IRS’s World Cup Prediction Market Stance Leaves Crypto Traders in Tax Limbo
The IRS still has not said whether World Cup prediction markets count as gambling for tax purposes, which leaves crypto traders with a real mess. Two people can wager on the same match and report it in completely different ways. One calls it an investment. The other calls it gambling. Same trade, different tax story. That is not just paperwork. It can change the tax bill.
The question sounds simple: are prediction market contracts investments, or are they bets? My take: the simple version is exactly where people get trapped. U.S. tax law usually treats investments better. If the IRS puts these contracts in that bucket, traders may be able to deduct full losses and get a lower rate on some gains. Gambling is harsher. Loss deductions are limited, and the math gets ugly fast. Why does this matter? Because for anyone using crypto to fund or settle these trades, the label may decide whether a profitable World Cup trade feels fine in April or turns into a nasty surprise.
Platforms such as Kalshi say they are not running ordinary betting markets. They say users buy and sell fixed financial contracts tied to future events. Kalshi argues that its markets look more like trading venues than casinos. It rejects the “casino” label and says its products are futures contracts regulated by the Commodity Futures Trading Commission (CFTC). The contracts settle at fixed values depending on whether a listed event happens. Most guides stop there and treat the CFTC point like the whole answer. That’s only half right. That argument matters because financial contracts may get better tax treatment under IRC Section 1256.
Critics care less about the label and more about what the customer is doing: putting money on an uncertain future result and getting paid if the prediction is right. I’ll be honest: this is the part I find harder to wave away. Courts and the IRS have used that kind of plain meaning analysis before. Names do not always carry the day. According to White & Case, gambling proceeds fall under IRC Section 61 as ordinary taxable income, while IRC Section 165(d) limits gambling loss deductions to the amount of winnings. For U.S. taxpayers, the rule gets worse starting with the 2026 tax year. Under the One Big Beautiful Bill Act, only 90% of gambling losses can be used against winnings. Yes, someone could break even and still owe tax. Absurd, but possible.
Section 1256 is the prize here because it uses yearly mark to market accounting and gives net gains a 60/40 split: 60% long term, 40% short term, even for short holding periods. It works. Sometimes. That can mean a lower tax bill than ordinary income treatment, especially when the alternative is ordinary income plus constrained loss deductions. But a CFTC connection does not automatically unlock Section 1256. According to Monaco CPA, the contract must trade on a qualified board or exchange. Registration with the regulator, by itself, is not enough. Some of these products have been described as “binary options,” and the CFTC treats binary options as swaps. That matters because Section 1256(b)(2)(B) excludes certain swaps from the 60/40 rule. Counter to the usual advice, “regulated by the CFTC” is not the same as “gets 60/40 tax treatment.” Crypto traders know this story too well: one regulator sees a commodity. Another sees a security. The taxpayer is stuck guessing.
The IRS has been much clearer on other World Cup tax issues than it has been on prediction markets. On April 1, the agency issued instructions for withholding agents handling the 30% withholding requirement on U.S. source compensation paid to foreign athletes and entities. On June 10, it reached an agreement with the Canada Revenue Agency over revenue earned by players and teams. Prediction markets got no comparable guidance. That gap matters because crypto users often arrive early on these platforms. They are used to gray areas, but gray areas still create audit risk. Is this overkill for a few trades? Maybe. For active traders using stablecoins, staking proceeds, or crypto derivatives alongside event contracts, no. Institutions notice that uncertainty too, and they tend to slow down when the tax treatment is foggy.
What this means
The IRS problem with World Cup prediction markets comes down to a familiar headache: some products look like trading on paper and betting in practice. I would not treat that as a philosophical debate; I would treat it as a return-prep problem. For crypto investors, that means more uncertainty and possibly higher tax bills than expected. A future IRS position on these markets could also affect DeFi products that use synthetic assets, event based tokens, or prediction style payouts. Yes, this sounds like it contradicts the “these are financial contracts” argument above. Bear with me: tax treatment often follows function after the labels run out of road. If a platform looks like betting, even when it settles in crypto, traders should be ready for ordinary income treatment and tight limits on loss deductions. That can shrink returns quickly.
Crypto investors should watch for direct IRS guidance on prediction markets because it may become the template for similar crypto products. CFTC statements matter too, since the IRS may look at how the contracts are classified. Broader digital asset tax bills are worth tracking as well. If Congress gives clearer definitions for crypto assets as commodities, securities, or something else, prediction market gains will probably get pulled into that framework. My practical read: do not build a tax position around the friendliest possible interpretation unless a professional has actually stress-tested it. Until then, the conservative move is boring but practical: assume tougher tax treatment, keep clean records, and talk to a tax professional who actually understands digital assets.