Prediction markets: How they work, risks and calculator

A lot of investing involves some kind of prediction. Stock investors are making predictions about what publicly-traded companies are worth. Bond investors are making predictions about whether companies and governments will pay their debts on time.

But what if you want to try to make money predicting who will win the next presidential election? Or what the Federal Reserve will do at its next meeting? Or which pop singer will win a Grammy next year? Enter prediction markets such as Polymarket, Kalshi and ForecastEx.

These betting platforms are a relatively new technology, and many operated in a legal gray area until recently. But regulators have recently relaxed their attitude toward prediction markets, and these platforms could be primed for growth in the years ahead.

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.

For example, imagine an event contract on whether or not the S&P 500 will close above 7,000 points by the end of 2025. If a trader buys “yes” positions on 1,000 contracts for 25 cents each, and then the index does close above that level for the year, the trader would earn $1 per contract, quadrupling their money — a return of $1,000 on an initial investment of $250. But if the trader were wrong, they’d get nothing and would lose their $250.

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. In 2025, the Trump administration abandoned federal enforcement actions against Polymarket without filing charges, although Polymarket is still in the process of resuming legal operations in the U.S. at the time of last update^[0]

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

In Kalshi's case, an October 2024 injunction against the CFTC that allowed Kalshi 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.

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 Crypto.com Derivatives North America, Crypto.com offers politics, economics and sports-related event contracts. It also plans to launch financial market and pop culture-related event contracts in the near future.

• 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. Through a partnership with Kalshi, Webull offers event contracts on economic and financial market questions.

Freestanding prediction markets

• Drift Bet. A cryptocurrency-based platform, Drift Bet operates prediction markets via the Solana blockchain on politics, economics, financial markets, sports and pop culture-related questions.

• Iowa Electronic Markets. A project of the University of Iowa, Iowa Electronic Markets operates prediction markets on political and economic questions. Users can bet up to $500 per account.

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

• Manifold. A crypto-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 charity fee-free. Manifold isn't available in Delaware, Idaho, Michigan or Washington state.

• Polymarket. A crypto-based platform, Polymarket claims to be the largest prediction market in the world, and operates politics, economics, sports, financial markets and pop culture-related questions. Users can bet and win Circle (USDC), a cryptocurrency whose price is pegged to the dollar. It has been banned in the U.S. since 2022, but after the Trump administration dropped enforcement actions against it in 2025, Polymarket acquired a licensed derivatives exchange called QCEX, paving the way for its legal relaunch in the U.S. in the near future.

• 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.

The upside of this, if you don't fare so well in prediction markets, is that you can deduct up to $3,000 in losses per year, and carry over any extra to offset winnings in future tax years.

Sports betting winnings

The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law on Jul. 4, 2025, makes changes to the taxation of sports betting winnings. Starting in 2026, bettors will only be able to deduct up to 90% of losses on unsuccessful sports bets^[0]

States with income taxes vary in how they treat winnings from sports bets. Some apply a flat tax rate, while others use a graduated system of rates that vary based on the bettor's income.

» Learn more: Taxes on sports betting

The state tax treatment of non-sports prediction market winnings could evolve in the years ahead. For now, it's probably best to assume that all winnings are taxable as ordinary income at the state level.

Part of the CFTC’s legal argument against Kalshi was that its markets constitute a form of gambling. Even though that argument didn'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.