Prediction Markets: What They Are, How They Work and Risks

In the lead-up to the 2024 presidential election, prediction markets such as Polymarket, PredictIt and ForecastEx expected Donald Trump to win, despite election models and poll aggregators showing a virtual coin toss.

Now we know: The prediction markets were right.

Last year's election outcome could be a turning point for these platforms, some of which have been operating in a legal gray area. The Trump administration may create a more lax regulatory environment for prediction markets such as Kalshi, PredictIt and Interactive Brokers ForecastEx going forward.

Prediction markets are online platforms where people can bet on future events.

These events can involve elections, financial markets (for example, whether or not the S&P 500 index will close above a specific level by year end), sports (for example, whether a specific basketball team will win the March Madness tournament) or even pop culture (for example, whether a specific film will win the Academy Award for best picture). They just have to involve binary, “yes or no” questions that will be resolved by a specific date.

Prediction markets run on a type of financial instrument known as an event contract. An event contract has a nominal value — often $1 — and traders can buy “yes” or “no” positions on it for some fraction of that value. When the event happens, the contract pays out to whoever was right.

Some prediction markets are freestanding platforms, while others are built into online brokerage accounts or crypto apps. Some prediction markets charge as little as $.01 per contract, while others take a cut of profits. The range of contracts available on each platform also varies widely. Some only offer sports-related event contracts, and others only offer market-related event contracts.

The legal status of prediction markets is complicated, but federal regulators seem to be getting more relaxed about them over time.

Historically, regulators have generally taken a firm stance against unlicensed online betting platforms — especially those that allow election betting. In 2022, the Commodity Futures Trading Commission (CFTC) prohibited Polymarket from taking bets in the U.S. That ban remains in place at the time of last update.

However, things have changed in the last two years. While the CFTC has attempted to enforce similar bans against PredictIt and Kalshi, PredictIt won its case in July 2023.

The CFTC’s case against Kalshi is ongoing. However, an October 2024 injunction that allowed it to continue operating while the case was decided was widely interpreted as a legal green light for prediction markets, including election-related prediction markets. In the weeks after that ruling, Interactive Brokers added ForecastEx contracts to its trading platform. Robinhood also launched an election betting market that uses ForecastEx contracts.

There are already some indications that the second Trump administration (and Congress) will be more lenient in its regulation of prediction markets.

On Nov. 14, 2024, the Judiciary Committee of the Republican-majority House of Representatives published an open letter demanding that the CFTC cease its legal action against Kalshi and suggested the Trump administration is not interested in pursuing the case further ^[0]

However, some state regulators have also taken issue with prediction markets. At the time of last update, six states — Illinois, Maryland, Montana, Nevada, New Jersey and Ohio — have issued cease and desist orders against Kalshi, according to gambling reviews and analytics website Comped. All of these except Nevada and Montana have also issued cease and desist orders against Robinhood for its prediction market activities. Ohio, Illinois and Maryland have additionally issued cease and desist orders against Crypto.com over its prediction markets^[0]

Below is a list of all of the prediction markets, as well as brokerage apps and crypto apps that offer prediction market access, that are currently allowed to operate in the U.S.

Brokers and crypto apps

• Crypto.com. Through its wholly-owned subsidiary Nadex, Crypto.com offers sports-related event contracts.

• Interactive Brokers. Through its wholly-owed subsidiary ForecastEx, Interactive Brokers offers event contracts on political, economic and financial market questions.

• NinjaTrader. Through a partnership with Tradovate, NinjaTrader offers event contracts on financial market questions.

• Robinhood. Through partnerships with Kalshi and ForecastEx, Robinhood offers event contracts on sports and economic questions. It also offered election-related event contracts in 2024. Sports betting on Robinhood is not available in New Jersey.

• Webull. Kalshi and Webull have announced a partnership to launch event contracts on Webull's platform sometime in 2025. The nature of these event contracts is not yet known.

Freestanding prediction markets

• Iowa Electronic Markets. A project of the University of Iowa, Iowa Electronic Markets operates prediction markets on political questions. Individuals can invest up to $500 in any contract.

• Kalshi. Kalshi offers event contracts on a wide variety of topics, including politics, economics, financial markets, and pop culture-related questions.

• Manifold. A cryptocurrency-based platform, Manifold operates prediction markets on politics, economics, financial markets, and pop culture-related questions. Users can bet and win play money, called "mana," or a cryptocurrency called "sweepcash" which can be traded for dollars for a 5% fee, or donated to a charity without fee. Manifold is not available in Delaware, Idaho, Michigan or Washington state.

• PredictIt. A project of Victoria University of Wellington, New Zealand, PredictIt operates prediction markets on political questions. Individuals can invest up to $850 in any contract.

Prediction markets are a relatively new financial technology, and their tax treatment may evolve in the years ahead. For now, many prediction markets, such as PredictIt and Kalshi, send their users annual 1099-MISC forms that list their net profits for the year as ordinary income.

That means that prediction market winnings are likely to be subject to ordinary income tax rates. Even if they are given a more specific tax status in the future, prediction market winnings are likely to be subject to short-term capital gains tax rates — which are the same as ordinary income rates — as they involve trading assets (event contracts) that are typically held for less than one year.

Part of the CFTC’s legal argument against Kalshi is that its markets constitute a form of gambling. Even if that argument doesn’t ultimately win in court, investors should consider it when deciding whether or not to put money into prediction markets.

Event contracts are short-term, everything-or-nothing bets based on uncertain future events. That makes them riskier than most other types of investments and generally unsuitable for building wealth over the long term — much like sports betting.

Gambling can be addictive — and prediction markets may provide a new medium for that addiction. If you feel that you may have a gambling problem, the National Council on Problem Gambling offers a phone helpline at 1-800-GAMBLER.

But if you’re already on track to meet your financial goals and you have extra money that you’d like to play with in prediction markets, there are a few common-sense guidelines worth following:

• Don’t bet money that you can’t afford to lose.

• Limit betting to special occasions; don’t do it habitually.

• Budget out a certain amount of money to bet, and don’t exceed it.

• Treat your bets as entertainment expenses, not investments.