The American Gaming Association (AGA) has raised pointed concerns about the tax treatment of sports prediction markets, arguing that platforms operating event-based contracts on sporting outcomes are skirting the regulatory and fiscal obligations that licensed sportsbooks must meet. The trade group contends that this asymmetry is not merely a competitive distortion but a growing revenue problem for state and federal treasuries. At stake is the question of whether prediction market operators, particularly those regulated by the Commodity Futures Trading Commission (CFTC) rather than state gaming commissions, should face the same tax framework as traditional sports betting operators.
Why the AGA’s Tax Warning Carries Weight Right Now
The timing of this intervention is deliberate. Sports prediction markets have expanded rapidly, with platforms like Kalshi securing regulatory clearance to offer contracts tied to the outcomes of professional sporting events. That expansion has outpaced the tax infrastructure designed to capture gaming revenue. Below are the core strategic takeaways from the AGA’s position:
- Revenue leakage at scale: Licensed sportsbooks paid more than $3.5 billion in state and local taxes in 2023. Prediction market platforms, structured as derivatives exchanges, currently face none of these obligations on equivalent wagers.
- Regulatory arbitrage in practice: By classifying sports-outcome contracts as event derivatives rather than bets, prediction market operators avoid state gaming taxes, licensing fees, and responsible gambling mandates.
- The AGA is framing this as a fairness issue, not an abstract policy debate, positioning licensed operators as subsidizing public services while competitors offering functionally identical products contribute nothing.
- Federal ambiguity persists: The IRS treats gambling winnings and investment gains differently. Whether prediction market profits qualify as one or the other remains unresolved, creating a compliance gray zone for consumers and platforms alike.
A Product That Looks Like a Bet but Isn’t Taxed Like One
The core of the AGA’s argument rests on a simple observation: a consumer placing a $50 contract on a team to win a championship on a prediction market is doing something functionally indistinguishable from placing a $50 bet at a licensed sportsbook. Yet the two transactions exist in entirely different regulatory and tax universes.
Licensed sportsbooks operate under state gaming commissions. They pay gross gaming revenue taxes that range from around 10% to over 50% depending on the jurisdiction. They fund responsible gambling programs. They submit to audits, maintain consumer protection protocols, and absorb the cost of compliance infrastructure.
Prediction market platforms, by contrast, operate under CFTC oversight (a distinction regulators have been slow to reconcile with state-level gaming frameworks). They are treated as exchanges facilitating derivatives contracts. That classification exempts them from state gaming taxes entirely.
The result: a market caught between two frameworks, with billions of dollars in potential tax revenue sitting in the gap.
How Large Is the Fiscal Exposure?
Quantifying the exact tax shortfall is difficult because prediction market volume data on sports-specific contracts remains fragmented. But the trajectory is clear. Kalshi reported significant growth in trading volume throughout 2024, and Polymarket, though primarily focused on non-sports events, demonstrated during the 2024 U.S. presidential election cycle that public appetite for event-based contracts is enormous.
| Metric | Licensed Sportsbooks (2023) | Prediction Markets (2023–2024) |
|---|---|---|
| State/local taxes paid | $3.5 billion+ | $0 in gaming-specific taxes |
| Regulatory body | State gaming commissions | CFTC |
| Responsible gambling mandates | Yes, in all licensed jurisdictions | No equivalent requirement |
| Consumer protection audits | Mandatory | Limited to exchange-level compliance, not gaming-specific |
Even modest prediction market penetration into sports wagering could redirect hundreds of millions in annual tax revenue away from state coffers. And the penetration is unlikely to stay modest.
What Regulators and Legislators Face Next
Several state attorneys general have already signaled discomfort with the current arrangement. But jurisdictional complexity makes enforcement messy. The CFTC’s authority over derivatives markets is federal; state gaming regulators lack clear jurisdiction over products classified as event contracts rather than wagers. Congressional action would be the cleanest resolution, though hardly the fastest.
The American Gaming Association’s advocacy on sports betting tax parity is aimed squarely at this legislative gap. The organization has called for Congress to ensure that any platform offering contracts on sporting event outcomes faces equivalent tax and regulatory treatment, regardless of whether the product is labeled a “bet” or a “contract.”
Still, not everyone in Washington agrees on the path forward. Some CFTC commissioners have defended the agency’s jurisdiction over event contracts, arguing that prediction markets serve a legitimate price-discovery function distinct from gambling. Whether that distinction holds when the underlying event is a football game rather than a commodity price is, arguably, the central unresolved question.
The Competitive Dynamics Behind the Policy Fight
Strip away the tax policy language and what remains is a market share battle. Licensed sportsbook operators like DraftKings, FanDuel, and BetMGM have invested heavily in compliance infrastructure, state-by-state licensing, and responsible gambling programs. Those costs are baked into their operating models. When a competitor can offer a nearly identical product without bearing those costs, the competitive imbalance compounds over time.
This isn’t theoretical. Prediction markets are actively marketing sports-outcome contracts to the same consumer demographic that sportsbooks target. The user experience is converging. The tax treatment is not.
For state governments that have built budget projections around gaming tax revenue, the emergence of an untaxed parallel channel is more than an inconvenience. It is a structural fiscal risk that grows with every percentage point of market share prediction platforms capture.
Frequently Asked Questions
Are prediction markets legal for sports events?
Some prediction market platforms have received CFTC approval to list contracts on sporting event outcomes. Legality depends on the specific platform’s regulatory status and the jurisdiction in question. State gaming regulators have not universally accepted these products as falling outside their authority.
Why aren’t prediction markets taxed like sportsbooks?
Because they are classified as derivatives exchanges under federal oversight, not as gambling operators under state gaming law. This classification exempts them from state-level gaming taxes, licensing requirements, and responsible gambling mandates that licensed sportsbooks must satisfy.
What is the AGA proposing?
The AGA wants Congress to establish tax and regulatory parity so that any platform offering contracts on sporting outcomes faces the same obligations as a licensed sportsbook. The organization argues the current disparity creates an unfair competitive advantage and deprives states of significant tax revenue.
Could this change soon?
Legislative timelines are uncertain. Several bills and regulatory discussions are underway, but the jurisdictional overlap between the CFTC and state gaming commissions makes a quick resolution unlikely. The pressure, however, is building from multiple directions simultaneously.
