Your Guide To Legal Prediction Markets: The Future Of Gaming Or A Regulatory Minefield?

Legal prediction markets are platforms that allow users to trade shares based on the outcome of events such as elections, award shows, economic trends, weather phenomena, news developments, and sports.

In the U.S., prediction markets are governed by the Commodity Futures Trading Commission (CFTC)—a federal agency. This differs from legal sportsbooks and betting apps, which are regulated and taxed on a state-by-state basis. 

Because legal prediction markets like Kalshiare federally regulated, they are exempt from many state-level rules and taxes that apply to legal sportsbooks and iGaming operators.

Operators argue that prediction markets aren’t "gambling" because customers aren’t wagering against the house. Instead, they’re trading on binary outcomes with other users. Critics—including legal sportsbooks and casino operators—say it’s merely gambling in disguise.

Here’s a guide to these platforms that are reshaping the U.S. gaming landscape.

How Do Legal Prediction Markets Work?

Trading in a prediction market involves buying an “event contract.” If your predicted outcome occurs, the contract pays out $1 per share. Traders can buy in at prices ranging from 1 cent to 99 cents, depending on the perceived likelihood of the outcome. Many prediction markets accept cryptocurrency or are entirely funded by it. Legal U.S. sports books and sports betting apps outside of Wyoming. Colorado and Virginia do not allow wagers funded by cryptocurrency.

How Are Legal Prediction Markets Regulated?

The CFTC oversees legal prediction markets and has designated some, including Kalshi, as Designated Contract Markets (DCMs). The agency’s role includes ensuring market transparency, efficiency, and the prevention of fraud.

The process of becoming a DCM involves submitting a detailed application to the CFTC that outlines the applicant’s compliance with 23 core principles outlined in the Commodity Exchange Act, 7 U.S.C. § 1 et seq. 

They include: 

• Compliance with the Law – The exchange must follow the CEA and CFTC regulations.
• Governance and Oversight – It must have fair and transparent governance structures. 
• Market Transparency – Trading information must be publicly available. 
• Fair Market Access – The market must provide equal access to traders. 
• Prevention of Market Manipulation – Strong surveillance mechanisms must be in place. 
• Contracts Must Be Well-Defined – Futures and options contracts must be clear, enforceable, and financially sound. 
• Financial Integrity – Must ensure proper risk management and margining processes. 
• Dispute Resolution – A process for resolving market participant disputes must exist. After approval by the CFTC, a DCM must submit regular reports to the CFTC, undergo periodic audits and inspections, and adapt to rule changes and new regulatory requirements. 

What Is the Future of Legal Prediction Markets?

For now, they’re here to stay.

In May, the CFTC withdrew its own appeal in a case before the U.S. Court of Appeals in the D.C. Circuit. This allows prediction markets to continue operating in their current form—at least until a new court ruling emerges.

The CFTC is currently in a state of flux and will soon be down to just two of its five commissioners. Gaming legal expert Daniel Wallach believes this benefits platforms like Kalshi, allowing the status quo to continue as legal challenges play out.

However, Wallach contends that sports-related prediction contracts may violate federal law.

Speaking at the SBC Summit Americas on May 15 in Fort Lauderdale, Florida, Wallach said Kalshi reversed its prior legal arguments used to support election markets.

“They’ve shifted 180 degrees, calling event contracts financial instruments,” Wallach said. “At best, Kalshi is gaslighting everyone. At worst, they’re changing their story. They can’t have it both ways.”

Still, Wallach expects the issue to be resolved in the courts, regardless of Donald Trump Jr.'s presence as a Strategic Advisor with Kalshi. 

“We may be a monarchy, but the judiciary hasn’t been captured,” he said. “I want event contracts to happen, but not this way. It’s the absolute worst way to make policy.” 

Kalshi is currently battling regulators in Nevada and New Jersey and has received cease-and-desist letters from agencies in Illinois, Maryland, Montana, and Ohio. The Michigan Gaming Control Board also wrote to the CFTC asserting that sports-betting contracts are equivalent to wagers and should fall under its oversight.

Not all states are ready to take a position. On Thursday, Massachusetts regulators discussed prediction markets without taking any action. 

In Massachusetts, any civil or criminal enforcement of unlicensed gambling activity falls under the guise of Attorney General Andrea Campbell. 

"This Commission prides itself on being educated and prudent when making decisions. It's my hope that the public knows that this item is not intended to generate sound bites. Nor to spotlight other public officials. We don't like it when other people wade into our jurisdiction. So we should be hesitant to the same. That said, this is an opportunity to learn and prepare for certain realities and what is happening today," MGC Chair Jordan Maynard said. "I also want to take this as an opportunity to remind the public that if you choose to wager, the safest place in the Commonwealth to do so is with our robustly regulated operators." 

Legal Prediction Markets In The U.S.

Here are some legal prediction markets of note in the United States and the types of trades they offer:

• Kalshi – Politics, economics, finance, pop culture, weather, and sports
• Sporttrade – The only regulated sports betting exchange; available in New Jersey, Arizona, Virginia, Colorado, and Iowa
• Crypto.com – Sports-related event contracts
• Interactive Political – Economic and financial markets
• Robinhood – Sports, political, and economic questions (sports contracts not allowed in NJ)

The Case for Legal Prediction Markets

Prediction markets are accessible nationwide, offering people in non-legal-sports betting states a way to engage in "trades" on events legally available elsewhere—or via offshore platforms. These operators also avoid the taxes that traditional sportsbooks and iGaming platforms must pay.

As a result, traders may find better pricing, especially on markets unavailable in regulated states—like political bets, which attracted hundreds of millions in trades during the 2024 election cycle. Prediction markets remain active in real time. Sports betting sites and apps, meanwhile,   have access to live data feeds and therefore can halt betting in certain markets before bettors can react.

Sporttrade CEO Alex Kane, speaking to bookies.com after appearing on a prediction markets panel at SBC Summit Americas, believes the gaming industry will eventually find harmony among sportsbooks, regulators, leagues, and prediction platforms.

“The type of activity you're talking about here is not the super high hold. It’s not the 10, 20, 30% hold, same-game parlay stuff. And that's where the states make all their revenue, and that's where the books make all their revenue,” Kane said. “My dad bets $10 at a time on DraftKings on the money line. Do you think he's the type of customer they make money off of? No. It's the people that do 7-, 10-, 20-leg parlays. Right? And that's not going anywhere.” 

Sporttrade is the only platform to request CFTC approval to expand nationwide.

“We're the only sports betting operator in human history to use market surveillance,” Kane added. “We literally partner with NASDAQ... protecting traders on Sporttrade the same way your 401(k) is protected.”

"And DCMs have that same requirement. So they find it interesting, wow, ‘This is a $10,000 order from a participant that 10 seconds later the price really moved. Right?’ You could start an investigation (because of that). I think all the things about customer protection, responsible gaming, and integrity could be addressed in 45 minutes," Kane said. "Leagues and DCMs could come together and draft the '10 Commandments of Customer Protection and Match Integrity' and get something that is amazing." 

The Case Against Legal Prediction Markets

Legal sportsbooks use sophisticated tech and integrity agreements with professional sports leagues to ensure transparency and compliance. Kalshi and similar platforms lack such measures.

Because many prediction markets accept cryptocurrency, it’s harder to trace users or those funding trades. Several states have launched legal actions arguing that sports contracts on these platforms are simply a new form of sports betting and should be regulated and taxed accordingly.

During the Associated Press Sports Editors' Commissioners meetings in New York on April 28-29, major league commissioners and the NCAA president expressed opposition to prediction markets when asked about them by bookies.com. Especially given their use of cryptocurrency in funding wagers. 

NCAA President Charlie Baker called them a “grey area” and “part of the problem.”

NBA Commissioner Adam Silver was more direct:

“These new trading markets, we’re watching them closely. We’re not participating in them. We’re not accepting advertising from them,” Silver said on April 28. “I am concerned about what integrity protections are in place . . . Our strong preference is for these to be regulated markets.”

Three days later, the NBA sent a letter to the CFTC voicing its concerns. That followed a similar letter previously sent by MLB. 

One major sportsbook executive told bookies.com at the SBC Summit Americas that their company expects to eventually participate in the prediction market space, viewing offshore books and single-player fantasy platforms as more immediate threats in non-betting and betting states. Another top-level gaming industry insider put it this way: "Publicly, they are telling you they are opposed to prediction markets. Privately, they are working to figure them out." 

Kane, again speaking to bookies.com, remains upbeat:

“It’s a very solvable thing. States and leagues are interested in this space," he said. “No one sues NASDAQ for insider trading—it’s just the exchange. If the leagues align with the exchange, they’re not taking on financial risk . . . This presents a very interesting opportunity.”

How Do Prediction Markets Differ From Sports Betting

Both allow people to place a stake on the outcome of an unknown event for the chance to win money. Prediction markets fit individuals on opposite sides of a single trade. In sports betting, everyone on both sides of any outcome is wagering against the house. 

Prediction markets are similar to parimutuel betting in that the price on each outcome is based on the money traded. In sports betting, the odds are set by the house but influenced by multiple factors. 

States regulate sports betting operators. Since the Professional and Amateur Sports Wagering Act (PASPA) was overturned by the Supreme Court in 2018, a total of 39 states and Washington D.C., have legalized sports betting. Each state sets its own rules, regulations, and tax rates. 

Prediction markets are regulated by the CFTC and face "relatively light regulations," according to the Massachusetts Gaming Commission. 

In a brief presented to the MGC at its May 22 meeting, MGC staff offered the following difference between sports betting and prediction markets: 

• Individuals can participate in prediction markets starting at age 18 (versus 21 for sports
  wagering in most states),
• There are no mandatory responsible gaming features such as deposit limits, wager limits
  limits, self-exclusion tools, or cooling-off periods required of DCMs
• DCMs can “self-certify” new markets by simply sending a “certification” letter to the
  CFTC, one day before offering a market, and the market is automatically approved
  absent CFTC action
• Tax treatment of gains from event contracts differs from gambling winnings
• States receive no tax dollars from DCMs, DCMs like Kalshi are generally taxed-based
  on their business income as a for-profit business entity
• AML standards for DCMs are not as strict as the regulated gaming space (generally not
  subject to the Bank Secrecy Act, no obligation to file suspicious activity reports)
• KYC protocols are minimal when compared to gaming operators (only name, address and a social security number required to create an account.

How Is Income From Prediction Markets Taxed?

Currently, profits earned in prediction markets must be reported as standard income. There are no federal tax offsets for losses, as there are with gambling losses if itemized.

Platforms like Kalshi issue 1099-MISC forms annually to users for tax filing purposes.

What Prediction Market Should You Use?

As is the case with any sports betting platform, users should only trade what they can afford to lose. And do so for entertainment, as opposed to investment, purposes. Kalshi is the most robust prediction platform in terms of what markets are offered and in terms of the size of each market. Trades are executed quickly. And users can monitor trades and movements in each market in real time. 

Kalshi accepts direct deposits from multiple U.S. financial institutions via debit cards, bank transfers, or wire transfers. It also takes crypto, but with a $500 max per day. Payouts are usually made out in fewer than 3 business days. Kalshi, like other trading platforms, pays accrued interest on your cash and open positions.