Is It Gambling or Not? IRS Urges Public to Stick With State-Licensed Betting Platforms

The line between gambling and investing has never been murkier, with federally regulated prediction markets increasingly resembling sportsbooks.

Yet the Internal Revenue Service (IRS) is telling Americans to stick with state-licensed betting platforms when gambling. With prediction markets licensed by the federal government, the IRS directive could leave consumers wondering: Is it gambling or not?

Ahead of the football season, the busiest time of the year for sports betting, the IRS is reminding the public that illegal gambling is often linked to other crimes, including money laundering.

“Illegal gambling isn’t just about placing unlawful bets. Our investigations routinely uncover money laundering and tax crimes tied to illegal gambling operations. Following the money allows us to dismantle larger criminal networks,” said IRS Criminal Investigation Chief Jarod Koopman.

Attorneys General: Prediction Markets Are Illegal Gambling

The IRS notice warns taxpayers to “steer clear of illegal gambling operations.” Numerous state attorneys general say sports prediction markets are running just that—unlicensed, illegal gambling.

“No matter what they call themselves, prediction markets are gambling platforms, plain and simple. By ignoring our laws, prediction markets are running illegal operations,” said New York Attorney General Letitia James.

However, the federal government, through the Commodity Futures Trading Commission (CFTC), continues to assert its exclusive jurisdiction over trading on sports prediction markets. The CFTC says sports trading is not gambling but an “innovative” financial product.

The IRS advisory discusses risks of engaging with offshore sportsbooks—not prediction markets—but does include language about the risks of “crypto-based gambling platforms” that “attract anonymous users by avoiding Know Your Customer protocols and financial reporting obligations.”

Some major prediction markets are crypto-based and therefore provide traders with a degree of anonymity.

Winnings Must Be Reported

Regardless of how one bets, the IRS says all winnings must be reported to the revenue service for tax purposes.

“Make sure to report all gambling winnings as taxable income to avoid civil and criminal penalties from the IRS. Sports enthusiasts who are unsure about their tax obligations or have questions about reporting gambling income are encouraged to consult tax professionals or visit the official IRS website for guidance. Ignorance of the tax law does not exempt individuals from their responsibilities,” the notice read.

A tax change that came through the Republicans and President Donald Trump’s One Big Beautiful Bill is that gamblers can now only deduct up to 90% of their losses against their winnings for federal tax purposes.

That means a bettor who loses $100,000 gambling during the year but also wins $100,000 would still need to pay federal taxes on $10,000.

The IRS has not yet issued official rules on tax reporting procedures for revenue from prediction markets. Tax professionals remain unclear on whether such income should be reported as gambling winnings, capital assets, or earnings from financial derivatives.

Schutz said that for most people, filing prediction market earnings on Form 6781—gains and losses from non-equity options, foreign currency contracts, and futures contracts—will likely “result in the least amount of tax.”