KPMG: What could the regulatory implications of prediction markets be?

The rapid expansion of exchange betting and prediction markets into sports-based event contracts has sparked significant interest and regulatory attention. These innovative financial products are raising discussions around jurisdiction, legal risk, taxation and industry alignment. I participated in recent panel alongside experts including DJ Hennes (KPMG Risk, Regulatory & Compliance Advisory), Bob Stoddard (KPMG US Gaming Tax Leader), Alex Costello (VP of Government Relations at the American Gaming Association), and Reade Jacob (Counsel at WilmerHale), on these emerging dynamics and what they could mean for the future of prediction markets in the US.

State vs. Federal oversight

At the heart of the current debate is the divide between federal and state regulation. The Commodity Futures Trading Commission (CFTC) allows new financial products, including event contracts, to be self-certified and launched quickly – an approach that prioritizes innovation. However, this has raised alarms among state gaming regulators where established sports betting frameworks may be at odds with the CFTC’s interpretations. Some states have argued that these products resemble traditional sports wagers and should fall under their oversight.

Meanwhile, the CFTC exercised its authority to review sports-based event contracts to determine their permissibility under the Commodity Exchange Act (CEA), the federal statute for the derivatives and futures markets. As part of this process, the CFTC requested industry comment and scheduled a public roundtable, after which it will determine whether such contracts (i) constitute “gaming” and (ii) are “contrary to the public interest.”11] Until the CFTC completes its review process, a definitive resolution remains elusive.

Legal risk and market integrity

Beyond regulatory boundaries, legal concerns are also at play. States that have not legalized sports betting are particularly concerned about how prediction markets could impact their legal frameworks and economies. Maintaining the integrity of these markets is another high priority. Concerns about transparency, manipulation and consumer protection are pushing regulators to consider stricter oversight mechanisms. The CFTC is evaluating potential enhancements such as disclosure rules and real-time surveillance to prevent fraud. State regulators are also exploring shared enforcement models to strengthen oversight and bolster public confidence.

Tax considerations for operators and users

The tax implications of these markets are equally complex. If classified as sports betting, operators could face both federal excise taxes and state-level gross gaming revenue (GGR) taxes. From the user side, tax treatment hinges on whether a participant is categorized as a trader or investor. Traders may deduct losses and treat gains as ordinary income, while investors may face more limited deductions and higher capital gains rates.

This uncertainty is causing hesitation across the industry. Operators are wary of launching products that could be subject to unpredictable tax burdens or future reclassification. The CFTC’s ultimate stance could shape the economic viability of the entire sector, influencing how and where these platforms are deployed.

Industry division and stakeholder response

Maintaining the integrity of these markets is another high priority. Concerns about transparency, manipulation, and consumer protection are pushing regulators to consider stricter oversight mechanisms.

Stakeholder engagement is increasing in response. The American Gaming Association (AGA), for example, has been adamantly opposed to the introduction of federally regulated sports-based event contracts. In its letter to the CFTC,

AGA commented that, “By circumventing the important regulatory protections implemented by states, these platforms also raise the prospect of considerable consumer and marketplace harms.”

Upcoming CFTC roundtables will offer an additional opportunity for industry voices to weigh in. While no immediate decisions are expected, the discussions will help shape the regulatory roadmap and inform future rulemaking.

What comes next?

The future of prediction markets and exchange betting is still being written. Regulatory clarity, especially from the CFTC, state agencies and potentially Congress, will be crucial in determining the direction of the market. Operators, investors and regulators must all prepare for a range of outcomes, including potential legal challenges and evolving tax frameworks.

Industry participants are encouraged to stay actively engaged. The decisions made in the coming months will have a lasting impact on how and where prediction markets grow. These markets could offer new tools for engagement, investment and economic activity. But without a coordinated regulatory approach, they risk becoming mired in legal and jurisdictional disputes.

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