The IRS has not decided whether wagers on prediction markets are gambling, leaving people trading World Cup contracts without a settled federal tax treatment as the tournament continues. The question affects whether those proceeds count as gambling income, capital gains, or income from Section 1256 contracts.

Kalshi and Polymarket have drawn billions of dollars in wagers around the 2026 FIFA World Cup. The agency has issued no formal guidance saying whether those event contracts belong under gambling rules or financial-derivatives rules.

The uncertainty carries a direct cost under the One Big Beautiful Bill Act, signed into law on July 4, 2025. For tax year 2026, filed in 2027, the law limits gambling-loss deductions to 90% of losses against gambling winnings.

A break-even bettor could still owe tax. Someone who wins $10,000 and loses $10,000 would have $1,000 of income left under the new calculation.

The classification question remains open as federal and state authorities take different positions. The Commodity Futures Trading Commission has moved toward treating the platforms as derivatives exchanges, while at least 17 states are suing the federal government to have them treated as gambling operations.

The agency’s silence leaves three potential reporting paths in circulation. Each produces a different result for a person who buys and sells contracts on a team, match, or tournament outcome.

The 90% limit can create income without a net profit

The new deduction rule applies starting January 1, 2026. A person whose losses equal winnings may still face taxable gambling income because only nine-tenths of the losses can offset the winnings.

That result is often called “phantom income.” The term describes the $1,000 remaining after $10,000 in winnings and $10,000 in losses, not a separate payment from the market.

The tax result could change if the contracts receive investment treatment. Under that approach, users could potentially offset 100% of their losses against gains, avoiding the deduction limit created by the new law.

No classification has been announced. That leaves the treatment of transaction records, proceeds, and losses dependent on the category eventually applied to the contracts.

The IRS Bulletin 2026-19, dated May 4, 2026, outlines reporting thresholds connected to the new law. It does not resolve whether event contracts are gambling or investments, according to the material available for the issue.

The derivatives regulator is moving while tax officials remain quiet

CFTC Chairman Michael Selig proposed rules on June 10, 2026, that would regulate prediction-market platforms as derivatives exchanges. He framed the approach as oversight paired with continued market development.

“The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation.”

Selig’s proposal does not settle the federal income-tax question. A derivatives regulatory framework and an income-tax classification can affect the same transaction in different ways, leaving traders to track both issues while the rules develop.

The dispute has also moved into court. At least 17 states argue that the platforms are “nothing but good old-fashioned gambling” and belong under state gaming commissions rather than federal commodities law.

That state-federal fight could influence how the contracts are regulated. It does not by itself provide taxpayers with a final reporting rule for 2026.

Nonresident winners and professional traders face different exposure

Foreign visitors who win on U.S.-based prediction markets could face a 30% withholding tax if the proceeds are classified as U.S.-sourced gambling winnings. The potential withholding rate therefore turns on the same unresolved classification question confronting domestic traders.

Professional bettors face a separate margin problem. High-volume traders have described the loss-deduction cap as an existential threat to their business economics, and many are considering moving operations outside the United States.

The distinction between gambling and investment treatment also affects how traders measure performance. A person making repeated trades may show money moving in and out of an account while still ending the year near break-even, yet the 90% limit could leave part of the gross result exposed if the activity falls under gambling rules.

The tax year now underway is the first one affected by the deduction change. Records showing each contract, amount, result, and loss may become important when taxpayers prepare returns for tax year 2026, filed in 2027.

Congress is addressing conduct in the markets, not their tax category

Lawmakers introduced the bipartisan Public Integrity in Financial Prediction Markets Act of 2026 in July 2026. The measure would ban government employees from using insider information to place bets in the markets.

That proposal targets public-sector trading conduct. It does not answer whether a private participant’s winning contract is gambling income, a capital gain, or a Section 1256 result.

The unresolved treatment reaches beyond the final amount of tax. It also affects withholding for nonresident visitors, loss calculations for frequent traders, and the records needed to support a return.

The CFTC proposal, the state lawsuits, and the new deduction limit are all operating during the ongoing tournament. Taxpayers may therefore have to report 2026 activity before the regulatory dispute produces a single classification.