6 Prediction Market Regulations You Need to Know (2026)

Prediction markets sit in an awkward legal crevice. They're not exactly securities. They're not exactly gambling. They're somewhere in between, and regulators have spent the last decade trying to figure out which box to shove them into.

If you're on a CFTC-regulated platform like Kalshi, you're in the clear — mostly. That "mostly" is doing heavy lifting. If you're using an offshore platform like Polymarket from a US IP address, you're in a legal gray zone that could collapse at any time. And regardless of where you trade, the IRS expects its cut.

Here are six regulatory areas that matter. Not in the abstract, "this is interesting policy" sense. In the "this affects whether you keep your money" sense.

The Commodity Futures Trading Commission is the primary US regulator for prediction markets. Under the Commodity Exchange Act (CEA), event contracts — binary contracts that pay based on whether a specific event happens — fall under CFTC jurisdiction when real money is involved.

To operate legally in the US, a prediction market must register as a Designated Contract Market (DCM) or a Swap Execution Facility (SEF). Kalshi became the first prediction market to receive DCM approval in 2020 after years of legal groundwork.

The critical statute is CEA Section 5c(c)(5)(C). This section gives the CFTC power to block event contracts that involve "activity unlawful under State or Federal law," "terrorism," "assassination," "gaming" (as in casino gambling), or other activities "contrary to the public interest." That last bucket — "contrary to the public interest" — is where every major fight has happened.

When Kalshi proposed election outcome contracts in 2023, the CFTC invoked the gaming and state law exclusions under 5c(c)(5)(C) to block them. The agency argued political event contracts were functionally gambling and could violate state gambling statutes. Kalshi disagreed and took it to federal court.

The 2024 CFTC election contracts ruling was a direct interpretation of this statute. The court found the CFTC hadn't adequately demonstrated that election contracts fell under the Section 5c(c)(5)(C) exclusions. The agency's arguments were procedurally flawed and substantively overreaching.

For traders, the practical effect: if you're on a DCM-registered platform, your funds sit in segregated accounts, the platform faces regular audits, and contract terms follow standardized rules. If you're not on a regulated platform, none of those protections apply. That distinction matters most when something goes wrong.

In late 2023, Kalshi filed suit against the CFTC in the U.S. District Court for the District of Columbia after the commission blocked its proposed congressional control contracts — binary event contracts on which party would control the House and Senate after the 2024 elections.

The CFTC's position: political event contracts constituted "gaming" under the CEA and could facilitate "activity unlawful under state law" (i.e., violating state gambling statutes). This was the CFTC reading Section 5c(c)(5)(C) as broadly as possible.

Kalshi's counterargument was specific and technical. They argued that: (1) event contracts on election outcomes serve legitimate hedging purposes for businesses exposed to policy risk, (2) the CFTC's definition of "gaming" didn't extend to political forecasting by the statute's plain text, (3) the agency's review process violated the Administrative Procedure Act by applying arbitrary criteria, and (4) the CFTC had approved similar contracts from the Iowa Electronic Markets and PredictIt under no-action letters, creating an inconsistency.

In September 2024, Judge Jia Cobb sided with Kalshi. The ruling didn't say election contracts are definitely fine. It said the CFTC hadn't met its burden of proving they fall under the statutory exclusions. The CFTC's emergency request for a stay was denied by both the district court and the appeals court. Kalshi launched election markets days before the November 2024 vote.

The ripple effects have been enormous. The ruling signaled that the CFTC's ability to categorically block event contracts is more limited than the agency thought. Multiple companies have since filed or are preparing DCM applications. The conversation shifted from "can prediction markets exist legally?" to "what specific rules should govern them?"

The appeals process is still active as of early 2026. The D.C. Circuit's decision will either reinforce the district court ruling or narrow it. But the trial court holding is the law right now, and it has changed the regulatory landscape permanently. Even if partially reversed, the precedent that the CFTC must provide specific statutory justification — not just "public interest" handwaving — to block a contract type isn't going away.

Federal law may permit event contracts on CFTC-regulated platforms, but state gambling laws add a second barrier. Some states classify prediction market trading as gambling regardless of federal status. Others have carve-outs. Many haven't addressed the question at all.

Kalshi is not available in every state. As of early 2026, residents of certain states and territories are restricted from certain contract types based on state-level legal analysis. The platform makes these determinations state-by-state, and the eligibility map shifts as state attorneys general issue opinions or legislatures pass new bills.

The post-2018 sports betting legalization wave has actually complicated things. In states where sports betting is legal and regulated, lawmakers sometimes argue prediction markets should fall under the same framework — with licensing fees, state revenue taxes (often 20-51% of gross gaming revenue), and age verification requirements that don't apply to CFTC-regulated markets. In states where sports betting is still illegal, prediction markets get painted with the same "online gambling" brush.

Three categories of states:

• Clear access: States with no specific prohibition on CFTC-regulated event contracts. Kalshi operates freely. This includes most states.
• Restricted: States where specific contract types (usually political) are blocked based on state gambling law interpretations. Montana has been one example.
• Gray zone: States that haven't issued guidance. Platforms make their own legal risk assessments, and those assessments can change with a single AG opinion letter.

For traders: check your state's eligibility before you deposit money. Platform terms of service are your first reference, but those terms update as legal interpretations evolve. If your state is in the gray zone, you're carrying legal risk that no platform will indemnify you against.

Polymarket is the largest prediction market by volume. It is also not available to US residents, at least officially. After the CFTC fined Polymarket $1.4 million in January 2022 for operating an unregistered trading facility, the platform agreed to geoblock US IP addresses and stop soliciting US traders.

In practice, VPN usage is widespread. Polymarket knows this. The CFTC knows this. US traders doing it know this. Everyone is pretending the problem is solved. It isn't.

The risks for US traders on offshore platforms are concrete, not theoretical:

• No segregated accounts. Your funds are not held in CFTC-mandated segregated accounts. They sit in smart contracts on the Polygon blockchain. If the smart contract is exploited or the platform shuts down, there is no regulatory recourse.
• No 1099. No tax forms are issued. You're responsible for self-reporting every gain. If you don't, and the IRS later subpoenas blockchain records (which they have the tools to analyze), you have both a tax compliance problem and a potential fraud exposure.
• Enforcement risk. The CFTC could pursue individual US traders, not just the platform. They haven't done so at scale — yet. But the legal authority exists, and the agency has signaled willingness to escalate.
• Terms of service violation. Using a VPN to circumvent the geoblock violates Polymarket's terms. If they identify your account, they can freeze your funds. You have no legal standing to demand them back.

Other offshore and crypto-native platforms — Insight Prediction, Azuro, various Solana-based protocols — occupy similar territory. The common thread: if a platform isn't registered with the CFTC and you're a US resident, you're outside the regulated framework. That's a personal risk calculation, not something anyone should mistake for legal compliance.

Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements vary dramatically across platforms, and that variation maps directly to your regulatory protection.

Kalshi (full KYC): Government-issued ID, Social Security Number, proof of address, OFAC sanctions screening. This is the same level of identity verification required by US brokerages. It means Kalshi can issue you a 1099-B, comply with IRS reporting, and hold your funds in properly segregated accounts. It also means Kalshi has your full identity on file.

Robinhood Event Contracts: If you already have a Robinhood brokerage account, you've already completed KYC. Event contracts (powered by Kalshi's infrastructure) piggyback on your existing account verification. No additional steps.

Polymarket (light KYC for non-US): Non-US users complete a basic verification that typically involves email and wallet connection. No SSN, no government ID for most users. This is one reason Polymarket has higher participation and volume — lower barriers. It's also why your funds have weaker protections.

Manifold (minimal to none): Play-money mode requires only an email. The sweepstakes mode involves basic identity checks to comply with prize redemption rules, but nothing close to brokerage-level KYC.

Here's the tradeoff: stricter KYC means more protection (segregated funds, tax reporting, regulatory oversight) but also more friction and more personal data exposure. Lighter KYC means easier access but less protection and more self-reporting burden. There's no version where you get both maximum privacy and maximum protection. Pick the tradeoff that matches your risk tolerance.

Tax treatment of prediction market gains is the area where traders get the most confused, and the IRS has provided the least guidance. Here's what the current framework looks like across platforms.

CFTC-regulated platforms (Kalshi, Robinhood Event Contracts): Event contracts on a DCM are treated as Section 1256 contracts. This gives you the 60/40 blended rate: 60% of gains taxed at long-term capital gains rates (0%, 15%, or 20% depending on income) and 40% at short-term rates (your ordinary income bracket). The platform issues a 1099-B at year-end. You report gains and losses on Form 6781. Losses can be carried back three years or carried forward indefinitely.

PredictIt (historical): When it was active, PredictIt issued 1099-MISC forms, treating gains as "other income" — meaning all gains were taxed at your ordinary income rate with no 60/40 benefit. Less favorable than Kalshi's treatment by a significant margin.

Offshore/crypto platforms (Polymarket, Insight): No 1099. No automatic reporting. But you still owe taxes. The IRS treats cryptocurrency transactions as taxable events, so converting USDC into a prediction market position and back creates reportable taxable events. If you're using Polymarket from the US via VPN, you have a tax compliance obligation on top of the illegal-access problem.

Dollar example: You make $10,000 in prediction market profits. On Kalshi (Section 1256), a trader in the 32% ordinary income bracket pays roughly $2,480 in federal tax: 60% taxed at 15% long-term rate ($900) plus 40% taxed at 32% ($1,280). Total: $2,180. On PredictIt-style ordinary income treatment, the same trader pays $3,200. On an offshore platform, you owe the same tax as ordinary income — plus you have no 1099 documentation, making audit defense harder.

Deducting losses: Section 1256 treatment lets you deduct losses against gains and carry net losses back three years. This is valuable in a losing year — you can amend prior returns to reclaim taxes paid on previous gains. On ordinary income treatment, loss deduction rules are more restrictive.

Gambling income classification: Some tax advisors argue that prediction market gains should be classified as gambling income under Section 165(d), which limits loss deductions to gains. This classification is unfavorable and is one of the reasons the CFTC-regulated, Section 1256 classification matters so much. If the IRS ever issues formal guidance classifying offshore prediction market income as gambling, traders on those platforms would face a significantly worse tax treatment than those on Kalshi.

Bottom line: keep records of every trade. Use a crypto tax tool (Koinly, CoinTracker, TokenTax) if you're on blockchain platforms. The IRS hasn't issued specific prediction market guidance yet, but the pressure from both taxpayers and preparers is building. When that guidance arrives, you'll want clean records.

Several regulatory developments are in motion. The CFTC's appeal of the Kalshi ruling will produce a circuit court decision that either reinforces or limits the trial court's broad reading. Multiple new DCM applications are pending, and how the CFTC handles them will signal how far the Kalshi precedent extends.

In Congress, bipartisan interest is growing. Several lawmakers have cited prediction market data in floor speeches. A standalone bill or CEA amendment formalizing event contract trading is plausible within the next 18 months. The prediction market industry doesn't have deep lobbying resources, but the Kalshi precedent and growing mainstream visibility create political cover.

The IRS is the other shoe waiting to drop. Formal guidance on event contract taxation — distinguishing DCMs from unregulated platforms from crypto-settled markets — would reduce compliance confusion. Whether that guidance arrives as a revenue ruling, a notice, or enforcement action is uncertain. But ignoring the question indefinitely isn't a realistic option for the agency.

The direction is clear even if the timeline isn't: more regulation, not less. More structure, not more ambiguity. Traders who position themselves on regulated platforms now are betting on the right side of that trend.