In 2026, some gamblers may find themselves owing federal income tax on a number that feels wrong. The reason is a small numeric change: For taxable years beginning after Dec. 31, 2025, amended Internal Revenue Code (IRC) §165(d) no longer allows gambling losses to offset gambling winnings one-to-one. Rather, the code will now permit a deduction for only 90% of aggregate wagering losses (including certain wagering-related expenses), even though losses remain deductible only up to wagering gains.^[1] Thus, for high-volume bettors, the statute can now decouple taxable results from economic results.

That change arrives as the public is being offered new ways to take positions on uncertain outcomes without placing a traditional “bet.” So-called “event contracts” and “prediction markets” allow users to buy and sell contracts that pay out based on sporting events, election outcomes, awards shows and other contingent events. The leading domestic exchange-listed examples are offered through exchanges regulated by the Commodity Futures Trading Commission (CFTC), which matters because federal law both authorizes and limits those listings.

What follows is a practical map for Oklahoma lawyers who may encounter the new §165(d) limitation and event contracts. Part I explains the 2026 change to §165(d). Part II defines event contracts and prediction markets and briefly summarizes their regulatory environment. Part III then examines two interesting and undecided legal questions in this space: whether these contracts can operate as a de facto end run around state gambling law through federal preemption and whether their federal tax treatment will track wagering rules or a derivatives regime after Congress has made high-volume betting materially more expensive on an after-tax basis.

PART I: The Amendment to §165(d)

Baseline Rule and the TCJA Expansion

Section 165(d) has long limited deductions for “losses from wagering transactions” to “the extent of the gains from such transactions.”[2] For most individuals, the practical effect is familiar: Gambling winnings are included in gross income, and gambling losses are deductible only up to winnings, typically as an itemized deduction.^[3]

Congress complicated the picture in 2017 through the Tax Cuts and Jobs Act (TCJA). For taxable years beginning after Dec. 31, 2017, Congress provided that “losses from wagering transactions” include “any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.”[4] That addition pulled certain expenses – travel, subscriptions, data and similar items – into the umbrella of §165(d), a significant change for taxpayers attempting to treat gambling as a trade or business.^[5]

The TCJA version of this rule was scheduled to sunset after 2025. Then, along came Public Law 119-21, which provides the current incarnation of §165(d).^[6] For taxable years beginning after Dec. 31, 2025, amended §165(d) effectively reduces the maximum deduction for aggregate wagering losses to 90% of those losses, while remaining subject to the winnings ceiling. The 90% limitation matters only when the winnings ceiling is not already the binding constraint; therefore, it is most consequential for bettors who are net winners or near break-even.^[7]

Two points in this simple change are easy to miss. First, Congress kept the TCJA concept that “losses” for §165(d) purposes include certain wagering-related expenses; the 90% cap now applies to that expanded base. Second, the cap still operates by year-end aggregation. It is not computed per wager, nor is it limited to a subset of wagers.

The Churn Problem: An Example

Under amended §165(d), even a net loser may show gambling income, and a net winner may see their expected gambling income overstated. The impact of the new law is most easily reflected, however, by a break-even bettor with significant gross volume.

Consider a taxpayer with $1 million in gambling winnings and $1 million in gambling losses for the year. Under prior law, assuming the taxpayer could itemize and substantiate losses, the taxpayer would report $1 million of gambling income and deduct $1 million of losses, producing zero net gambling income. Under amended §165(d), the deductible loss amount is limited to 90% of losses ($900,000) (ignoring wagering-related expenses for simplicity) and limited to winnings. The winnings ceiling does not bind here, so the deduction becomes $900,000. The taxpayer reports $1 million of income and deducts $900,000, producing $1 million of taxable income despite the breakeven economic result.

Limits on the Amendment’s Reach

While the stylized example above may make §165(d) appear unduly burdensome, some practical qualifiers temper the reach of the amendment.

First, many casual gamblers receive no federal tax benefit from wagering losses under any version of §165(d) because they take the standard deduction rather than itemizing.[8] For those taxpayers, gambling winnings remain taxable, and the loss limitation is largely irrelevant.

Second, the amendment does not guarantee that a losing gambler owes tax on phantom income. A taxpayer whose losses exceed gains will rarely have taxable gambling income after applying the §165(d) ceiling, even after the 90% amendment. The more common phantom income case is still rather rare: a high-volume bettor who is flat or slightly positive but whose gross wins and losses are enormous.

Third, Oklahoma practitioners should expect the change to be treated primarily as a federal income tax problem. Oklahoma starts with federal adjusted gross income (AGI), not federal taxable income, and for many recreational bettors, the wagering loss limitation operates as an itemized deduction below the AGI line.^[9] In addition, Oklahoma caps most itemized deductions (excluding charitable contributions and medical expenses) at $17,000, so high-volume bettors whose federal gambling-loss deductions would be very large frequently hit the Oklahoma deduction cap regardless.^[10]

There is a final limitation on the reach of the amendment, inherent in the nature of tax increases: They are (dis)incentives that drive taxpayers to seek an avoidance mechanism. If wagering has now become more expensive, the taxpayer’s natural next question is whether some products are not “wagering” at all. As more fully described in Part II, some bettors believe they have found their avoidance mechanism in event contracts and prediction markets.

PART II: Event Contracts and Prediction Markets

What an Event Contract Is (and Why It Looks Like a Wager)

An event contract is a derivative whose payoff depends on an event, contingency or value. Generally, they are framed as a binary proposition: A contract might pay $1 if Team A wins a game and $0 if it does not. Traders buy and sell “yes” and “no” positions at prices between $0 and $1, and the price reflects a market-implied probability of the event’s occurrence (subject to fees and other frictions).^[11]

From the user’s perspective, an event contract can feel like sports betting or other forms of quasi-gambling. From the regulator’s perspective, these products are analyzed through the Commodity Exchange Act (CEA) and CFTC rules governing futures, options, swaps and related derivatives.^[12]

What a Prediction Market Is (and What the CFTC Has To Do With Them)

In casual discussion, “prediction market” can describe (at least) two different things. First are CFTC-regulated entities – designated contract markets (DCMs) with related clearing infrastructure – that may be colloquially known as prediction markets. Second are platforms that have operated without such registration (often offshore), sometimes offering event-based binary options to U.S. users; these, too, are often called prediction markets.^[13]

Despite the inclusiveness of the term “prediction market,” the distinction matters. A DCM can list products through a statutory self-certification process, subject to CFTC review and enforcement, and it can credibly assert that the CEA supplies a federal regulatory home for the contract. Unregistered platforms do not share these characteristics; the CFTC has used enforcement actions to police U.S.-accessible event-based products offered outside the exchange framework.^[14]

Self-certification is also why legal disputes over event contracts move fast. A DCM may either seek commission approval of a new contract or submit a written self-certification that the contract complies with the CEA and CFTC regulations. Because the commission only needs to receive a self-certified submission one business day before listing, these products can reach the market quickly. That timing helps explain why the disputes so often arrive as emergency injunction fights: States move quickly to stop what they view as unlicensed gambling, and exchanges respond that federal law controls.[15]

The CEA’s ‘Special Rule’ and the CFTC’s Rulemaking (and Withdrawal)

A quick look at current offerings can make event contracts seem limited only by the platforms’ imagination. Kalshi – among the most visible CFTC-regulated prediction markets – offers markets across politics, sports, culture, crypto and other current events.[16]

There are ostensibly federal limits to these offerings, however, as the CEA contains a special rule for event contracts. In broad strokes, the statute authorizes the CFTC to review and prohibit certain event contracts that implicate specified categories (including “gaming”) if they are contrary to the public interest. The CFTC has implemented the special rule by regulation (17 C.F.R. §40.11), but the boundary between “permissible event derivative” and “impermissible gaming contract” remains ambiguous.^[17]

For example, a trader can take a position on whether the Oklahoma City Thunder will win a particular game. Within the federal exchange framework, that transaction is presented as trading a listed derivative contract rather than placing a traditional sportsbook wager. Many state regulators disagree with that framing, which is precisely why the federalism dispute matters.

In an effort to provide greater certainty, in May 2024, the CFTC issued a notice of proposed rulemaking aimed at further specifying what types of event contracts fall within the “gaming” prohibition, including a proposed determination that political contests are gaming.^[18] On Feb. 4, 2026, the commission formally withdrew that proposal and, the same day, announced the withdrawal of staff letter No. 25-36, a 2025 staff advisory concerning sports-related event contracts.^[19] Less than two weeks later, the commission filed an amicus brief in the 9th Circuit, arguing that event contracts traded on CFTC-regulated markets fall within the agency’s exclusive jurisdiction and that state gambling regulation is preempted as applied to those markets.^[20] The immediate result is continued uncertainty: The proposed categorical rule is gone, while the commission is now pressing a broad federal jurisdiction position in ongoing litigation.

PART III: Tax Characterization and Federalism

Part II ends where many practitioners will likely end up: waiting on the courts. The cases have moved quickly, but they have not produced a single, reliable answer.

Litigation Snapshot: Political Contracts and Sports Contracts

Event contracts on political outcomes – in particular, the 2024 federal election season – are where the modern conflict first became concrete. In September 2023, the CFTC disapproved KalshiEX LLC’s (now Kalshi) congressional control contracts (contracts on which political party would have a majority). Kalshi sued. In September 2024, the U.S. District Court for the District of Columbia vacated the disapproval order and enjoined the commission from enforcing it. The D.C. Circuit denied a stay, and in May 2025, the commission voluntarily dismissed the appeal.^[21]

After the 2024 election season, sports contracts became the next battleground. On Jan. 24, 2025, Kalshi self-certified sports event contracts, and several states quickly responded with cease and desist letters and related enforcement threats. The early rulings have split: New Jersey granted preliminary relief, Maryland refused it, and Nevada later dissolved the interim relief it had previously entered. The takeaway is narrow but important: The preemption issue is live, fact-sensitive and unsettled.[22]

Tax Characterization: No Easy Workaround

Because amended §165(d) now disallows part of aggregate wagering losses for some high-volume bettors, the natural question is whether event contracts can avoid the wagering loss limitation. That instinct is understandable. However, the tax answer does not turn on branding but, rather, the instrument, the trading framework and the code provisions that actually apply.

Several paths are plausible. If the contracts are treated as wagers, §165(d) remains the problem. If they fall within a derivatives regime, such as Code §1256, timing and character may change materially, but so may loss limitations and mark-to-market consequences. If they are treated as capital positions outside Code §1256, ordinary capital gain and capital loss rules come into play. Listing on a regulated exchange may matter, but it does not, by itself, answer the tax question.

If the contracts are treated as wagering transactions, the taxpayer is back in familiar §165(d) territory, including the new 90% limitation. In that world, event contracts are simply a different wrapper for the same deduction problem.[23]

If a contract actually qualifies for §1256, year-end mark-to-market and 60-40 capital treatment can change the result materially. That may help some clients and hurt others, as §1256 brings its own constraints.[24] It remains a capital regime, and special loss rules and carryback limits can matter just as much as rates.[25]

If the contract is a capital asset outside §1256, the usual capital gain and capital loss rules apply. That can be better or worse depending on the client’s other capital positions and ability to use losses.[26]

The reporting mechanics may matter as much as the label. Wagering often produces gross income with any loss offset constrained by §165(d), while capital and derivatives regimes more often compute gain or loss within their own buckets. That can affect AGI and other limitation questions even when the economics look similar.

For now, the safer practitioner view is simple: Event contracts are a product category with open tax-characterization questions, not a settled tax strategy.

Federalism: Preemption in Brief

Even if the tax result was clear, the legal-access question remains: Can a client lawfully trade sports event contracts in a state that treats sports wagering as illegal? The exchange-side argument relies on the CEA’s exclusive jurisdiction clause and the contention that state gambling laws are preempted as applied to a CFTC-listed contract. The state-side response is that these contracts function as sports wagers within the state’s traditional police power and that the CEA’s special rule for event contracts (including “gaming”) signals that Congress did not intend blanket displacement of state gaming law.^[27]

Until appellate courts or the CFTC provide clearer boundaries, Oklahoma practitioners should treat preemption as a still-contentious theory. Clients who want to trade these products should be advised that 1) enforcement posture varies by state, 2) litigation outcomes have been mixed and 3) federal regulation does not make state law irrelevant.

CONCLUSION

Congress changed the after-tax economics of high-volume betting with one small amendment to §165(d). For some bettors, the new 90% limitation can create taxable income that exceeds economic profit. Event contracts complicate the picture, but they do not yet supply a settled answer on either tax characterization or preemption. Until the tax characterization and preemption questions are shown to be less volatile, practitioners and clients alike should treat event contracts as an asset class worth watching – but perhaps from a distance.

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ABOUT THE AUTHOR

Jay P. Eischen is a 2022 graduate of OSU and a 2025 graduate of Vanderbilt Law School. Mr. Eischen founded Eischen Law Firm PLLC in 2025, where he practices in Fairview, principally in the areas of real property and estate planning.

 

 

 

 

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ENDNOTES

^[1] Pub. L. No. 119-21, §70114, 139 Stat. 72, 166-67 (July 4, 2025) (amending I.R.C. §165(d)) (effective for taxable years beginning after Dec. 31, 2025).

[2] I.R.C. §165(d) (2024).

^[3] I.R.C. §§61(a), 63(d), 165(d) (2024).

[4] Tax Cuts and Jobs Act, Pub. L. No. 115-97, §11050, 131 Stat. 2054, 2088-89 (2017); see also I.R.C. §165(d) (2024).

^[5] Tax Cuts and Jobs Act, Pub. L. No. 115-97, §11050, 131 Stat. 2054, 2088-89 (2017) (adding flush language to I.R.C. §165(d) for taxable years beginning after Dec. 31, 2017).

^[6] Pub. L. No. 115-97, §11050, 131 Stat. at 2089 (sunset provision); Pub. L. No. 119-21, §70114, 139 Stat. 72, 166-67 (2025) (extending and modifying limitation on wagering losses).

^[7] Pub. L. No. 119-21, §70114, 139 Stat. 72, 166-67 (2025) (amending I.R.C. §165(d) for taxable years beginning after Dec. 31, 2025).

[8] I.R.C. §§63(c), (d), 165(d) (2024); I.R.S., Topic No. 419, Gambling Income and Losses (updated Oct. 3, 2025); I.R.S., 2025 Instructions for Schedule A (Form 1040), line 16 (2026).

^[9] Okla. Stat. tit. 68, §2353 (2025) (Oklahoma adjusted gross income); see also I.R.C. §63(d) (2024) (itemized deductions).

[10] Okla. Stat. tit. 68, §2358(E)(3)(b) (2025).

[11] Event Contracts, 89 Fed. Reg. 48968, 48970 (June 10, 2024) (describing event contracts as derivative contracts, typically with a binary payoff structure); KalshiEX LLC v. Flaherty, No. 25-cv-02152-ESK-MJS, 2025 WL 1218313, at *1 (D.N.J. April 28, 2025) (describing binary sports-event contracts).

[12] 7 U.S.C. §§1a(19)(iv), 1a(47)(A)(ii), 2(a)(1)(A), 7a-2(c)(5)(C) (2022); Event Contracts, 89 Fed. Reg. 48968, 48968-70 (June 10, 2024).

[13] Event Contracts, 89 Fed. Reg. 48968, 48969-70 (June 10, 2024) (discussing event contracts listed by CFTC-registered exchanges); In re Blockratize, Inc. d/b/a Polymarket.com, CFTC Docket No. 22-09, Order, at 2-3 (Jan. 3, 2022); Commodity Futures Trading Comm’n, Press Release No. 8478-22, “CFTC Orders Polymarket to Pay $1.4 Million for Offering Illegal Off-Exchange Event-Based Binary Options Contracts and to Wind Down Markets,” (Jan. 3, 2022).

[14] 7 U.S.C. §7a-2(c) (2022); 17 C.F.R. §§40.2, 40.3 (2025); In re Blockratize Inc. d/b/a Polymarket.com, CFTC Docket No. 22-09, Order, at 2-3 (Jan. 3, 2022).

[15] 7 U.S.C. §7a-2(c) (2022); 17 C.F.R. §§40.2(a)(2), 40.11(c) (2025); Event Contracts, 89 Fed. Reg. 48968, 48972-73 (June 10, 2024).

[16] Kalshi, Finding Markets, Help Center, https://bit.ly/4c0jMqr (last visited March 12).

^[17] 7 U.S.C. §7a-2(c)(5)(C) (2022); 17 C.F.R. §40.11 (2025).

^[18] Event Contracts, 89 Fed. Reg. 48968 (proposed June 10, 2024); Commodity Futures Trading Comm’n, Press Release No. 8907-24, “CFTC Issues Proposal on Event Contracts,” (May 10, 2024).

^[19] Event Contracts; Withdrawal of Proposed Regulatory Action, 91 Fed. Reg. 5386, 5386-87 (Feb. 6, 2026); Commodity Futures Trading Comm’n, Press Release No. 9179-26, “CFTC Withdraws Event Contracts Rule Proposal and Staff Sports Event Contracts Advisory,” (Feb. 4, 2026).

^[20] Commodity Futures Trading Comm’n, Press Release No. 9183-26, “CFTC Reaffirms Exclusive Jurisdiction over Prediction Markets in U.S. Circuit Court Filing,” (Feb. 17, 2026); Amicus Brief of Commodity Futures Trading Commission, N. Am. Derivatives Exch., Inc. v. State of Nevada, No. 25-7187 (9th Cir. Feb. 17, 2026).

[21] Commodity Futures Trading Comm’n, Press Release No. 8780-23, “CFTC Disapproves KalshiEX LLC’s Congressional Control Contracts,” (Sept. 22, 2023); KalshiEX LLC v. Commodity Futures Trading Comm’n, No. 23-cv-03257 (JMC), 2024 WL 4164694 (D.D.C. Sept. 12, 2024); KalshiEX LLC v. Commodity Futures Trading Comm’n, 119 F.4th 58 (D.C. Cir. 2024) (denying stay); KalshiEX LLC v. Commodity Futures Trading Comm’n, No. 24-5205, 2025 WL 1349979 (D.C. Cir. May 7, 2025) (granting unopposed motion for voluntary dismissal).

[22] KalshiEX LLC v. Flaherty, No. 25-cv-02152-ESK-MJS, 2025 WL 1218313, at *4-7 (D.N.J. April 28, 2025) (granting preliminary injunction); KalshiEX LLC v. Martin, No. 25-cv-1283-ABA, 2025 WL 2194908, at *1, *5-13 (D. Md. Aug. 1, 2025) (describing Jan. 24, 2025, self-certification and April 7, 2025, cease and desist letter; denying preliminary injunction); KalshiEX LLC v. Hendrick, No. 2:25-cv-00575-APG-BNW, 2025 WL 3286282 (D. Nev. Nov. 24, 2025) (dissolving preliminary injunction).

^[23] I.R.C. §165(d) (as amended by Pub. L. No. 119-21, §70114, 139 Stat. 72, 166-67 (2025)).

^[24] I.R.C. §1256(a), (b) (2024).

^[25] I.R.C. §§1211(b), 1212(b), 1212(c), 1256 (2024).

^[26] I.R.C. §§1211(b), 1212(b) (2024); cf. I.R.C. §165(d) (as amended).

^[27] 7 U.S.C. §2(a)(1)(A) (2022) (exclusive jurisdiction); 7 U.S.C. §7a-2(c)(5)(C) (2022) (special rule for event contracts); 17 C.F.R. §40.11 (2025).