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Prediction markets: How they work, risks and calculator

Prediction markets may grow in the years ahead. Here's the lowdown on how they work, their legal and tax status, and the risks of betting in them.

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Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York.

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Chris Davis is a Managing Editor on the Investing team. As a writer, he covered the stock market, investing strategies and investment accounts, and as a spokesperson, he appeared on NBC Bay Area and was quoted in Forbes, Apartment Therapy, Martha Stewart and Lifewire, among others. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet.

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.

Update: On Oct. 7, 2025, Intercontinental Exchange (ICE), the company that owns the New York Stock Exchange, announced that it would invest up to $2 billion in Polymarket, the largest freestanding prediction market platform in the world.

Prediction markets definition and calculator

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.

Brokerage firms

on Charles Schwab's website

on E*TRADE's website

on Vanguard's website

on Fidelity's website

Are prediction markets legal?

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.

But since then, things have changed. The CFTC attempted legal action against PredictIt and Kalshi in the early 2020s, but 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. The CFTC dropped its case against Kalshi in May 2025

Later in 2025, the Trump administration abandoned federal enforcement actions against Polymarket without filing charges. Polymarket is in the process of relaunching its app for U.S. users at the time of last update.

However, some state regulators have also taken issue with prediction markets. Eleven state governments are attempting to enforce a cease-and-desist order or some other legal action against at least one prediction market operator as of February 2026, and another eight states have pending civil litigation or class action lawsuits against prediction market operators

List of prediction market platforms operating legally in the U.S.

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, financial market and sports-related event contracts. It also plans to launch 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 was banned in the U.S. between 2022 and 2025, although some Americans continued to use it during that time via VPNs and other workarounds. In late 2025, the Trump administration dropped enforcement actions against Polymarket, and the company acquired a licensed derivatives exchange called QCEX for the purpose of restarting its U.S. operations. As of March 2026, it is rolling out a new, legally-sanctioned app to U.S. users via a waitlist

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.

Verse. Verse is an operator of prediction markets on sports, current events and pop culture-related questions. Users can bet and win two currencies: a play money called "VerseCoin," or a token called "VerseCash" that can be used to enter sweepstakes with real-money prizes.

How are prediction market earnings taxed?

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

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.

The risks of betting in prediction markets

Shifting laws, and shifting platform rules

As discussed above, many states have taken legal action against prediction markets, and the taxation of prediction market winnings is still evolving. That creates risks for prediction market bettors — that your state could potentially ban a platform that you've put money into, or that you could end up with an unexpected tax bill on your winnings.

On top of this, users of some prediction market platforms have complained that those platforms' own internal rules can shift unpredictably. Some prediction market activity related to the recent outbreak of has brought attention to this issue.

Kalshi, whose prediction markets sometimes address geopolitical questions, operated a market in early 2026 on the question of whether former Iranian supreme leader Ali Khamenei would be ousted from power by March 2026. Bettors had wagered more than $54 million on the "yes" side of this question by the time of Khamenei's assassination in U.S.-Israeli strikes on Feb. 28, 2026. But Kalshi refused to pay out winnings on the question after his death, saying that bets related to death violated its rules, and instead reimbursed bettors' initial wagers and fees. A lawsuit against Kalshi over the lack of winnings payouts is pending at the time of last update

Insider trading

A key principle of fairness in financial markets is that all participants should have access to the same information, at least in theory. If some participants have special access to nonpublic insider information about a market, or have control over events that could affect the market, then they could use that to manipulate the market at the expense of other participants.

Insider trading laws attempt to prohibit this kind of behavior in the stock market, but there are no such laws regulating prediction markets yet — at least in the United States. As a result, prediction market bettors run the risk getting swindled by betting on "uncertain" future events against people who are actually certain about what is going to happen. The recent Middle East news has shined a spotlight on this issue as well.

In mid-February 2026, Israeli authorities accused two people of using classified information to place bets on Polymarket, the world’s largest prediction market. Israeli broadcaster Kan News previously reported on government investigations into Polymarket bets related to the last round of U.S.-Israeli strikes on Iran in 2025.

And in late February 2026 six new accounts were opened and funded on Polymarket, and placed large “yes” bets on the question “U.S. strikes Iran by February 28, 2026?” The accounts netted more than $1.2 million in profits after the strikes began, raising further suspicions that insiders with connections to one of the militaries involved in this conflict are profiting from prediction markets related to it

Gambling-like behavior: Very high risk, potentially addictive

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.

» Need help budgeting? Check out this free budget template.

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