As the 2024 presidential election approached, various prediction markets including Polymarket, PredictIt, and Interactive Brokers ForecastTrader were banking on a Donald Trump victory, even while traditional election models and polling data painted a tight race, akin to flipping a coin.
It turns out, they were on point. This accuracy could mark a pivotal moment for these platforms, many of which have been skating on thin legal ice. A Trump-led administration might usher in a more permissive regulatory landscape.
So, what exactly are these prediction markets? They are online platforms where users can stake money on upcoming events. These can span from political elections and financial outcomes, like the S&P 500 index closing above a certain threshold by the end of the year, to entertainment guesses, such as which movie will snag the Best Picture Oscar. The common thread here is they revolve around “yes or no” questions that get resolved on a specified date.
These markets hinge on financial instruments known as event contracts. Typically priced at a nominal $1, traders buy into “yes” or “no” options at a fraction of this. If their prediction holds true, they reap a reward, determined by the event’s outcome.
Imagine a scenario where there’s a contract based on whether the S&P 500 surpasses 7,000 points by the conclusion of 2025. A trader who buys “yes” contracts at 25 cents each, and the scenario pans out, profits $1 per contract, effectively quadrupling their original outlay, turning $250 into $1,000. However, a wrong bet means they walk away empty-handed and $250 lighter.
Four main prediction markets are currently active in the U.S.: Kalshi, PredictIt, Interactive Brokers ForecastTrader, and Robinhood Event Contracts. Each operates uniquely; for example, some levy a mere $0.01 per contract, while others take a slice of the winnings. The selection of contracts varies too. Robinhood just stepped into the arena and is yet to expand its offerings beyond election scenarios, though it plans to diversify soon.
The legality of these markets is a bit tangled, but there’s a trend toward leniency. Historically, regulators have put their foot down against unlicensed online betting, especially for elections. In 2022, for instance, the CFTC barred Polymarket from taking U.S. bets.
However, the landscape is shifting. Although the CFTC has pursued similar actions against PredictIt and Kalshi, PredictIt won a legal victory in July 2023. As for Kalshi, their battle is ongoing, but they received an injunction in October 2024 that allowed operations to continue, signaling a regulatory nod for prediction markets—even those centered on elections. Following this, Robinhood and Interactive Brokers both rolled out election-related offerings.
Trump’s campaign championed deregulation, particularly in finance, suggesting his imminent administration, along with Congress, would likely be more forgiving toward prediction markets. As evidence, on November 14, 2024, the Republican-led House Judiciary Committee issued a letter urging the CFTC to halt its legal assault on Kalshi, hinting at little appetite to further pursue the case.
Regarding taxation, prediction markets are still carving out their niche, and tax treatments might evolve. Currently, platforms like PredictIt and Kalshi issue 1099-MISC forms to users, categorizing their net profits as ordinary income, subject to the usual rates. Prediction markets’ winnings could potentially be treated as short-term capital gains in future, remaining under ordinary income tax rates, given the short duration most event contracts are held.
Of course, betting in prediction markets isn’t without its risks. The CFTC has argued that platforms like Kalshi are tantamount to gambling. Even if this argument doesn’t hold up legally, prospective traders should weigh it carefully. Event contracts are high-risk, all-or-nothing transactions, aligned more closely with gambling than traditional investing strategies suitable for long-term wealth accumulation, akin to sports betting.
Moreover, the addictive nature of gambling presents a concern, and prediction markets offer yet another outlet for such tendencies. The National Council on Problem Gambling provides resources including a helpline at 1-800-GAMBLER for those who may need it.
If you’re on solid footing with your financial objectives and have some discretionary funds to spend in prediction markets, it’s prudent to follow a few sensible tips:
1. Only wager money you’re prepared to potentially lose.
2. Reserve betting for special occasions rather than making it routine.
3. Set a betting budget and stick to it.
4. View your wagers as entertainment expenses, not investments.
