They look like derivatives contracts, but act like gambling bets. They are prediction contracts– one of the fastest growing trading sectors despite conflicting regulatory frameworks, no clearcut taxation rules, unique operating policies, and rumors of insider trading.
A 2025 Keyrock-Dune analysis of the global prediction market industry puts Polymarket, operating strictly overseas at the time, in the lead accounting for USD$21.5 billion of the US$44 billion market with rival Kalshi trailing at USD$17.1 billion. While Polymarket and Kalshi combined reflect 99 percent of the prediction market, smaller rivals have recently emerged such as cryptoplatforms Coinbase, Gemini, and Crypto.com, which on February 3, 2025, announced the launch of a new standalone prediction platform called OG. Last year, Robinhood partnered with Kalshi to list event contracts inside its hub and has now set up an independent derivatives exchange and clearinghouse through its acquisition of MIAXdx. The move allows Robinhood to expand from routing event contracts elsewhere to listing and clearing them on its own. Meanwhile, in December 2025 derivatives exchange giant CME Group has teamed up with sports betting platform FanDuel to bring regulated CME-listed prediction contracts to FanDuel’s U.S. retail base through the FanDuel Predicts front-end platform. Interactive Brokers offers a prediction market called ForecastEx and was recently reported to be backing another one known as Lumina.
While active retail traders remain the prominent players in prediction markets, they appear to be at the cusp of institutional investment with proprietary trading desks showing the greatest potential. A November 2025 study on global proprietary trading by London-based research firm Acuiti indicates that 10 percent of all prop traders surveyed were already trading prediction contracts, while 35 percent had an interest. Activity appears highest among U.S. firms where 75 percent of respondents were either trading prediction contracts or will do so. That compares to 37 percent of European peers. Yet another study, conducted in January 2026 by research firm Crisil Coalition Greenwich, among U.S. buy-side, sell-side professionals, analysts, and technology firms found that 43 percent of respondents had a favorable view of the role of prediction markets in the financial system. About 60 percent said that their data — including prices, implied odds, volume and positioning — could supplement traditional market indicators to be used for macroeconomic analysis or hedging strategies.
Despite the growing appeal of prediction contracts, without a clear resolution on who governs prediction markets, uptake from mainstream players will remain lukewarm. Trading desks strive for higher investment returns, but compliance directors crave legal certainty. That is what prediction markets lack as a turf war has emerged between state and federal regulators. Proprietary trading desks also say that prediction markets bring unique obstacles for risk management and trade execution. “Event contracts are similar to binary options in their risk profile requiring unique methods to manage risk compared to traditional underlyings,” wrote Acuiti in its research report. “Firms also face the challenge of how to model non-financial underlyings with limited data sets.” Acuiti cited the following example- while firms can model predictions on where the S&P index will finish on a specific day — or the score the cubs are likely to get– there is no data available on which a firm can model the likely date for Taylor Swift’s wedding. Firms trading in prediction contracts also reported an inability to trade in size and wide spreads. In its report, Crisil Coalition Greenwich noted that limited liquidity and inconsistent participation were obstacles to growth. Without depth and participation, prediction markets may not win institutional trust. Prediction markets must demonstrate repeatable actionable forecasting value rather than entertainment-driven volatility.
Several U.S. states are trying to shut down the burgeoning prediction platforms, while the Commodity Futures Trading Commission (CFTC) has taken the lead among federal agencies to mandate prediction markets follow its rules under the Commodity Exchange Act. Massachusetts is the only state to successfully win an injunction to either partly or entirely stop Kalshi’s operations. Details on the extent of the shutdown have yet to be finalized. Because it didn’t resurface in the U.S. until late 2025, Polymarket has successfully evaded state intervention. However, the Nevada Gaming Control Board on January 16, 2025, filed a civil enforcement action in state court, making it the first lawsuit filed against Polymarket’s U.S. affiliate seeking to ban its operations unless it receives a state gambling license. Polymarket was just ordered to stop offering event contracts in Nevada temporarily. (In late 2025 Kalshi had a similar ruling and has appealed the decision to the Ninth CIrcuit Court of Appeals). According to company statements issued in late 2025, Crypto.com does not offer sports event or other event contracts in Arizona, Michigan, Maryland, Massachusetts, Illinois, Nevada, New York and Ohio. U.S. traders are prohibited from using Polymarket’s foreign (non-U.S.) platform and access for foreign traders to Polymarket’s overseas platform depends on a country’s regulations; it ranges from outright banned to allowed without the platform’s legal recognition. Among the countries which prohibit trading on Polymarket are Australia, France, Germany, and the U.K.; Denmark, Greece and Spain permit it. (A full list of restricted overseas markets can be found here). Late last year, Kalshi announced it would expand to 140 overseas markets, with Brazilian co-founder Luana Lopes Lara highlighting her home country as a potential opportunity. However, there is no official confirmation that Kalshi is actually operational in any foreign country.
To combat state interference, top players in the prediction market have formed a new national lobbying group — the Coalition for Prediction Markets — promoting federal oversight. Led by Crypto.com, members include Coinbase, Kalshi, Robinhood, and Underdog. On January 28,2025, the organization launched the opening salvo of a media campaign aimed at pushing for codification of federal regulation of prediction markets. The group’s one-page ad in the Washington Post highlighted support for CFTC-governed domestic markets and sought to distance its members from offshore markets, such as Polymarket, which has been the focus of speculation about insider trading. A trader earned USD$410,000 in profit on multiple initial wages totaling between USD$32,000 to USD$34,000 after predicting former Venezuelan President Nicolas Maduro’s downfall just hours before he was captured by U.S. military forces on January 3, 2025. Only a handful of government officials and media outlets knew of the potential arrest in advance.
Regulatory Debate
The crux of the regulatory battle over whether the CFTC or individual states should govern prediction markets is how to categorize them due to their unique nature. The question at hand is whether they are selling financial contracts or gambling bets, and the answer depends on the respondent. Prediction markets are on-line trading platforms where buyers bet on the outcome of economic, political, sports or other events. There are multiple flavors such as binary, multiple selection, continuous, and conditional. In the most popular type — binary markets — investors choose between one of two outcomes. Those are either yes or no with contract prices reflecting the probability of each scenario. Prices range from zero to USD$1. A contract of thirty U.S. cents reflects a thirty percent chance an event will occur. The outcomes are all or nothing propositions with zero reflecting a loss and US$1 reflecting a correct decision. Multiple selection contracts allow for more than two possible results while continuous forecasting markets are priced on numerical results such as how high or low Bitcoin will reach this year. Conditional prediction markets forecast outcomes under certain conditions.
Those in support of prediction markets– namely traders and the platforms themselves — argue that unlike gambling venues, they rely on the collective opinion of investors and offer types of swap contracts. Therefore, as financial derivatives, they should fall under the CFTC’s jurisdiction based on the provisions of the CEA. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, expanded the CFTC’s oversight of binary event contracts, classifying many to be swaps. Detractors, namely state gambling regulators, counter that the CEA does not displace state authority when it comes to betting. Prediction contracts are not swaps and should be governed by state regulators as gambling venues because investors stake money on uncertain outcomes. Critics draw the comparison to casinos where the “house” acts as the banker to extract fees and maintain a competitive edge. The role of the “house” in prediction markets, state regulators claim is played by market makers — a stance prediction market operators vehemently deny. Naturally, states stand to gain financially by controlling prediction markets as they can generate significant income from taxing sports betting. New York State, the largest sports-betting market in the U.S. taxes online gambling revenue at 51 percent. In 2025 that generated over USD$1 billion in tax revenue for the state.
Just days before Super Bowl 60 on February 8, 2025 New York’s Attorney General Leticia James and CFTC’s Chairman Michael Selig publicly highlighted the divergent interpretations of how prediction markets must be governed. On January 29, Chairman Selig ordered agency staff to withdraw a 2024 rule proposal to ban event contracts related to sports and politics. He also directed staff to rescind a 2025 advisory that urged prediction markets to exercise caution over offering sports related contracts and said the regulatory agency would issue new rules specific to prediction markets. While not citing any specific state lawsuits against prediction markets, Chairman Selig said his agency would defined its exclusive jurisdiction over the industry. Any new rulemaking will likely require the CFTC to re-interpret the governing provisions of the CEA. The CFTC’s permissive signal has done nothing to eliminate state-level resistance. On February 2, NY AG James issued a warning that prediction markets are susceptible to insider trading, operate without consumer protection and pose financial risk. “Treat these prediction markets as high risk, no guarantee of returns, and no guarantee of access to funds.”
A bill in the New York Assembly known as the ORACLE Act (A9251), if passed, would prohibit prediction markets from offering contracts on “sensitive matters” such as elections, sports events, wars, natural disasters and other “sensitive events” without a state gambling license. A separate friendlier measure in the Senate, known as the Prediction Market Regulation Act (S8889), would require any operator of a prediction market to obtain a state license to operate under the jurisdiction of the New York Department of Financial Services. That means it would have to follow strict financial disclosure, consumer protection, and anti-money laundering rules while being subject to audits. As the legislative battle rages, the prediction markets themselves are betting on the outcome in New York with the odds dropping for passage of the ORACLE Act after the Prediction Market Regulation Act was introduced on January 16, 2025. Legal experts predict that both bills could be dead in the water should the Southern District of New York rule in favor of Kalshi in its October 2025 lawsuit to prevent the New York State Gaming Commission from imposing state-level gambling regulations. A decision is expected in late February.
While Kalshi and Polymarket encounter state controversy, their past tumultuous relationships with the CFTC appear to have been resolved. Kalshi was approved by the CFTC back in 2020 as a “designated contract market,” which, among other things, allows it to self-certify and offer event contracts governed by the CEA. However, in 2024 Kalshi was forced to challenge the CFTC’s attempt to prevent it from offering political event contracts. Kalshi subsequently won the battle in federal district court in Washington, D.C, and in May 2025 the CFTC dropped its appeal. For the most part, Kalshi has defeated state intervention, after federal district courts ruled that the CEA supersedes state statutes. The decision by Superior Court Judge Christopher Barry-Smith in Suffolk County in Massachusetts blocking Kalshi from accepting sports-related contracts from Massachusetts residents without a state gaming license marks the strongest judicial rejection so far of Kalshi’s claim that its federal registration with the CFTC preempts state gambling laws.
Launched in June 2020, Polymarket never obtained any regulatory approval in the U.S. and in January 2022, the CFTC decided to fine it USD$1.4 million for operating as an unregistered swap contract market. The platform ceased U.S. operations and was only able to restart U.S. after the Federal Bureau of Investigation, Department of Justice and CFTC ended their investigations. Polymarket’s resurgence in the U.S. was expedited after it bought QCEX, a CFTC-licensed derivatives exchange and clearinghouse for USDS$112 million last year, creating an immediate CFTC-compliant structure. The Intercontinental Exchange subsequently made a USD$2 billion investment valuing Polymarket at close to USD$9 billion. Polymarket has yet to announce when a full U.S. public launch will occur after it began rolling out a separate U.S. app for U.S. traders which now has a waiting list of 177,000 positions as of December 2025 based on user reports. No updated official figure been published. (A detailed explanation of Polymarket’s US operations can be found on its separate U.S. website where potential users can sign up). Kalshi’s total funding, after several rounds, comes to over USD$1.6 billion following a USD$1 billion Series E round led by Paradigm which valued Kalshi at USD$11 billion.
For traders on prediction markets, the battle between U.S. federal and state control is not academic. It is unclear what would happen to transactions in process if a prediction market were forced to shut down by a state regulator while trading on a contract occurred. CFTC-regulated such as Kalshi and Polymarket are required to segregate their funds from investor funds in a derivatives clearing organization. Therefore, investors would not lose their funds. “There are questions about whether existing contracts will be processed in accordance with the contract rules once the event occurs or if the contracts will be voided and the funds returned to their respective trading parties,” explained Andrew Kim, a partner with the law firm of Goodwin Procter in Washington, D.C. “There are also questions about whether traders will be permitted to take more of an existing position or conversely sell it.” A decision by Massachusetts Judge Barry-Smith regarding Kalshi will likely set a legal precedent for other states. He has indicated that he will not force any Massachusetts resident to liquidate positions on Kalshi, but traders cannot buy additional contracts.
Tax Uncertainty
For investors willing to take a legal chance on trading in prediction contracts, tax ramifications must also be considered. Because the Internal Revenue Service has not issued any ruling on how to treat capital gains and losses from prediction market contracts, taxpayers are left to make a best effort by following one of three different accounting interpretations. One popular school of thought among tax experts is that prediction market contracts should be treated the same as stocks and bonds with losses offsetting gains. Traders with an overall capital loss for the year can deduct up to USD$3,000 each year with the ability to carry additional losses forward to later years. A second proposed methodology would be for prediction markets to be taxed as gambling with losses also offsetting gains. However, the new One Big Beautiful Act (OBBA) will allow only 90 percent of gambling losses to offset any gains in 2026. A third option under IRS Code Section 1256 — considered a longshot — would be to allow 60 percent of any capital gain to be considered a long-term gain and 40 percent a short-term gain. “Although the Coalition for Prediction Markets seems to be pushing for the IRS to treat income and losses from prediction contracts as 60 percent long term gains and losses and 40 percent short-term gains and losses under IRS Code Section 1256, traders should probably not take that approach unless the IRS takes action to specifically add these prediction contracts as eligible for such treatment under Section 1256,” cautioned Mark Luscombe, a principal analyst for Wolters Kluwer’s Tax and Accounting practice in Riverwoods, Illinois.
Despite the lack of clarity on tax methodology from the IRS, tax accountants are urging taxpayers to report their profits and losses from event contracts. “Treatment as short-term capital gains and losses taxed as ordinary income seems to be the most common suggestion,” explained Luscombe. “Doing so could result in some tax advantage compared to reporting the transactions as gambling gains or losses.” Taxpayers should also not depend on prediction platforms to do the tax work for them and must be proactive to prove their decisions are consistent and well-documented. Neither Polymarket nor Kalshi provide taxpayers with 1099 forms for gains and losses. “Traders should retain complete platform trade histories, settlement records, account statements and valuation,” recommended Patrick Camuso, managing director of Camuso CPA, an accounting firm specializing in crypto-taxation in Charlotte, North Carolina. “For crypto-settled platforms the data should include wallet addresses, transmission hashes, timestamps, and reliable price sources.” Neither Polymarket nor Kalshi provide traders with 1099 forms detailing capital gains and losses.
Operational Quirks
For traders deciding whether to rely on Kalshi, Polymarket, or another prediction market, differences in accessibility and fees might also impact investment strategy. Kalshi’s platform seems to be the easiest choice because it has a well-established U.S. infrastructure; it can be accessed directly through an App with payments made to Kalshi in U.S. dollars by using a bank account, credit card or debt card. Alternatively, traders can rely on an intermediary futures commission merchant (FCM) which will charge additional fees. Polymarket’s new intermediated CFTC-approved model in the U.S. allows trading access only through registered brokerages or FCMs with trades executed in U.S. dollars. (A November 2025 press release indicated that PricePicks would be an FCM for Polymarket’s U.S. platform. PrizePicks, which has activated its FCM relationship with Kalshi, would not specify when its affiliation with Polymarket would go live.
Kalshi’s fees vary depending on the price of the contract, whether a trade is a taker or maker, and the number of contracts. A taker order must be executed immediately, while a maker order can be executed later. Kalshi’s fee, assessed each time a contract is bought or sold, ranges from under one percent for a notional value at extreme prices (for contract prices of near one cent or 99 cents) to about 3.5 percent for a contract at 50 cents. Additional processing fees are charged for using debit cards and cash withdrawals. Polymarket’s U.S. platform will charge a flat taker fee of 0.10 percent value of a contract for most taker orders. (The international platform has taker trading fees only for 15-minute crypto contracts which vary depending on the share price but will not exceed 1.56 percent of the price).
Unlike U.S. stocks and bonds where settlement of transactions must occur one day after a trade is made, Kalshi and Polymarket will settle contracts only after the outcome of the event takes place. The rules of engagement — or what constitutes settlement– depend on the terms of each type of event and are outlined by each firm in their documentation. Kalshi settles the outcome of an event by relying on a CFTC-designed source for each type of event using a centralized market team with the result taking anywhere from a few hours to up to a day Polymarket also relies on a CFTC-designated source, but its Universal Market Access (UMA)-optimistic Oracle approach (a blockchain-based system) generates the results in a matter of minutes by allowing smart contracts to request and verify real-world information when it’s needed. (A detailed explanation of how the process works can be found here). It could take at least a day to receive any funds from Kalshi. However, traders receive their funds immediately from Polymarket after the outcome of an event has been resolved.
While U.S. traders decide whether prediction market contracts are worth the gamble, it could be up to the Supreme Court to decide their regulatory status. There is concern that ultimately federal appellate courts could end up with differing opinions making the situation ripe for review by the U.S.’ highest court. “It could take another two to three years before a case on prediction markets makes its way to the Supreme Court, but it will eventually happen,” said Kim. Until that occurs, traders in prediction markets should take the legal, tax, and operational challenges under consideration. As is the case with all investments, caveat emptor applies.
Chris Kentouris
New York City
KentourisC@gmail.com
917.510.3226
This article is not aimed at offering legal, financial, investment, or tax advice or at promoting prediction markets. Prior to making any decisions, please consult with legal, financial, investment, and tax experts. The author does not hold any prediction contracts or cryptocurrencies.
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