This September, the most contested financial product in America is not a stock, a fund or even a coin. It is a yes-or-no contract on whether your team covers the spread, whether a midterm flips, or whether a ceasefire holds by Friday. In the last two weeks alone the ground has moved three times: New Jersey took its fight against Kalshi to the Supreme Court on September 2, a Michigan judge barred Kalshi sports contracts and threatened fines up to $500,000 a day on September 3, and a federal court in Iowa refused to stop that state from regulating the platform on September 8.
The money has arrived at scale. Kalshi, valued at $22 billion after its May funding round, collected $263.5 million in fees in 2025 โ 89% of it from sports. Polymarket, backed by a $2 billion investment from NYSE parent ICE, relaunched legally in the U.S. in December and has since signed deals with MLB, MLS and the NHL. During the World Cup, prediction markets accounted for 27% of all legal U.S. sports-betting volume, up from 9% in January, and Kalshi alone added three million new users.
Then there is the number that should matter most to anyone tempted to call this investing. Bank of America Institute tracked actual payments flowing to and from betting platforms and found that in every single month of 2026, customers recovered less than 75 cents for every dollar they sent in. One in five Americans now call sports betting an investment โ and for Gen Z, it is two in five. Even Gen Z, the best-performing cohort, got back barely 80 cents on the dollar.
If you freelance or run a one-person business, this story is addressed to you, because the product is dressed in exactly your language: markets, positions, portfolios, trading. But the payout structure is gambling, the legal status changes by state and by week, the tax character is genuinely unsettled, and for a freelancer a run of winnings can quietly detonate your health-insurance subsidy and student-loan payment. This is the money story: what these platforms actually are, who really wins, what the IRS sees, and a nine-move playbook for staying on the right side of all three.
What Prediction Markets Actually Are โ and How They Differ From Sportsbooks
A prediction market lists event contracts: yes-or-no questions about the real world, each priced between one and 99 cents. The price is the crowd’s implied probability โ a contract trading at 62 cents means the market assigns a 62% chance. You buy from other users, not from the house. You can sell the contract back to the market any time before it settles, or hold it until it resolves at a dollar (you win) or zero (you lose).
The legal distinction doing all the heavy lifting: Kalshi and Polymarket US are Designated Contract Markets (DCMs) licensed by the CFTC โ the same federal license structure that governs futures exchanges. In the platforms’ framing, event contracts are federally regulated derivatives, not wagers. That is why they can operate in California and Texas, where sports betting is illegal, and why they admit users at 18 rather than 21. Roughly a dozen states insist that a bet by another name is still a bet, and that fight is now at the Supreme Court.
| Feature | Traditional sportsbook | Prediction market (Kalshi / Polymarket US) |
|---|---|---|
| Your counterparty | The house | Other users (peer-to-peer exchange) |
| Regulator | State gaming commissions | CFTC (federal) โ contested by states |
| Minimum age | 21+ in most states | 18+ |
| Cost model | Vig baked into odds (typical hold 4โ8%) | Trading fees (Polymarket 0โ1.75% by category; Kalshi per-contract fee formula) plus bid-ask spread |
| Position lifecycle | Ticket held until settled | Tradable โ exit before resolution at market price |
| Coverage | Mostly sports | Sports, elections, economics, weather, geopolitics, culture |
| Extras | Comps, boosts, parlay insurance | Kalshi pays 3.25% APY on balances of $250+ (reported on 1099-INT) |
The platform field has exploded. Beyond Kalshi and Polymarket US, ProphetX (operating since 2019) runs a peer-to-peer exchange with odds-style pricing, while FanDuel, Fanatics, Underdog, Robinhood, Crypto.com, Coinbase and Novig have all bolted prediction-market products onto existing apps. New entrants are launching almost weekly โ which is convenient for you and convenient for the one party guaranteed to profit: the exchanges, which earn fees whether or not you win.
๐ The scale of the pivot: More than 90% of activity on Kalshi is now sports, and sports generated 89% of its $263.5 million fee revenue in 2025. The Financial Times put it bluntly in December 2025: prediction markets barely make money for users; the platforms and sportsbooks make money. When Kalshi claims $100 billion in annualized volume โ a figure industry analysts have publicly questioned โ that is a number about the house, not about you.
The Legal Map in September 2026: A Country-Wide Patchwork
The core dispute is federal preemption: does the Commodity Exchange Act, which created the CFTC, override state gambling laws? The platforms say yes. States say no. Federal judges have now split โ sometimes in the same circuit โ and the outcomes determine whether your account works on Tuesday.
| Jurisdiction | What happened | Status (Sept 16, 2026) |
|---|---|---|
| Supreme Court | New Jersey asked the justices on Sept 2 to resolve whether states can enforce gambling law against CFTC-licensed exchanges โ the first prediction-market challenge to reach the Court | Cert petition pending |
| Michigan | Judge barred Kalshi sports bets on Sept 3, threatening fines up to $500,000 per day; AG suit filed in March | Sports contracts blocked |
| Iowa | Sept 8: federal judge denied Kalshi’s pre-enforcement injunction โ the CEA’s preemption clause “does not meet the mark” for state gambling police powers | State free to regulate |
| Ohio | March 9: judge ruled Kalshi products are gambling under Ohio law and belong to the state casino commission โ creating a Sixth Circuit split with Tennessee | On appeal |
| Massachusetts | Jan 14: injunction in Commonwealth v. KalshiEX โ sports event contracts are unlawful sports wagering | Sports contracts blocked |
| Nevada | May 29: judge blocked Polymarket; gaming board complaints against Kalshi and others since January | Polymarket blocked |
| Arizona | 20 criminal misdemeanor charges filed in March โ dismissed May 5 after a federal judge found CFTC jurisdiction preempts state law | Kalshi win |
| Minnesota | First state to ban prediction markets (effective Aug 1); DOJ sued the next day; July 27 a federal judge halted the ban, citing exclusive CFTC jurisdiction | Ban halted |
| New York | AG James sued in July demanding roughly $36 billion โ profit forfeiture plus nationwide user compensation; the CFTC countersued to stop the case | Litigation |
| Utah / Washington | Utah banned prediction markets outright; Washington’s ban on sports and pop-culture contracts took effect Aug 19 | Bans in force |
| Federal | CFTC Chairman Michael S. Selig has sued Wisconsin, New York, Arizona, Connecticut, Illinois, Massachusetts and Minnesota to defend exclusive jurisdiction; President Trump called state officials “SCUM” for regulating | Suits ongoing |
Abroad, the map is even harsher. More than 30 jurisdictions restrict Polymarket: France, Switzerland, Belgium, Poland, Singapore and Greece blocked it earlier; Bulgaria and Portugal followed this spring; Spain blocked both Polymarket and Kalshi in May; South Korea ordered ISP blocks on August 18 and Denmark on August 19. The UK, notably, is weighing the opposite move โ The Times reported on September 4 that ministers are considering lifting its ban on US-style prediction markets.
๐ One week, three moves: Sept 2 โ the Supreme Court petition. Sept 3 โ Michigan’s injunction. Sept 8 โ Iowa freed to regulate. If you held sports positions in Michigan that week, your platform’s legality changed underneath you while you slept. Treat availability as a pending motion, not a fact.
Follow the Money: Who Actually Wins
The Bank of America Institute study, published September 7, is the cleanest look yet at retail outcomes because it tracks payments rather than surveys. Its findings deserve to be read slowly by anyone who has called a Kalshi position part of their portfolio:
- Recovery: customers of every generation recovered less than 75 cents per dollar sent to betting platforms, in every month of 2026. Gen Z recovered the most โ over 80 cents โ and still lost money at scale.
- Perception: one in five Americans view sports gambling as an investment tool; two in five among Gen Z. Across all generations, people rated prediction-market contracts as even more investment-like than sports bets.
- Habit: nearly a quarter of sports bettors wager daily; another third weekly. First-time users in June and July ran more than triple January’s level.
- Demographics: Gen Z and millennials made up 88% of all betting activity in July, with Gen Z alone at 48% โ overtaking millennials for the first time.
- Balance sheets: betting households keep median deposit balances at just 59% of non-betting households. Lower-income households are the largest bettor group at 37%.
- Spillover: a Federal Reserve Bank of New York study found credit-card delinquencies among sports bettors under 40 jumped 26% after legalization โ even in states where betting remained illegal.
The internal distribution is even more lopsided than the averages. The Wall Street Journal reported in May that 0.1% of Polymarket accounts capture 67% of the profits, while more than 70% of users lose money. Academic work presented this year found roughly 3% of traders generate the majority of price discovery. Translation: the odds you trade against are set by a tiny, informed minority โ and in some markets, by people who know the news before it happens.
“Despite our data showing that online betting is not a reliable source of income, 20% consider sports betting a type of investment and Gen Z is twice as likely to think so,” BofA Institute economist Taylor Bowley told Fortune. The platforms have noticed: Acorns launched a product called Investinall in September specifically to capture bettors’ money, and one CEO is running ads offering to pay people not to bet this football season.
๐ The 75-cent math for a freelancer: commit $500 a month to contracts and the base rate says you recover about $375 โ a $1,500 annual drag, before the tax paperwork. The same $500 a month into a high-yield savings account at 4%+ (see our HYSA roundup) or a boring index portfolio ends the year positive with near-certainty. The contracts are not an alternative investment; they are an alternative entertainment expense โ and priced like a premium one.
The age loophole and the addiction literature
Because the platforms regulate as financial exchanges, the entry age is 18 โ three years below most state sportsbooks. A CNN analysis found users aged 18 to 21 traded an estimated $5.4 billion on Kalshi this year, $3.9 billion of it on sports and parlay-style combos; Kalshi says that cohort is 3.14% of volume. A peer-reviewed paper in Science warned in April that the design of commercial prediction markets creates behavioral-addiction risk: “Continuous novelty and infinite event streams eliminate stopping pointsโฆ This architecture maximizes trading volume rather than forecasting accuracy.” Congress now has bipartisan bills in the works to add age verification and consumer protections, and the CFTC made Kalshi shut its NFL injury markets days before the season opened.
The Insider Problem: You Are Not Trading Against the Crowd
Sportsbooks take the other side of your bet and manage risk with math. Prediction markets promise an information-efficient crowd. The documented record of 2026 suggests something closer to a poker game where several players can see your cards:
- A U.S. Army Green Beret with access to classified planning was arrested in April after a new account netted over $400,000 on Nicolรกs Maduro’s removal before the Venezuela operation was announced.
- Israeli Air Force members were indicted over bets on strike timing โ one officer allegedly leaked a strike date and, with a colleague, earned $244,000. An airman told interrogators: “The entire squadron is on Polymarket, the entire air force is betting.”
- Bets on the Iran conflict drew more than $1 billion in suspiciously well-timed wagers (The Guardian), with $529 million flowing into strike markets from fresh wallets alone (Bloomberg).
- A Google engineer and an OpenAI employee were caught up in insider-trading episodes on company-related markets; OpenAI fired its employee.
- France’s weather service alerted police to tampering after suspicious temperature bets; bettors on an Iran-strike market threatened an Israeli journalist to change his reporting.
Regulators are catching up. On September 10 the Financial Times reported an EU watchdog warning that prediction markets are “rife with insider trading.” The next day, WIRED revealed three previously unreported U.S. government investigations of Polymarket trades. CNBC demonstrated on September 9 that moving a midterm-election market costs “not much” โ thin order books cut both ways: easy for you to enter, cheap for someone richer to steer. And settlement risk is its own hazard: the WSJ documented in June how Polymarket’s practice of issuing “clarifications” to market fine print turned one student’s surefire bet to zero.
None of this means every market is dirty. Public-data markets โ the official CPI print, an election called by the AP, a game final โ resolve on facts insiders cannot easily front-run. War, raids, diplomacy and regulatory decisions resolve on information that leaks. The distinction is not subtle, and it should drive what you trade if you trade at all.
The Tax Trap: What the IRS Sees When You Trade Outcomes
Three things are certain. Your winnings are taxable โ every dollar, from the first contract. The venue determines your paperwork. And for a freelancer, the ripple effects of a windfall through your adjusted gross income can cost more than the wager itself. What is not certain is the character of the income, and that fight is worth real money.
| Venue | What the IRS likely sees | Paperwork you get | The trap |
|---|---|---|---|
| Traditional sportsbook | Gambling income โ ordinary rates, reported on Schedule 1; losses deductible only if you itemize, only up to winnings | W-2G on big wins; 24% federal withholding above thresholds | Losses cannot offset your freelance business income, ever |
| Kalshi (CFTC exchange) | Unsettled: gambling income vs. Section 1256 traded contracts (60/40 long-term/short-term split, year-end mark-to-market). The IRS has issued no guidance on event contracts | Per Kalshi’s June 2026 help docs: 1099-INT (the 3.25% APY), 1099-MISC (rewards), 1099-B and 1099-DA via ZeroHash (crypto transfers), plus monthly-updated P&L statements computed FIFO and delivered by Zenwork | Character determines your rate and loss treatment โ and Kalshi explicitly says its P&L “is not tax advice” |
| Polymarket US (QCEX) | Same unsettled character as Kalshi | Reporting from a regulated U.S. entity | State residency questions if you have moved |
| Offshore Polymarket (.com) | Crypto trading: every position entered and exited is a taxable disposition of USDC/contracts; from 2026, wash-sale rules extend to digital assets under the 2025 budget law | None mailed to you โ but CARF/DAC8 automatic reporting sends exchange data to tax authorities in 40+ countries starting with 2026 activity | Thousands of on-chain transactions to reconstruct; “offshore” does not mean invisible (our crypto tax guide covers the mechanics) |
| Bonus and promo credits | Taxable rewards income | 1099-MISC above thresholds | The $50 sign-up bonus was never free money |
Why the Section 1256 fight matters to you
If your event-contract gains are gambling income, they are taxed at ordinary rates (up to 37%) and your losses are only deductible if you itemize, capped at winnings. If they qualify as Section 1256 contracts โ the regime for regulated futures โ 60% of gains are taxed at long-term rates regardless of holding period, a meaningful discount, but open positions are marked to market on December 31: you owe tax on unrealized gains you have not collected. Platforms are not taking a position; the IRS has not published guidance; your return will reflect whatever you and your preparer can defend. That uncertainty is itself a cost.
The freelancer ripple effects
- Your health-insurance subsidy. Winnings raise MAGI, and the ACA’s enhanced subsidy structure already faces a cliff in 2027 enrollment โ a good month on Kalshi can quietly price you out of subsidized coverage (see our ACA open-enrollment breakdown).
- Your student-loan payment. Income-driven plans recalculate on AGI; a windfall year feeds into next year’s payment (details in our SAVE/RAP deadline guide).
- Your estimated taxes. A five-figure winning month breaks your safe-harbor math; recompute the Q4 voucher or eat the underpayment penalty (our quarterly-taxes playbook walks through it).
- Your retirement math. Winnings are not self-employment income โ no SE tax, but also no new contribution room for your Solo 401(k) or SEP IRA (retirement guide here).
- Your mortgage application. Underwriters already scrutinize self-employed income; a bank statement littered with transfers to a betting exchange is a red flag in exactly the review covered in our self-employed mortgage playbook.
The nomad layer
U.S. citizens owe tax on winnings wherever they live โ the FEIE covers earned income only, and gambling or trading gains are not earned income (background in our FEIE guide and nomad tax guide). Your country of residence may stack its own rules: the UK famously does not tax individual gambling winnings; much of the EU does; some hubs tax remitted income. And access is a compliance minefield โ with 30+ jurisdictions blocking Polymarket and Spain blocking both platforms, trading through a VPN violates terms of service and can freeze your balance mid-position. KYC means the platform knows exactly who you are; CARF means your tax authority may soon know too.
๐ The character question in one sentence: the same winning trade can be ordinary gambling income at 37% with itemized-only losses, or a Section 1256 contract taxed 60% at long-term rates with mark-to-market โ and nobody, including the exchange holding your money, will tell you which one you have. Price that uncertainty before you size the position, and get a preparer who has seen event contracts before filing season, not after.
The 9-Move Freelancer & Digital Nomad Playbook
1. Budget it as entertainment, not income
Cap monthly deposits at money you can lose completely, because the base rate says you probably will: under 75 cents back per dollar is the measured norm, not an outlier. If the actual goal is more income, selling your skills beats trading contracts on the math โ start with our 15 side hustles with real income data.
2. Check your state and country status today, not at sign-up
The September map changed three times in one week. Before depositing โ and before every big position โ confirm the platform is legal where you physically are. Keep positions liquid enough to exit on a day’s notice.
3. Never VPN into a restricted jurisdiction
It violates terms of service, invites frozen funds, and accomplishes nothing tax-wise: your identity is on file and CARF reporting crosses borders. If your country blocks the platform, that is your answer.
4. Ring-fence the bankroll
Fund a dedicated account monthly. Never let trading touch your emergency fund or your client-tax reserve โ the two accounts a freelancer cannot afford to lose, and the two most commonly raided when a “sure thing” needs more margin.
5. Price your real cost per trade
Fees (0โ1.75% at Polymarket by category; Kalshi’s per-contract formula peaks near 50/50 prices), the bid-ask spread, and adverse selection from the 0.1% who take 67% of the profits. Assume your order is someone sharper’s liquidity until proven otherwise.
6. Read the resolution rules before you buy
Not the headline โ the settlement fine print, including the platform’s right to issue “clarifications.” If you cannot explain precisely what resolves the contract and who decides, you are donating.
7. Stay out of war, raid and geopolitics markets
The documented insider record โ the Green Beret, the air-force squadron, a billion dollars of perfectly timed Iran bets โ lives almost entirely in markets that resolve on leaked information. Stick to public-data resolutions: game finals, official economic prints, certified elections.
8. Run the tax side like a business
Export the monthly P&L (Kalshi) or wallet CSVs (offshore platforms) every month, not every April. Set aside 25โ35% of net winnings, recompute quarterly estimates after any big month, and model the MAGI effect on your ACA subsidy and loan payments before you withdraw. If volume is high, pipe it through tax software โ our accounting software ranking covers the crypto-capable options.
9. Audit your own language
The moment you start calling losses “unrealized” and bets “positions,” reread the BofA numbers. A quarter of bettors wager daily; the design eliminates stopping points on purpose. 1-800-GAMBLER is free and confidential. If what you actually want is the dopamine of winning at money, moneymaxxing and no-buy months deliver it with positive expected value โ and neither can be indicted for insider trading.
Frequently Asked Questions
Are prediction markets legal in the U.S. in 2026?
Federally licensed, state-contested. Kalshi and Polymarket US operate under CFTC licenses and are available in most states โ including California and Texas, where sports betting is illegal. But courts have blocked sports contracts in Michigan, Massachusetts, Ohio and Nevada; Utah, Minnesota and Washington have passed bans; New York is suing for roughly $36 billion; and the Supreme Court now has the preemption question. Check your state before you deposit, and expect change.
Are Kalshi and Polymarket winnings taxable?
Yes โ all gambling and trading gains are taxable income in the U.S. What is unsettled is the character: ordinary gambling income versus Section 1256 contracts with a 60/40 rate split. Kalshi provides 1099-INT, 1099-MISC, 1099-B and 1099-DA forms plus FIFO-based P&L statements; offshore Polymarket activity is crypto-taxable trade by trade and reportable under CARF/DAC8 regardless of where you live.
Can you actually make money trading prediction markets?
The measured base rate says no: BofA found under 75 cents recovered per dollar in every month of 2026; the WSJ found 0.1% of Polymarket accounts take 67% of profits and more than 70% of users lose money. A small informed minority does win consistently โ they are why the prices move. Absent a genuine information or modeling edge, you are paying fees to be their counterparty.
How are prediction markets different from sports betting?
Mechanically: peer-to-peer exchange instead of a house, tradable positions instead of tickets, fees instead of vig, 18+ instead of 21+, CFTC instead of state regulators. Legally, states argue those are labels, not differences โ which is precisely what the Supreme Court has been asked to decide.
Can digital nomads use these platforms abroad?
Rarely, and never via VPN. More than 30 jurisdictions block Polymarket (France, Spain, Portugal, South Korea, Denmark and many more), and Spain blocks Kalshi too. U.S. citizens owe tax on winnings worldwide โ the FEIE does not cover them โ and your country of residence may tax them again. The UK is weighing legalizing US-style platforms (Times, Sept 4), which shows the map is still being drawn.
What is the safest way to participate?
Small, ring-fenced entertainment bankroll; public-data markets only; resolution rules read in full; positions small enough to exit quickly; complete tax records from day one. Or skip the contracts and take the same dopamine from beating your own budget โ it compounds instead of decaying at 25 cents per dollar.
The Bottom Line
Prediction markets in 2026 are a genuine innovation wrapped in an old business: the house takes its cut, the sharps take the rest, and the marketing department would like you to call both of those things “investing.” The data โ 75 cents on the dollar, 0.1% of accounts taking two-thirds of profits, delinquencies up 26% among young bettors โ describes gambling with a derivatives wardrobe. For freelancers and nomads, the extra dangers are structural: legality that shifts by state and by week, tax character nobody has settled, and windfalls that ripple through your insurance subsidies and loan payments. If you trade anyway, trade like the CFO of a one-person company: budgeted, documented, provisioned for tax, geographically compliant, and small. The Supreme Court may decide what these products are. Only you can decide what they cost.
Sources
- Fortune, Sept 7, 2026 โ Bank of America Institute payments data (75 cents per dollar; generational shares; household balances; NY Fed delinquency study; Bowley quotes; World Cup volume share); Fortune, Aug 31, 2026 โ CNN analysis ($5.4B / $3.9B; 3.14% of volume), Science (April 2026) behavioral-addiction paper
- Courthouse News, Sept 8, 2026 โ Iowa injunction denial (Judge Locher, CEA preemption); NPR/Reuters/CNN/The Hill, Sept 2, 2026 โ New Jersey’s Supreme Court petition; Decrypt, Sept 3, 2026 โ Michigan bars Kalshi sports bets, $500K daily fine threat
- The Wall Street Journal โ May 4, 2026 (0.1% of Polymarket accounts net 67% of profits; 70%+ lose); June 13, 2026 (fine-print “clarifications”); May 30, 2026 (Google engineer insider bet)
- Financial Times โ Sept 10, 2026 (EU watchdog: “rife with insider trading”); Dec 19, 2025 (platform economics); French weather-service tampering report
- WIRED, Sept 11, 2026 โ three previously unreported U.S. investigations of Polymarket trades; CNBC, Sept 9 and 13, 2026 โ midterm-market manipulation cost; critical fall season
- The Guardian, April 18, 2026 โ $1bn in timed Iran-war bets; Haaretz, March 2026 โ IDF indictments; CNN, April 23, 2026 โ Green Beret arrest; Bloomberg, Feb 28, 2026 โ $529M Iran-strike markets
- AL.com prediction-markets guides, AugโSept 2026 โ CFTC DCM status, Kalshi 3.25% APY, state restrictions, Polymarket US relaunch via QCEX ($112M), MLB/MLS/NHL deals
- Kalshi Help Center, June 22, 2026 โ tax documentation (1099-INT/MISC/B/DA, FIFO P&L, Zenwork); Polymarket fees page, accessed Sept 16, 2026 โ category fees 0โ1.75%
- Wikipedia, “Kalshi” and “Polymarket” (accessed Sept 16, 2026) โ battle map, valuations ($22B TCV round; ICE $2B at $8โ9B), blocked-jurisdiction list, state/CFTC litigation, SSRN price-discovery study
- The Times (UK), Sept 4, 2026 โ UK weighs lifting ban; CBS Sports, Sept 13 and 16, 2026 โ 50-state legality tracker; IRS gambling-income rules; OBBBA (2025) wash-sale extension to digital assets; OECD CARF / EU DAC8
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. Prediction-market regulation is changing weekly across U.S. states and dozens of countries; availability, fees and legal status reflect the sources cited as of September 16, 2026. The tax character of event-contract gains is unsettled โ consult a licensed tax professional familiar with both gambling income and Section 1256 contracts before filing. If betting is affecting your finances or wellbeing, call or text 1-800-GAMBLER for free, confidential help.