The Supreme Court Kalshi Case: What a Ruling Would and Wouldn't Do to Your Taxes

The Supreme Court is not being asked about taxes. It is being asked who gets to regulate sports contracts on prediction markets: the states or the CFTC. But the word at the center of that fight is the same word at the center of your tax question, and that is why a ruling would matter on your return even though the Court will never mention the IRS.

The case, in one paragraph

New Jersey has asked the Court (docket No. 26-299) to review a Third Circuit ruling that went Kalshi’s way. The Sixth and Ninth Circuits have ruled the other way, so the courts of appeals are split, which is the classic reason the Court takes a case. Thirty-nine states have filed in support of New Jersey, and so have the NFL and the American Gaming Association. Robinhood and Crypto.com have filed petitions of their own. In the NFL’s words, the question is “whether Congress, through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, preempted States from regulating sports bets if those bets are offered on DCMs.”

Why the same word keeps showing up

Read the NFL’s brief and you will find an argument that could have come out of a tax paper. Dodd-Frank’s idea of a swap, it says, “reaches only instruments created and used for the purpose of hedging preexisting risk—not wagers that create risk primarily for gambling purposes.”

That is nearly the same test the Tax Law Center applied on October 5 when it concluded that sports event contracts appear to be wagers for federal tax purposes: look at what the thing does, not what it is called. The regulatory fight and the tax fight are two courtrooms asking one question.

What a ruling would and wouldn’t do

It would not set your federal tax treatment

Federal tax follows the Internal Revenue Code. The CFTC said so itself in the swap proposal it released on October 9: tax treatment is “determined under the Internal Revenue Code and applicable Treasury regulations and IRS guidance.” A preemption ruling, either way, does not change a line of the tax code.

It would move the tax argument a long way

The Bipartisan Policy Center put it plainly: if the courts find these markets are gambling, “the tax treatment would be clarified as akin to gambling.” That overstates it a little, since the IRS would still have to act, but not by much. A Supreme Court opinion calling sports contracts wagers would be very hard for a taxpayer to argue around.

It could change what you receive

Gambling has its own paperwork. Payers issue Form W-2G on qualifying wins and, according to the same brief, withhold 24% on winnings of $5,000 or more. If sports contracts end up regulated as gambling, platforms could start issuing those forms, and you would see tax taken out of large payouts. None of that happens today.

It would matter more for some states

A win for the states would put sports contracts under state gambling law, and several states tax gambling winnings with little or no deduction for losses. The state-by-state picture.

And if Kalshi wins?

Then the CFTC keeps sports contracts, and the tax question stays exactly as open as it is now: four defensible treatments, no IRS guidance, and a Section 1256 argument that the CFTC’s own “swap” label is already making harder.

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