Are Prediction Markets Gambling?

The short answer: it depends on which contract, on which platform, under which law, and what you mean by gambling. The longer answer matters because it affects what protections you have, how your gains are taxed, and whether your trades are even legal in your state. Here is the real breakdown.

The Federal Legal Frame: Derivatives, Not Gambling

Under U.S. federal law, prediction market contracts traded on CFTC-registered Designated Contract Markets (DCMs) are classified as event contracts, a subset of derivatives regulated by the Commodity Exchange Act (CEA). Kalshi received its DCM designation in November 2020, becoming the first exchange specifically built for event contracts to receive that status. Polymarket was fined $1.4 million by the CFTC in January 2022 for running unregistered markets, then returned to the U.S. in December 2025 after acquiring QCEX (QCX LLC), a CFTC-licensed derivatives exchange and clearinghouse, for $112 million, and receiving an Amended Order of Designation for the acquired entity.

The CEA gives the CFTC the power to prohibit event contracts it deems contrary to the public interest, including contracts that involve "gaming." Under the Biden administration, the CFTC tried to use that power to block Kalshi from listing political contracts. Kalshi sued and won in federal district court in September 2023. The CFTC did not finalize its proposed rule to broadly restrict event contracts; under the current administration, the CFTC published an advance notice of proposed rulemaking (ANPRM) on event contracts in March 2026, inviting public comment on the scope and public interest implications of "gaming" and "sports competition" under CEA Rule 40.11.

The federal position, as of mid-2026, is that CFTC-regulated event contracts are derivatives, not wagers. On April 6, 2026, the Third Circuit affirmed a preliminary injunction in KalshiEX LLC v. Flaherty (No. 25-1922), becoming the first federal appellate court to hold that the CEA likely preempts New Jersey's gambling laws as applied to sports-related event contracts traded on a DCM. Importantly, this is an interlocutory ruling on a preliminary injunction, not a final judgment on the merits. The court found Kalshi had a "reasonable likelihood" of success, not a guaranteed win.

The State Legal Frame: Gambling, Full Stop

Dozens of states disagree. Nevada, New Jersey, and Maryland each sent Kalshi cease-and-desist letters in 2025 after it began offering sports contracts in January of that year. More than 30 states filed an amicus brief opposing Kalshi's preemption arguments in federal litigation. On April 2, 2026, the CFTC and DOJ jointly sued Arizona, Connecticut, and Illinois, asserting that those states' enforcement actions against prediction markets are preempted by federal law.

The states' argument is structural: sports event contracts mirror standard sports wagers outcome-for-outcome, and CFTC registration does not make a product something other than what it functionally is. Courts have split sharply. The Third Circuit sided with Kalshi on the preliminary injunction standard. Nevada federal district courts ruled against Kalshi, finding sports contracts are not swaps under the CEA. A Maryland federal judge also sided with Maryland, holding the CEA did not preempt the state's gambling laws. The Ninth Circuit heard consolidated oral argument on April 16, 2026. The Supreme Court will likely have to draw the final line.

The tax question follows the same fault line. Whether CFTC-regulated event contract winnings are subject to the federal excise tax on wagers depends on how "wager" is interpreted under 26 U.S.C. 4421. There is currently no definitive IRS guidance specific to event contracts.

The Economic Frame: Price Discovery vs. Pure Chance

Gambling and derivatives trading share one feature: you put up money and receive a payoff contingent on an uncertain outcome. That is where the overlap ends, economically speaking.

The economic case for prediction markets rests on information aggregation. Traders who believe a contract is mispriced relative to true probabilities have a financial incentive to trade, which drives the price toward the correct probability. As Hayek argued about prices generally, markets can aggregate dispersed information that no single forecaster possesses. In practice, research on the 2024 U.S. presidential election found that more liquid prediction markets substantially outperformed polls in accuracy. Polymarket data was integrated into the Bloomberg Terminal as a market signal.

Futures markets let farmers and airlines hedge real economic risk. Prediction markets can serve an analogous function: a media company with advertising revenue tied to election outcomes could hedge on a political contract. That is a genuine economic use case distinct from entertainment gambling. But it is also not why most retail users are there.

A roulette wheel produces outcomes with fixed, known probabilities and no information content. No amount of research improves your edge. Prediction market contracts have exploitable mispricings because participants have unequal information. That asymmetry is what separates a skilled trader from a pure gambler, and it is the same asymmetry present in equity or options markets.

Where the Line Genuinely Blurs

Sports contracts are the honest problem case. Kalshi's full-year 2025 trading volume was $23.8 billion, and sports accounted for roughly 89% of fee revenue and approximately 90% of total volume. These figures use Kalshi's notional volume methodology, which counts both sides of each trade at face value, so they are not directly comparable to sportsbook handle, which measures dollars wagered. On that basis, the comparison to regulated sportsbooks understates the difference in actual dollars at risk. Still, the growth is real: Kalshi's annual volume surged over 1,000% year-on-year from 2024 to 2025.

The informational-edge argument applies less cleanly to a single NFL game outcome than to, say, a Fed rate decision or an election. When the contract is "Chiefs -3.5" repackaged as a binary event contract, the price discovery rationale weakens and the gambling resemblance strengthens. That is the honest tension, and it is the one driving most of the litigation.

• Macro and economic contracts (Fed rate decisions, CPI, unemployment): strong derivatives case, genuine hedging use, informational edge plausible.
• Political contracts: mixed. Price discovery value is real, but many states criminalize election wagering, and manipulation risk around close elections is a legitimate concern.
• Sports game-result contracts: functionally close to sports betting. The regulatory argument is preemption, not product differentiation.
• Weather, science, and cultural contracts: low volume, clear informational purpose, minimal gambling-law conflict.

What This Means for US Traders

US persons can legally trade on Kalshi and on Polymarket US, both CFTC-regulated DCMs. The international polymarket.com site blocked US persons following the 2022 CFTC settlement and resumed US access in December 2025 via the QCEX acquisition. PredictIt continues to operate under a CFTC no-action letter with per-market and per-trader position limits.

State-level legal risk is real but currently diffuse. No state has successfully enforced a ban against a retail user of a CFTC-registered platform. Enforcement actions have targeted the platforms, not individual traders. That posture could shift if state or federal criminal statutes are applied more aggressively, a risk the ongoing multi-circuit litigation keeps live.

If you are running a systematic strategy on these markets, the regulatory uncertainty is worth factoring into your risk model alongside the usual market risks. Tools like Banger let you paper-trade strategies against live order books before committing real capital, which is useful in any market but particularly in one where the rules are still being written.

The Honest Summary

Prediction markets are derivatives under federal law. They are gambling under the laws of multiple states. Economically, they function like derivatives when information asymmetry drives trading, and like gambling when the underlying event is a pure sports result with binary payoff. Both descriptions are accurate in different contexts. The question is not which label is correct but which legal framework has jurisdiction, and that question will not be settled without a Supreme Court ruling.