The 2% Federal Wagering Tax: Could It Reach Kalshi Traders?

You won’t get a bill for it. The federal wagering excise tax is owed by whoever accepts a bet, not by the person who places it. But the argument that would put it on prediction markets is the same argument that would put your sports contracts under gambling rules on your own return. That is the part worth understanding.

The story

On October 20, InGame reported, as relayed by Event Horizon, that “market makers or the platforms themselves may be subject to eight times the legal gambling excise tax.” The “researchers” are the Tax Law Center at NYU Law, whose paper in Tax Notes Federal on October 5 argued that sports event contracts appear to be wagers under federal tax law. We read the paper itself. Here is what it actually says about the excise tax.

What the wagering excise tax is

Section 4401 of the tax code has taxed commercial betting since 1951. It covers bets on sports events, bets on contests (the regulations list elections by name), and for-profit lotteries. Today the rate is:

• 0.25% of the amount wagered, if the bet is authorized under the law of the state where it is accepted, and
• 2% if it is not.

That 8-to-1 ratio is where “eight times” comes from. Licensed sportsbooks pay the lower rate today. DraftKings, for example, tells its shareholders it is “subject to a federal excise tax of 25 basis points on the amount of each sportsbook bet.”

The tax is charged on the amount the bettor risks, fees included, and it is owed by people “engaged in the business of accepting wagers.” Not by the bettor.

Who would owe it on a prediction market

The paper makes two arguments, either of which would put the tax on the exchange side:

1. Market makers. Firms that continuously quote both sides of sports contracts, including trading arms affiliated with the platforms, “appear very likely to be ‘engaged in the business of accepting wagers.’” Platforms could also be liable as a backstop if they do not meet the registration and reporting rules.
2. Platforms as pool operators. Alternatively, a platform that matches many bettors on one event may be running a “wagering pool,” which would make it liable for the tax on every sports contract traded there.

Which rate would apply is murkier. It depends on where a wager is “accepted” when the platform and the two traders may all be in different states, and whether it is “authorized” there. The paper says the IRS would need to clarify both. Nobody has yet.

How big is 2%, in Kalshi terms?

Take a plain trade: buy 100 YES contracts at 50¢. You are risking $50.

At the low rate, it is a rounding error. At 2%, it is more than half the size of the fee you already pay, charged on every sports position. Someone would bear that cost, and in practice it would show up as wider spreads or higher fees.

The part that actually matters for your return

The excise question and your income tax question are the same question asked twice: is a sports event contract a wager? The paper answers yes for both. If the IRS ever agrees, the consequences for a trader are not a quarter-point excise. They are the gambling rules on your own return: winnings as ordinary income, losses only if you itemize, and only 90% of them from 2026.

What to do

• Nothing about the excise. It is not your tax to file.
• Split your year by contract type. Sports contracts carry the strongest gambling argument; election, economic and weather contracts carry much weaker ones.
• Look at the gambling number before you file, not after. WagerMints prices it next to the other three treatments, including the 90% loss cap and the standard-deduction trap, so you can see your exposure in dollars.