns till an precise court docket case and a income process come out of this, as a result of in my view, that is going to be sparking pink flags far and wide.”
Audit Danger
Russell Fox, one other Vegas-based playing tax specialist, is having the identical dialog together with his shoppers. Fox believes that, primarily based on the “kind vs. substance” precept on which the IRS operates, the company will finally determine that buying and selling on prediction markets is certainly playing.
“We’ve to take a look at what’s the underlying exercise for prediction markets,” Fox defined. “Should you’re predicting the end result of, oh, let’s simply say, ‘will it rain at present in Las Vegas,’ … that’s a prediction, that’s a contest. Fairly well-defined. If I’m going to foretell who’s going to win tonight’s basketball recreation … it feels like sports activities betting to me.
“And I feel that’s how the IRS will finally – notice the phrase ‘finally’ – rule.”
He added, “The problem is sadly going to be – and I do clarify this to all my shoppers – in an audit state of affairs, it’s extra seemingly than not the IRS goes to rule that it’s nonetheless a wagering exercise.”
Elaborated Truman State assistant professor of accounting Andrew Greiner, former head of FanDuel’s tax-legal division, “I’ve by no means seen any authority say that simply because a transaction would possibly qualify as (a 1256 contract, as some assume trades on prediction markets do) means it will probably’t even be wagering.”
One Measurement Does Not Match All
Fox and Kondler agree that several types of taxpaying gamblers are handled in a different way by IRS.
“The way it needs to be handled will rely on the person taxpayer, however proper now, most taxpayers can use whichever means is most helpful to them,” Fox stated. “Primarily based on unsettled legislation and the truth that there are numerous completely different doctrines and tax that will in all probability permit it, that is going to be a really a lot facts-and-circumstances situation for every taxpayer.”
Added Kondler, “There’s gonna be a variety of completely different ways in which this revenue may be dealt with, the identical means a gambler can file their tax return 4 alternative ways – whether or not it’s an beginner gambler, skilled gambler, whether or not they have a partnership or an S company.
“And I feel in the same state of affairs, it’s gonna be, ‘Hey, what can we do with this Kalshi revenue to take advantage of sense in your tax return? And keep in mind, this is able to solely be uncovered in an audit. …
“I’m not gonna let you know that I’ve one lifeless set avenue that I wish to go down proper now.”
Selecting The Path
To Robinson, professional bettors face this selection: “Do I commit fraud [by not abiding by the letter of the new tax rule], or do I transfer to a platform the place I could make an inexpensive judgment concerning the tax therapy of this exercise and proceed to proceed accordingly?”
For his betting group, it’s an apparent selection.
“On my workforce, we’re planning for zero – zero – regulated motion subsequent 12 months,” he declared. “We’re placing all the things, in all of our funding and techniques and processes, into algorithmic, API-based motion with exchanges and prediction markets.
“We’re prepared to take that danger. If we report regulated play to the letter of the legislation, if this isn’t repealed, I do know what subsequent 12 months’s gonna appear to be. It means we’ve to beat the market by 10% simply to interrupt even. It’s not gonna occur.”
