What Are Prediction Markets?

Prediction markets are regulated financial exchanges where participants buy and sell event contracts — binary instruments that settle at exactly $1 if a specified real-world outcome occurs and $0 if it does not. Unlike a sportsbook that sets fixed odds on a game, a prediction market uses a continuous double-auction mechanism, meaning the price of any contract fluctuates between $0.01 and $0.99 based on live supply and demand — and that price doubles as an implied probability. As of May 2026, the two largest US-facing platforms are Kalshi (launched March 2023 under CFTC oversight) and Polymarket (operating since 2020, primarily via crypto wallets and currently blocked for US residents under CFTC enforcement action).

How the Pricing Model Works

In a traditional sportsbook, the operator sets a line — say, -110 on both sides of a spread — and collects the margin (the "vig") regardless of outcome. In a prediction market:

• A contract trading at $0.65 implies a 65% probability of the event occurring.
• Buyers and sellers set prices through open-order books, not a house.
• The platform earns a small transaction fee (Kalshi charges ~1–3% of winnings as of January 2025) rather than a built-in spread on every bet.

This structure means prices can be more accurate than bookmaker lines, because they aggregate information from many traders simultaneously — a property researchers call the wisdom of crowds.

Who Regulates Prediction Markets?

Regulation is the sharpest dividing line between prediction markets and sportsbooks:

Platform	Regulator	US Legal Status (as of May 2026)
Kalshi	CFTC (federal)	Legal in all 50 states
Polymarket	None (crypto-native)	Blocked for US residents since 2022
PredictIt	CFTC (no-action letter)	Operating under a limited academic exemption

State-licensed sportsbooks operate under individual state gaming commissions, making prediction markets and sportsbooks parallel — not competing — legal regimes at the federal level.

What Can You Trade?

As of May 2026, Kalshi lists event contracts across more than 20 categories, including:

• Politics (election outcomes, legislative votes)
• Economics (Federal Reserve rate decisions, CPI readings)
• Weather (hurricane landfalls, snowfall totals)
• Sports (Super Bowl winner, NBA championship)

A single contract on a sporting event functions identically to a binary sports wager, but the legal framework and pricing mechanism differ entirely from a state-licensed sportsbook.

Market Size and Growth

Prediction markets remain small relative to sports wagering. The US legal sports-betting market generated approximately $11.1B in gross gaming revenue in 2023, according to the American Gaming Association. By contrast, Kalshi reported $5B in total trading volume from its launch in March 2023 through December 2024 — meaning annual revenue (fees) is a fraction of that figure. Polymarket processed roughly $3.6B in trading volume during the US election cycle alone in Q3–Q4 2024, illustrating how political events can drive sharp volume spikes.

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FAQ

Are prediction markets legal in the United States? As of May 2026, CFTC-regulated platforms like Kalshi are legal nationwide because event contracts are classified as derivatives under the Commodity Exchange Act, not as gambling. State gaming laws do not apply to federally regulated derivatives exchanges.

What is the difference between a prediction market and a sportsbook? A sportsbook sets fixed odds and keeps a margin on every transaction, while a prediction market uses a live auction where prices are set by traders. The legal regimes are also different: sportsbooks are licensed state-by-state, whereas prediction markets fall under federal CFTC jurisdiction.

How does a prediction market make money? Platforms earn revenue by charging a percentage fee on net winnings rather than embedding a margin in the odds. Kalshi's fee structure as of January 2025 ranges from 1% to 3% of profits, depending on the contract category.

Can prediction market prices be manipulated? Manipulation is possible in low-liquidity contracts but becomes increasingly costly as trading volume rises. Academic studies published through 2023 show that highly liquid political prediction markets (like those run by Iowa Electronic Markets since 1988) have historically outperformed polling averages in forecasting election outcomes.

Are winnings from prediction markets taxable in the US? Yes. The IRS treats gains from CFTC-regulated event contracts as ordinary income or, in some cases, Section 1256 contract gains — which receive a blended 60/40 long-term/short-term capital gains treatment. Traders should consult a tax professional, as the rules as of 2025 are still being clarified through IRS guidance.