The CFTC Just Asked Whether Prediction Markets Are Gambling: What the New Rulemaking Means for Your Taxes

What Did the CFTC Just Do and Why Should Prediction Market Traders Care?

On March 12, 2026, the Commodity Futures Trading Commission did something it has been avoiding for eighteen years.

It formally asked the public how prediction markets should be regulated.

The CFTC published an Advance Notice of Proposed Rulemaking (ANPRM) titled "Prediction Markets" in the Federal Register (91 FR 12516, RIN 3038-AF65). The document contains 40 detailed questions covering market manipulation, margin trading, insider information, contract classification, and the definition of "gaming." The same day, the CFTC's Division of Market Oversight issued Staff Letter No. 26-08, a non-binding advisory reminding designated contract markets of their existing regulatory obligations -- with pointed new language about sports contracts specifically.

Chairman Michael S. Selig, who is currently the sole sitting CFTC commissioner (all four other seats are vacant following the departure of Acting Chair Caroline Pham in December 2025), voted alone to issue the ANPRM. He called it "an important step in the Commission's continued effort to promote responsible innovation in our derivatives markets." On X, he added: "For too long, the CFTC has failed to provide guidance for these markets being used by millions of Americans. This ends today."

The public comment period closes April 30, 2026.

Here is the problem nobody in the prediction market industry is talking about: the CFTC's answers to its own questions will not just determine which platforms survive. They will determine how the IRS treats billions of dollars in trader gains.

For the full guide to the three defensible tax approaches for prediction market income, see the complete prediction market tax guide. For professional filing help, see the prediction market tax services page.

Why Does a Regulatory Document Matter for Your Tax Return?

The Internal Revenue Code does not contain a section titled "Prediction Market Taxes." Instead, the tax treatment of your Kalshi, Polymarket, or Robinhood gains depends entirely on what these contracts are under existing law.

Are they regulated futures contracts? Swaps? Binary options? Gambling wagers? Ordinary income? Each classification maps to a different line on your tax return, a different tax rate, and different loss deduction rules. The difference between the most favorable treatment (Section 1256, ~26.8% blended rate) and the worst (gambling income with the 90% loss cap for 2026+) can be tens of thousands of dollars on the same trading activity.

The IRS has not told you which one to use. The CFTC is now formally asking the questions that will influence those answers.

The CFTC and the IRS are separate agencies with separate statutory mandates. A CFTC classification does not automatically bind the IRS -- Patrick Camuso of Camuso CPA has been emphatic on this point: "Federal regulatory status under the Commodity Exchange Act does not determine federal income tax character." But a formal CFTC determination creates a powerful factual record. If the CFTC says event contracts are swaps, the IRS has strong cover to apply the Dodd-Frank swap exclusion that blocks Section 1256. If the CFTC says sports contracts involve "gaming," the IRS has a federal regulatory data point to classify those gains as gambling income.

No law firm, Big 4 accounting firm, or tax publication has published an analysis connecting the ANPRM's specific regulatory questions to their IRC consequences. As of March 19, 2026, that analysis does not exist anywhere in print. What follows is the first.

What Did the CFTC Withdraw Before Issuing This ANPRM?

Before issuing the ANPRM, the CFTC took a critical preliminary step that most coverage has buried.

On February 6, 2026 (91 FR 5386), the Commission formally withdrew the Biden-era 2024 proposed rules (89 FR 48968, published June 10, 2024) that had sought to broadly prohibit event contracts involving "gaming." Those proposed rules would have categorically banned contracts on political contests, awards shows, and athletic competitions by classifying them as gaming and contrary to the public interest. The same day, the CFTC retracted Staff Letter 25-36, a prior advisory that had cautioned DCMs against offering sports-related contracts during pending litigation.

Chairman Selig characterized the withdrawn proposal as "the prior administration's frolic into merit regulation."

The withdrawal notice cited seven specific federal lawsuits as the reason for reconsideration, including cases in Nevada (State ex rel. Nevada Gaming Control Board v. Blockratize), Illinois (Coinbase Financial Markets v. Raoul), and multiple Ninth Circuit appeals. The Commission acknowledged the need to rethink how the "swap" and "excluded commodity" definitions apply in the context of state-federal preemption disputes.

Why this matters for your taxes: The withdrawal signals the current CFTC leadership does not intend to categorically ban prediction markets. But the ANPRM replaces prohibition with classification -- and the classification outcome could be worse for your tax bill than an outright ban would have been, because it could formally lock in the "swap" designation that blocks the most favorable tax treatment available.

What Is CFTC Staff Letter 26-08 and What Does It Say About Sports Contracts?

Issued the same day as the ANPRM, Staff Letter 26-08 is a non-binding advisory from the Division of Market Oversight to all registered DCMs and all entities that have applied for DCM designation.

The Advisory does not create new rules. Multiple law firm analyses (Mayer Brown, Morgan Lewis, Akin Gump, Dentons) confirm it restates existing obligations under CEA Section 5(d) and Part 38. But the practical effect is significant: it establishes heightened expectations, particularly for sports-related contracts.

What the Advisory says about sports contracts specifically:

The Advisory flags contracts based on the conduct of a single person or small group as heightened manipulation risks, expressly giving sports examples: injuries, unsportsmanlike conduct, physical altercations, and officiating decisions. For sports contracts, the CFTC now recommends DCMs consider communications with the relevant sports league before self-certification, disclosing in the submission whether the contract aligns with league integrity standards, information-sharing arrangements with sports integrity monitoring organizations, using official league data as the definitive settlement source, and cooperating with league-run integrity investigations.

What the Advisory says about the swap vs. futures classification:

This is the most tax-relevant line in the entire document. The Advisory states that event contracts are "a type of derivative contract, often a swap with a binary payoff structure." But footnote 4 adds that depending on structure, an event contract "may be a futures contract or a swap." This confirms the classification question is not settled at the staff level -- which is exactly why ANPRM Questions 33-34 exist.

The bottom line on the Advisory: It does not change current law. DCMs can still self-certify sports contracts. But it raises the bar for what a defensible sports-contract filing looks like, and it signals the CFTC is watching this category more closely than any other.

The Three ANPRM Questions That Will Determine How Your Gains Are Taxed

Question 19: Is This "Gaming"?

The most dangerous question in the entire 40-question ANPRM for prediction market traders is Question 19.

It asks the CFTC to determine the scope of "gaming" under CEA Section 5c(c)(5)(C)(i)(V). Under the Commodity Exchange Act, the CFTC has the authority to prohibit event contracts that "involve gaming" if it determines they are contrary to the public interest.

The ANPRM asks whether gaming is "synonymous with, or more or less extensive than, the scope of activities covered by State and Federal gambling statutes." It asks whether characteristics like "an entertainment purpose, or an element of chance" distinguish gaming from other activities. And it asks the critical sub-question: should "a sports competition be treated differently than an award competition"?

Neither the CEA nor CFTC regulations define "gaming." The now-withdrawn 2024 proposed rule attempted a definition -- "the staking or risking by any person of something of value upon the outcome of a contest of others, a game involving skill or chance, or the performance of one or more competitors" -- that would have swept in sports competitions, political contests, and awards ceremonies. The D.C. District Court took a narrower view in the Kalshi election contracts case, holding that elections are not "games," and the CFTC dropped its appeal in May 2025.

Why Question 19 matters for your taxes:

If the CFTC formally determines that sports event contracts involve "gaming," it creates a federal regulatory data point that the IRS could reference when classifying prediction market gains as gambling income under IRC Section 165(d).

Under the gambling framework, losses are only deductible up to the amount of winnings. And starting in 2026, the One Big Beautiful Bill Act (OBBBA) caps the gambling loss deduction at 90% of total losses. This creates a devastating "phantom income" scenario.

The phantom income math: A trader who wins $100,000 and loses $100,000 on sports prediction markets has zero economic profit. Under the 2026 OBBBA rules, the allowable loss deduction is capped at $90,000 (90% of losses). The trader is taxed on $10,000 of phantom income despite netting zero dollars. If you take the standard deduction, you cannot deduct any prediction market losses at all -- you owe tax on the full $100,000 in gross winnings.

The split classification risk: Question 19 also asks whether different types of contests should be treated differently. If the CFTC determines that sports contracts are "gaming" but economic indicator contracts (Fed rate decisions, inflation data, GDP) and political contracts are not, prediction market traders could face a bifurcated tax landscape.

Under this scenario, a single trader on a single platform could generate gambling income from March Madness bets on Kalshi (reported on Schedule 1, Line 8b, subject to the 90% loss cap) while simultaneously generating ordinary or capital gains income from Fed rate decision bets on the exact same platform (reported on Schedule D or Schedule 1, Line 8z, with full loss deductibility).

This is not hypothetical. Staff Letter 26-08 already singles out sports contracts for heightened scrutiny. Approximately 85-92% of Kalshi's trading volume comes from sports. If sports gets classified as gaming, the vast majority of Kalshi activity falls under the most punitive tax framework.

NJ advantage: New Jersey allows 100% netting of gambling wins and losses on the NJ-1040 regardless of the federal 90% cap. But NJ taxes all gains at ordinary income rates up to 10.75% with no preferential capital gains rate. See the NJ-specific section of the prediction market tax guide for the full analysis.

Questions 33-34: Swap or Futures? The Section 1256 Question.

Questions 33 and 34 ask whether event contracts should be classified as swaps under CEA Section 1a(47)(A) or as futures contracts. The ANPRM explicitly notes in footnote 15 that "futures contracts are specifically excluded from the statutory definition of 'swap.'"

This sounds like regulatory minutiae. It is a multi-billion-dollar tax question.

What Section 1256 gives you: Under IRC Section 1256, "regulated futures contracts" receive a blended 60% long-term / 40% short-term capital gains treatment regardless of holding period. On a $50,000 gain, a trader in the 37% bracket would owe approximately $13,400 under Section 1256 compared to $18,500 at ordinary income rates -- a savings of over $5,100 on that single position. Section 1256 losses can also be carried back three years under Section 1256(h), and wash sale rules do not apply under Section 1256(f)(5).

What kills Section 1256 -- the Dodd-Frank swap exclusion: The Dodd-Frank Act added Section 1256(b)(2)(B) to the Internal Revenue Code, explicitly excluding swaps -- including "commodity swaps" and "similar agreements" -- from Section 1256 treatment. If event contracts are classified as swaps, this exclusion blocks the favorable 60/40 split. Traders would be stuck at ordinary income rates.

Here is the fact that changes the entire tax analysis:

Every event contract currently on file with the CFTC is classified as a swap.

Research across the CFTC's public product filings database confirms that Kalshi (KalshiEX) and Polymarket US (QCEX) file their event contracts as "Swap (Binary Option)" -- not futures. The CFTC's own February 2026 amicus brief in the Ninth Circuit (North American Derivatives Exchange v. State of Nevada) explicitly argued that "event contracts on CFTC-registered DCMs are swaps under the CEA." Chairman Selig's February op-ed stated the same position.

This creates a paradox that no one in the industry has publicly acknowledged: the CFTC is simultaneously the prediction market industry's biggest defender (asserting exclusive federal jurisdiction against state gambling regulators) and the biggest obstacle to favorable tax treatment (by classifying the products as swaps, which triggers the Dodd-Frank exclusion from Section 1256).

The futures reclassification pathway: If the ANPRM process ultimately leads to some event contracts being reclassified as futures rather than swaps, the Dodd-Frank exclusion barrier would be removed. But traders would still face a second barrier.

Under IRC Section 1256(g)(1)(A), a "regulated futures contract" must be subject to a "system of marking to market" -- essentially, daily variation margin where amounts are deposited or withdrawn based on daily price changes. Currently, prediction market contracts are fully collateralized. You pay the full price upfront when you buy a "Yes" or "No" share. There is no daily variation margin. As Camuso CPA notes: "Price movement alone does not satisfy the statutory daily mark-to-market requirement."

ANPRM Question 2f explicitly asks whether prediction markets should be permitted to offer trading on margin. If the CFTC introduces margin trading with daily variation margin, it would address this second barrier. But both dominoes would need to fall -- futures classification plus margin trading -- for Section 1256 to work.

The IRS pattern of narrow construction: Even if both barriers were removed, the IRS has a documented history of reading Section 1256 categories as narrowly as possible. In Summitt v. Commissioner (134 T.C. 248, 2010), the Tax Court held that OTC foreign currency options did not qualify as "foreign currency contracts" under Section 1256(g)(2). The Sixth Circuit reversed in Wright v. Commissioner (809 F.3d 877, 2016) on plain-meaning grounds, but the IRS immediately issued proposed regulations (REG-130675-17) to codify its restrictive interpretation. James Creech of Baker Tilly has warned: "We're going to be using hindsight to tell people what they did wrong."

Any taxpayer claiming Section 1256 treatment for prediction market gains should file Form 8275 (Disclosure Statement) and understand that this position, while arguable, carries meaningful audit risk.

The bottom line on Questions 33-34: The CFTC's current "swap" classification actively undermines the most favorable tax treatment available to traders. These are the most tax-relevant questions in the entire ANPRM -- even though the ANPRM never mentions taxes once.

Questions 29-32: Insider Trading and the Legislative Avalanche

Questions 29 through 32 address inside information. The ANPRM asks whether people with "asymmetric information advantages" should be allowed to trade on prediction markets and whether some events are "under the control of a single individual or small group."

These questions were prompted by the Iran prediction market controversy (where anonymous accounts netted millions betting on U.S. military strikes hours before they occurred), the Venezuelan Maduro capture trades (one Polymarket trader turned $30,000 into $400,000+ approximately 71 minutes before news broke), and growing Congressional alarm about government insiders profiting from their own policy decisions.

The existing CEA already prohibits federal government employees from trading on material nonpublic information (CEA Section 4c(a)(3)). But this provision has never been enforced in the prediction market context. And it does not cover private insiders, corporate employees, military contractors, or anyone outside the federal government.

Five separate bills introduced between March 5 and March 17, 2026:

• End Prediction Market Corruption Act (March 5, Sens. Merkley and Klobuchar) -- bans the President, VP, and Members of Congress from trading event contracts. Civil penalties of at least $10,000 per violation plus disgorgement. - Event Contract Enforcement Act (March 5, Reps. Moore and Carbajal) -- prohibits contracts on sports, terrorism, elections, and government activity. Includes a state opt-out for sports, effectively acknowledging state gaming authority. - DEATH BETS Act (March 10, Sen. Schiff and Rep. Levin) -- permanently prohibits contracts tied to war, terrorism, assassination, or death. - Prediction Markets Security and Integrity Act (March 12, same day as the ANPRM, Sens. Blumenthal and Kim) -- targets insider trading and would reverse CFTC preemption of state gambling regulations. - BETS OFF Act (March 17, Sen. Murphy and Rep. Casar) -- bans contracts on government actions, terrorism, war, assassination, and events where someone controls or knows the outcome.

Why this matters for your taxes: If any of these bills pass, the forced closure of certain contract categories could trigger taxable events for traders with open positions. Additionally, the Prediction Markets Security and Integrity Act would reverse CFTC preemption of state gambling regulations -- meaning states like NJ, Nevada, and Massachusetts could independently classify prediction market activity as gambling for state tax purposes regardless of federal treatment.

What Did Arizona Just Do -- and Why Does It Escalate Everything?

Five days after the ANPRM was published, on March 17, 2026, Arizona Attorney General Kris Mayes filed the first-ever criminal charges against a prediction market platform. The target was Kalshi. The charges: 20 counts, including 16 counts of "betting and wagering" and 4 counts of "election wagering."

This is not a civil lawsuit. This is not a cease-and-desist letter. These are criminal charges.

Chairman Selig responded publicly, calling it "a jurisdictional dispute and entirely inappropriate as a criminal prosecution. The CFTC is watching this closely and evaluating its options."

The Arizona escalation sits on top of an already hostile state landscape. Thirty-four state attorneys general have filed amicus briefs supporting state authority over prediction markets. Massachusetts obtained a preliminary injunction requiring Kalshi to geofence residents from sports markets. Ohio's Chief Judge ruled sports event contracts categorically are not "swaps." Connecticut issued cease-and-desist letters to Robinhood, Crypto.com, and Kalshi on March 11 -- the day before the ANPRM. Michigan's Attorney General sued Kalshi. The Ho-Chunk Nation in Wisconsin filed a federal lawsuit accusing Kalshi and Robinhood of undercutting on-reservation sportsbooks.

The tax risk here is state-level classification. If your state determines that prediction market activity is gambling under state law -- regardless of what the CFTC says at the federal level -- your state return may require gambling treatment even if you report differently on your federal return. NJ is among the nine states that issued cease-and-desist letters to Kalshi. Track this carefully.

How Does the ANPRM Affect Each of the Three Tax Approaches?

For readers of the complete prediction market tax guide, here is how the ANPRM changes the risk profile of each approach:

Approach 1: Section 1256 (60/40 Split) -- Riskier After the ANPRM

The ANPRM makes this position harder to defend, not easier. The CFTC's consistent classification of event contracts as swaps -- reinforced by Staff Letter 26-08, the February amicus brief, and every product filing in the CFTC database -- strengthens the argument that the Dodd-Frank exclusion under IRC Section 1256(b)(2)(B) applies.

Traders using this approach should absolutely file Form 8275 and document their rationale in writing. The position remains most defensible for Kalshi traders specifically, given Kalshi's status as a CFTC Designated Contract Market and its appearance on EY's Section 1256 qualified board or exchange list. But appearance on the EY list addresses exchange status, not whether specific contracts satisfy the full Section 1256 definition.

Do not take this position without professional tax guidance.

Approach 2: Gambling Income -- Arguably Strengthened for Sports Contracts

The ANPRM arguably makes this the most defensible classification for sports-related event contracts. If the CFTC determines that sports contracts involve "gaming" under Question 19, the gambling framework becomes the natural tax treatment. Staff Letter 26-08's heightened scrutiny of sports contracts reinforces this direction.

The major downside is the 2026 OBBBA 90% loss cap creating phantom income for break-even and high-volume traders. NJ residents benefit from NJ's 100% netting rule, which ignores the federal 90% cap on the NJ-1040.

For non-sports contracts (economics, politics, weather, crypto), the gambling classification is weaker. These contracts lack the "entertainment purpose" and "element of chance" characteristics the ANPRM identifies as potential markers of gaming.

Approach 3: Ordinary Income -- Still the Safest

Unaffected by the ANPRM. The IRS is unlikely to challenge a taxpayer for reporting too much income. This remains the recommended approach for the 2025 filing season unless there is a specific, documented reason to take a more aggressive position. If the CFTC's rulemaking or the IRS ultimately clarifies a more favorable treatment, an amended return can be filed within three years to claim a refund.

What Should Prediction Market Traders Do Right Now?

The ANPRM changes nothing today. It is an information-gathering exercise. It imposes no new restrictions, no new reporting requirements, and no new tax obligations. DCMs can continue to self-certify new event contracts. Your 2025 return should be filed under the same framework as before. A final rule is realistically 12-24 months away -- the ANPRM closes April 30, then the CFTC must draft a Notice of Proposed Rulemaking, take another comment period, and issue a final rule. Akin Gump predicts the process "may take a year or longer."

But the ANPRM tells you what the future likely looks like. Here is what to do now:

1. Start tracking gains by contract category. If a split classification emerges -- sports as gaming, non-sports as derivatives -- you will need records showing which contracts were sports-related and which were not. Most platform P&L exports do not break this out. Kalshi's transaction exports store all monetary values in cents, not dollars. Start organizing now so you are not scrambling later.
2. Do not assume Section 1256 treatment is safe. Every event contract on file with the CFTC is classified as a swap. The CFTC's own litigation position says they are swaps. The Dodd-Frank exclusion is a real and serious barrier. If you take the Section 1256 position, file Form 8275 and understand the audit risk.
3. File conservatively for 2025. Unless you are a high-volume Kalshi trader with professional tax guidance, report prediction market gains as ordinary income on Schedule 1 or Schedule C. You will pay more federal tax now. But you will avoid audit risk and penalties. If the IRS later clarifies a more favorable treatment, file an amended return.
4. Consider submitting a public comment to the CFTC. The Commission is explicitly seeking public input. Traders and tax professionals can submit comments through the CFTC Comments Portal (comments.cftc.gov) by April 30, 2026. One thing notably absent from all 40 ANPRM questions: any mention of the tax consequences of the CFTC's classification choice.
5. Watch the Ninth Circuit. Oral arguments in the Nevada/Kalshi case (North American Derivatives Exchange v. State of Nevada) are scheduled for April 16, 2026. A ruling on whether CFTC-regulated event contracts are federally preempted from state gambling laws could come at any time and would significantly affect both the regulatory and tax landscape.
6. Keep meticulous records. Track every trade with date, contract type (sports/economics/politics/other), entry price, exit price, and settlement outcome. If a bifurcated classification emerges, these records will be essential for accurate filing.

The Pending DCM Applications: Who Is Coming Next?

The ANPRM notes that "as of March 2026, Commission staff are reviewing several pending applications for DCM designation from entities with a stated interest in operating prediction markets." It does not name them.

Based on public CFTC filings, pending applicants include Smarkets Board of Trade Exchange (a UK betting exchange backed by Susquehanna, applied March 2026), Ludlow Exchange (affiliated with Novig sports exchange), ProphetX, Sporttrade, Juice Exchange, Water Street Labs, Optex Markets, and several others.

DraftKings is not a pending DCM applicant -- it already acquired Railbird Exchange, an approved DCM, in October 2025. FanDuel operates through a joint venture with CME Group. Crypto.com already has DCM status through CDNA (formerly NADEX/HedgeStreet, designated in 2004).

More platforms means more volume, more contract diversity, and more regulatory pressure to resolve the classification question. It also means the tax ambiguity will affect an increasingly larger population of traders. The IRS cannot stay silent indefinitely.

The Timeline: When Will This Actually Be Resolved?

The ANPRM is the earliest stage of the federal rulemaking process. Here is the realistic path forward:

This timeline could accelerate -- Chairman Selig is acting alone, which eliminates the need for multi-commissioner negotiation -- or it could slow dramatically if litigation outcomes change, Congressional legislation supersedes the rulemaking, or additional CFTC commissioners are confirmed.

The 90-day fast-track mechanism: Under CEA Section 5c(c)(5)(C)(iv), the CFTC can take final action on a "public interest determination" regarding specific event contracts within 90 days. This is a contract-specific tool, not related to the ANPRM. If the CFTC wants to fast-track a ban on specific manipulation-prone sports prop contracts while the broader rulemaking plays out, it can.

Until a final rule is issued, the status quo holds. DCMs self-certify under existing rules. Traders self-report under existing (ambiguous) tax guidance. And the IRS stays silent.

Key Takeaway

The CFTC just started the formal process of answering the question that prediction market traders, CPAs, and tax attorneys have been asking since Kalshi launched in 2021: what are these things?

The answer will determine whether your gains are taxed at favorable capital gains rates under Section 1256, ordinary income rates under Schedule 1, or the most punitive gambling framework in modern tax history under Section 165(d) with the 2026 OBBBA 90% loss cap.

The CFTC's current position -- that event contracts are swaps -- actively undermines the most favorable tax treatment. A "gaming" finding on sports contracts would trigger the worst. And the possibility of a split classification -- sports as gambling, everything else as derivatives -- would create an accounting nightmare without precedent.

No one has connected these dots in print until now. The comment period closes April 30. A final rule is at least a year away. In the meantime, file conservatively, track your trades by contract type, and keep meticulous records.

See the full prediction market tax service page for details, or contact directly.

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