US tax loophole may give prediction markets an edge over sportsbooks

American sports bettors may have found an incentive to switch from sportsbooks to prediction markets, according to a leading US finance news outlet.

Gambling winnings from traditional sportsbooks such as DraftKings and Flutter-owned FanDuel are treated as ordinary income by the Internal Revenue Service (IRS) and taxed at a bettor’s standard rate, according to current US tax law.

By contrast, sports event contracts offered on prediction markets – which can closely resemble sports bets – are, for now, subject to the tax rules governing futures contracts and options, including so-called straddles, because the IRS has not issued guidance stating otherwise.

Under those rules, gains are taxed at a blended capital gains rate: 60 per cent at the lower long-term capital gains rate and 40 per cent at the higher short-term rate. For many taxpayers, that blended rate is significantly lower than the tax applied to gambling winnings.

“The tax treatment of gambling differs from the tax treatment of contracts and straddles, even though the underlying act is still gambling,” Nicole DeRosa, director of tax at SKC & Co., told Barron’s, the News Corp-owned investment publication. “That’s the loophole.”

Sports event contracts only became available in 2025, and the IRS has yet to publish formal guidance on how profits should be taxed. 

The disparity between sportsbook betting and event contracts grew more pronounced after Congress passed the GOP-backed One Big Beautiful Bill Act, which reshaped several areas of the tax code.

The IRS is not the only regulator facing questions over the status of sports event contracts. 

The Commodity Futures Trading Commission, which oversees futures markets, regulates event contracts but has not definitively ruled on whether sports-related contracts should be considered gambling.