Even if prediction-market platforms don’t notify the beneficiary and the IRS of the money, gains are still considered taxable income.
Americans who placed wagers on the outcome of the previous year’s presidential election now have to deal with the certainty that the IRS will demand a share of the profits.
Last October, prediction markets became well known as people flocked to websites like Polymarket, PredictIt, Kalshi, Interactive Brokers, and Robinhood to wager on whether Donald Trump or Kamala Harris would win the presidency.
Prediction markets are a relatively recent development, particularly in relation to political events. Last October, a court ruling made it possible for traders to place large-scale wagers on the outcome of the election.
The tax filing season for 2024 income has now begun. According to experts, the IRS has always maintained that earnings from gambling are fully taxable, and prediction markets are no exception.
Given that this weekend is Super Bowl Sunday, the most anticipated event of the year, they are particularly pertinent.
“It’s taxable income,” claimed tax lawyer Matthew Foreman, a partner at Falcon Rappaport & Berkman. “Even if the prediction platforms do not send a notice formally reporting the money to the recipient and the IRS, the winnings are income,” he continued.
“It’s income, regardless of whether they receive documentation,” stated Russ Fox, principal of Clayton Financial and Tax in Las Vegas. It is his responsibility to ensure that his clients, who include professional gamblers who have previously profited from prediction markets, do not violate IRS regulations.
Meanwhile, Kalshi, Interactive Brokers (IBKR), Robinhood (HOOD), and PredictIt all confirmed that they are in fact distributing tax forms.
Requests for comment were not answered by Polymarket. According to its fine print, customers have the “sole responsibility” for ensuring that they are abiding by any applicable tax rules.
Are prediction markets considered a form of gambling?
Purchasing stock is essentially a wager that the value of the company’s shares will rise. Capital gains taxes are due on the profits when they sell the shares.
A long-term gain is one that can be taxed at 0%, 15%, or 20% if the sale occurs more than a year after the purchase. The rate is determined by taxable income levels; married couples filing jointly who earn $250,000 and individuals earning $200,000 are subject to an additional 3.8% net investment income tax.
A short-term capital gain is regarded as regular income if the selling occurs less than a year after the purchase. This implies that it is subject to the standard income-tax rates of 10% to 37% and is grouped together with other funds, such as wages.
However, the contrast between prediction markets and stock markets may have tax ramifications.
Technically speaking, prediction markets usually entail the buying and selling of “event contracts.” With these financial instruments, one can wager on a “yes” or “no” result.
Buying and selling contracts on prediction markets, according to experts, is essentially speculating on an outcome that is not yet known, such as the outcome of a roulette wheel spin or the winning Super Bowl team. According to experts, the IRS, as the referee for the tax code, may consider wins from prediction markets to be gambling winnings even if they appear to be investments.
Foreman, the tax lawyer, stated, “I just don’t see how it could be different from putting money on a sporting event.” “If you were to get audited by the IRS on this, I think they’d take a hard-and-fast position that this is just like sports gambling.”
This is the development of “an investment vehicle that is like a gambling bet,” according to Wolters Kluwer Tax & Accounting principal federal-tax analyst Mark Luscombe.
The question of whether profits from prediction markets qualify as gambling income is still up for debate, though. “It’s unlikely that these brokers view themselves as gambling establishments. Luscombe expressed uncertainty about the IRS’s perspective on the matter.
“The brokerages seem to seek to contend that it is not gambling – rather, it is a method that can be used to hedge risks, while acknowledging that some may use the contract who are not hedging risks,” he stated.
Fox used a more direct strategy, bringing to mind the adage that something is what it seems if it looks, walks, and sounds like a duck. “The duck test says this is gambling,” he stated.
Requests for comment were not answered by the Treasury Department or the IRS.
What are the gambling tax regulations?
With regard to gambling gains and losses, the IRS has particular regulations. Most significantly, the winnings are treated as regular income rather than a capital gain, which is often subject to a lower tax rate.
There is a caveat to the IRS’s gambling loss tax break: if you wish to take advantage of it, you must itemize your deductions. Only a small percentage of people accept the standard deduction instead of doing that. Moreover, the gambling-loss deduction must be greater than the winnings. To put it another way, a person who won $100 and lost $200 could only deduct $100 for gambling losses.
The fortunate recipient of a payout from a casino or sportsbook might anticipate receiving a tax document known as a Form W-2 G. According to the IRS, it is typically issued when winnings reach at least $600 and at least 300 times the wager amount.
According to Luscombe, the gambling establishment may withhold 24% of the earnings after they reach $5,000 and are at least 300 times the wager amount. He pointed out that the 24% is a withholding amount, similar to wages withheld from a paycheck, rather than a tax rate. Together with the remainder of an individual’s income picture, the amount of taxes still owed or due back is finally calculated at tax time.
Another trap is that the exchanges and prediction sites claim to be sending out 1099 forms, which are a separate document designed to report revenue from investments rather than gambling. ForecastA representative for the company stated this month, for instance, that it is “required to issue Form 1099 to any trader, resident in the U.S., who has a net profit of $600 or more in any calendar year.”
According to the spokesperson, net profit is the amount that remains after losses, trading costs, and withdrawal fees are deducted from gross profit. The accounting team at PredictIt “is working on [the tax forms] now.”
Events contracts will be reported as “miscellaneous income” on a 1099, according to Robinhood’s website. The money would be recorded for 2025 reports submitted the following year if the real payment was received this year. On the other hand, the proceeds from the purchase and sale of an event-contract position last year would be shown on the 2024 tax return that was submitted this year.
According to a Kalshi representative, the business “provides a statement for users with their history similar to a 1099-B they would receive from their stock broker.”
Interactive Brokers stated to MarketWatch: “We will be reporting on a 1099, but provide no guidance as to how the client should report this on their tax return as the client should consult a tax professional.” Through ForecastEx, a subsidiary, the brokerage provides event contracts.
Brokers must provide these 1099 forms to recipients by February 18th in order to record their 2024 gains.
Foreman and Luscombe speculate that the IRS may not care that wins from prediction markets are displayed on a 1099 rather than the W-2 G provided by casinos and sports betting websites. The IRS is discovering that someone has taxable income to declare by obtaining the third-party reports from prediction-market websites, they claimed.
According to Luscombe, the money from the prediction market is taxed as regular income, regardless of whether it is a short-term financial gain or wins from gambling.
However, Fox pointed out that it would be crucial to ascertain if the IRS would categorize the revenue as gambling wins as opposed to investment income. Instead of reporting their gains on a 1099, his professional gambler clients have done so on their Schedule C form, which tracks business revenues and losses.
According to Fox, many prediction-market profits may remain below $600 and not result in the issuance of a tax form. However, “absolutely, positively no rule that says if you don’t get a tax form, you don’t have to report [the income],” he stated.
Fox said that amateurs who have won money in the prediction market may choose to declare it using a Schedule 1 document that is attached to the main tax return form. People may theoretically record their profits, even those under $600, in the gambling and other income lines, he said.
What occurs if you fail to notify the IRS of your prediction-market income?
Even if they haven’t received tax forms and their victory is substantial, what if someone wishes to take a chance and choose not to report their prediction-market income?
These unreported winnings “may escape detection given the low audit rates [of taxpayers] by the IRS,” according to Luscombe. nevertheless, “audits of gambling institutions may be more likely and produce information about those who received gambling winnings,” he stated.
According to Foreman, prediction markets are just another area where taxes and life mix that should use further clarification from the IRS. He pointed out that there is still a fundamental guideline for those winnings: “The most important thing is to put it on your return.”
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