Will Gambling Tax Deduction Cap Spur Migration To Prediction Markets?

Unless it’s repealed, a brand new tax provision capping the losses gamblers can deduct at 90% takes impact on Jan. 1, 2026. Meanwhile, 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.

While debate intensifies about whether trading 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 might be handled as some other CFTC-regulated monetary instrument, not like sports activities wagers, and 100% of losses can be utilized to offset features.

Under the 90% rule, snuck into the One Big Beautiful Bill 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 Rate. “I imagine this tax loss provision goes to incentivize those that are accountable for 80% of regulated deal with to look elsewhere. …

“Next 12 months is a do-or-die second,” Robinson burdened. “If the tax loss provision is just not repealed, prediction markets would be the place people go.”

For what it’s value, there’s only a 12.5% probability the legislation might be repealed earlier than the calendar flips to 2026, based on Kalshi odds as of this writing.

“[Much of my day is] telling my purchasers 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 difficulty steerage on how prediction markets might be handled. But figuring out 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.

“Anyone who understands the tax threat of regulated sportsbook play within the United States, if this isn’t repealed, is determining how you can transfer all of their motion to federally licensed merchandise the place nothing is settled,” Robinson stated. “Accountants usually are not by and enormous recommending their purchasers comply with the OBBB’s tax legal guidelines provisions for occasion contracts.”

This might be, nevertheless, a ‘pay-me-now or pay-me-later’ state of affairs. Several 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 is a solution, but it surely’s sooner or later,” cautions Captain Jack Andrews, a professional gambler, participant advocate and founding father of Unabated. “You can guess nevertheless you suppose it ought to go, and in case you’re mistaken, you pay penalties and curiosity on being mistaken looking back.

“It’s certainly one of these offers the place you’re proper till you’re mistaken, and once you’re mistaken, you’re gonna pay for it.”

The time-frame for a willpower might be prolonged. Tax returns for 2026 usually are not 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 courtroom might be subsequent.

“We will not be 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 courtroom case and a income process come out of this, as a result of for my part, that is going to be sparking crimson flags all over.”

Audit Risk

Russell Fox, one other Vegas-based playing tax specialist, is having the identical dialog together with his purchasers. Fox believes that, primarily based on the “type vs. substance” precept on which the IRS operates, the company will finally determine that buying and selling on prediction markets is certainly playing.

“We have to have a look at what’s the underlying exercise for prediction markets,” Fox defined. “If you’re predicting the result of, oh, let’s simply say, ‘will it rain immediately in Las Vegas,’ … that’s a prediction, that’s a contest. Pretty well-defined. If I’m going to foretell who’s going to win tonight’s basketball recreation … it seems like sports activities betting to me.

“And I believe that’s how the IRS will ultimately – be aware the phrase ‘ultimately’ – rule.”

He added, “The difficulty is sadly going to be – and I do clarify this to all my purchasers – 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 may qualify as (a 1256 contract, as some assume trades on prediction markets do) means it may possibly’t even be wagering.”

One Size Does Not Fit All

Fox and Kondler agree that several types of taxpaying gamblers are handled otherwise by IRS.

“How it ought to be handled will depend upon the person taxpayer, however proper now, most taxpayers can use whichever method is most helpful to them,” Fox stated. “Based on unsettled legislation and the truth that there are numerous totally different doctrines and tax that will most likely permit it, that is going to be a really a lot facts-and-circumstances difficulty for every taxpayer.”

Added Kondler, “There’s gonna be a whole lot of totally different ways in which this revenue could be dealt with, the identical method a gambler can file their tax return 4 other ways – whether or not it’s an newbie gambler, skilled gambler, whether or not they have a partnership or an S company.

“And I believe in an identical 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 might solely be uncovered in an audit. …

“I’m not gonna inform you that I’ve one lifeless set avenue that I need to go down proper now.”

Choosing 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 affordable judgment in regards to the tax therapy of this exercise and proceed to proceed accordingly?”

For his betting group, it’s an apparent selection.

“On my staff, we’re planning for zero – zero – regulated motion subsequent 12 months,” he declared. “We are placing every part, in all of our funding and techniques and processes, into algorithmic, API-based motion with exchanges and prediction markets.

“We’re keen to take that threat. 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 seem like. It means now we have to beat the market by 10% simply to interrupt even. It’s not gonna occur.”

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