The Takeaway: The Double-Edged Sword Of Prediction Markets Going Mainstream
Gambling news roundup: Report shows how efforts to legalize California sports betting are still plagued by in-fighting; new analysis details potential impacts of gambling loss tax deduction change.
Every Thursday in The Takeaway, The Closing Line provides commentary on trends and news in the gambling industry.
There was a veritable parade on the virtual streets of social media on Wednesday night and all day Thursday for prediction markets.
They had a real moment in the spotlight in the latest episode of South Park, with both Kalshi and Polymarket getting name-checked. The CEOs and employees of both companies were taking a victory lap, and honestly, I don’t blame them. South Park has crossed over into the cultural consciousness in a bigger way with its newest season; prediction markets riding that wave is certainly a feather in the industry’s cap.
But at the same time, the moment for prediction markets is not necessarily all rainbows and unicorns. As big as Kalshi and Polymarket have gotten — they are both unicorns by valuation — they are still small in the grand scheme of things. Despite hundreds of millions being bet/traded at Kalshi every week, it’s not particularly big in comparison to the largest state-regulated sportsbooks.
That’s all to say this: Americans don’t really know what prediction markets are, or what’s going on at them. As that changes, it’s definitely good. But it can also be bad.
We’ve seen this movie before with DraftKings and FanDuel circa 2015, in the heady days of daily fantasy sports and prior to the expansion of legal sports betting. One day, they were both massive companies, raising lots of money, generating lots of revenue, and spending a lot on letting everyone know who they were. At one point in 2015, a DraftKings commercial was appearing every 90 seconds.
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It wasn’t quite overnight, but in very short order things went sideways as more and more people learned about daily fantasy sports. The legality of DFS came under fire; the headlines were often negative. In hindsight, if a few things had gone differently, it’s possible both FanDuel and DraftKings would have folded. (Of course they didn’t, and now they are both online gambling behemoths.)
To be fair, Kalshi and Polymarket are ahead of the DFS curve in one important way. The legal battles are already underway; there’s even a pretty good chance that Kalshi ultimately wins its cases in federal court.
What they haven’t done is a speed-run on becoming well-known by the general public. Yes, we’ll see references to odds from Polymarket and Kalshi on the news from time to time, but the number of normal people who really know that these are betting sites for anything you want to bet on — sports included — is relatively low as we sit here.
South Park and the recent growth of sports betting via prediction markets are the start of the steeper upward trend of an increased awareness of prediction markets. Polymarket is launching in the US soon, and that will come with even more eyeballs.
What I can tell you is there will be a cohort of people that will be very excited about legal nationwide sports betting. There will also be a large group of people who are going to be less than excited that we are experiencing the largest expansion of legal online gambling in the nation’s history.
Is more people learning about prediction markets good for the companies in the space? Yes. Could it be bad? Also yes.
If you want to get up-to-date on prediction markets, I have it all covered here:
And more on South Park:
‘South Park’ Introduces Prediction Markets To Mainstream America (InGame): “For those of us in the gambling industry, it’s all too easy to forget most of Americans couldn’t tell a parlay from a teaser. Or, for that matter, a ‘bet’ from an ‘event contract.’ Prediction markets — all the rage and all anyone and everyone is talking about in our little corner of the world — hit mainstream America bigly on Wednesday night when the gang from South Park decided to wade into the waters. The search data doesn’t lie. Within hours of South Park’s latest episode hitting screens, searches for ‘prediction markets exploded. Dustin Gouker’s tweet showing the search spike tells the story better than any industry report ever could: America just learned about prediction markets from a cartoon fourth-grader named Cartman betting on whether Kyle’s mom would bomb a Palestinian hospital.”
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Gambling news roundup
SBA ‘YES Pledge’ For Legal California Sports Betting Circulating, But CNIGA Calls It A ‘Corporate-Driven Maneuver’ (InGame): “Members of the Sports Betting Alliance’s (SBA) Tribal Advisory Council are circulating a document to rally support to legalize sports betting in California, but the state’s biggest tribal association does not support it. The document, obtained Wednesday by InGame, encourages tribes to ‘commit to working together to secure voter or legislative approval of a tribally governed framework for online sports betting.’”
Called the ‘YES Pledge: Support for Online Sports Betting in California,’ the document lists out ‘core commitments,’ including ‘collaborate with groups like CNIGA, SBA, other industry experts and entities, and legislators to develop a solution that legalizes online sports betting in California.’ CNIGA is the California Nations Indian Gaming Association, and the SBA is comprised of bet365, BetMGM, DraftKings, Fanatics Sportsbook, and FanDuel.” …
“But CNIGA sent a strongly worded response obtained by InGame to the state’s 109 tribes indicating that it did not ‘originate’ and does not ‘endorse’ or ‘support’ the pledge.”
My take: Keep betting “no” on whether California will legalize sports betting. For now, the market belongs to the early movers in prediction markets, daily fantasy sports and the offshore sports betting industry. But probably not sweepstakes sportsbooks anymore.
The OBBB Gambling Tax Provision: An Existential Threat to Regulated Sports Betting (Bettors Voice): I am going to include the executive summary here…
“The One Big Beautiful Bill Act (OBBB), signed into law on July 4, 2025, contains a provision that poses an existential threat to the regulated sports betting industry in the United States. Section 70114 of the Act limits gambling loss deductions to 90% of actual losses starting January 1, 2026, creating ‘phantom income’ scenarios where bettors owe substantial taxes on money they never actually won.
This seemingly minor tax adjustment strikes at the heart of an industry built on extreme customer concentration. Academic research demonstrates that just 10% of bettors generate 80% of total handle in regulated sports betting markets. The OBBB’s phantom income provision directly targets this critical customer segment — professional and high-volume recreational bettors who drive the industry’s economics.
The financial implications are staggering. Under conservative migration scenarios, where just 15% of high-value customers seek alternatives to avoid phantom income taxation, the industry faces $18 billion in annual handle loss, $1.5 billion in gross gaming revenue decline, and $420 million in state tax revenue reduction. More severe scenarios project handle losses exceeding $48 billion annually.
These customers have immediate escape routes: prediction markets regulated by the Commodity Futures Trading Commission (CFTC), which maintain 100% loss deductibility and operate under more favorable tax frameworks, and offshore sportsbooks that have overtaken the regulated market with $163 billion in handle versus $150 billion for legal operators in 2024. Kalshi, the leading U.S. prediction market, recently processed $303 million in sports-focused volume during a single weekend in September of 2025, demonstrating the viability of these alternatives.
The convergence of phantom income taxation, regulatory arbitrage opportunities, and the industry’s dependence on a small customer base creates a perfect storm that could fundamentally reshape American sports betting. Without legislative intervention through The OBBB Gambling Tax Provision: An Existential Threat to Regulated Sports Betting Executive Summary 4 of 37 the FAIR Bet Act or similar remedy, the regulated industry faces an unprecedented migration of its most valuable customers to platforms operating under different regulatory frameworks.”
Full report here.
My take: If you care about this issue, definitely read it, it’s by far the most detailed analysis I have seen about the potential effects of the law.
I definitely agree this is a threat to US sports betting without a fix. Accurately reporting your sports betting activity under the new provision is going to result in a lot less money in your pocket.
But that’s the rub…I imagine there’s already a lot of underreporting and there’s going to be more, plus more tax fraud when people think about filing to a shrinking IRS. I would bet a lot of money that a vast majority of recreational sports bettors aren’t even thinking about filing taxes the way you’re supposed to. They’re netting wins and losses and calling it a day, if they’re claiming those wins and losses at all.
Underreporting and fraud likely apply less to the high-value customers this research specifically contemplates, but it’s still in play.
There’s been a lot of chatter saying you don’t have to claim prediction markets winnings and losses as gambling. That’s certainly a defensible position, but I think you probably want to talk with a tax professional before you accept that as the gospel. (The paper notes that Kalshi issues 1099-B’s.)
For NFL season, Vixio Shares Forecasts & Commentary on Prediction Markets: “With the new NFL season now in full swing, Vixio forecasts that around $35bn in legal sports bets will be placed on the 2025 season. Roughly 63.5% of which Vixio estimates will be attributed to singles bets and 36.5% to parlay bets (though parlays will drive the majority of gross revenue).” …
James Kilsby, Chief Analyst, Vixio, explains: “The eighth NFL season since the landmark U.S. Supreme Court ruling of 2018 finds the still rapidly growing sports betting market at an early inflection point, as traditional sportsbooks licensed by state regulators face competition for the first time from upstart prediction markets such as Kalshi offering sports-event contracts for both college and pro football, under the guise of federal regulation via the Commodity Futures Trading Commission.
“This situation has set state regulators and federally-regulated prediction markets up for a high-stakes battle before federal courts in various circuits across the country, with the potential to change the legal landscape for the sports betting industry indefinitely,” Kilsby concludes.
You can download a copy of Vixio’s outlook here.
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Sports Betting Industry Mobilizing Against Another Illinois Tax Threat (Covers): “At the end of August, the Chicago Financial Future Task Force, launched by Mayor Brandon Johnson to assist with a forecasted $1.1-billion deficit, recommended the Illinois metropolis consider a 50-cent tax on all online sports wagers placed within its borders. This could, the task force estimated, generate an additional $17 million in annual revenue for cash-strapped Chicago.”
“Yet the new tax on online sports betting in Illinois would follow the statewide per-bet tax that kicked in at the start of July for mobile sportsbook operators. It would also follow a tax hike that was approved by Illinois lawmakers last year, which increased the revenue-related levy to as high as 40% of receipts for bookmakers.”
My take: This is an extremely dumb idea. I don’t have anything else to say about it.
MGM Empire City is first New York casino applicant to receive local approval (iGB): “The fourth New York casino vote was the charm for MGM Empire City Thursday morning, as it became the first bidder for a downstate licence to win approval from its appointed community advisory committee (CAC). All three previous bids to be voted upon by local committees were rejected, but Empire City went through on a unanimous 5-0 vote.”
“It will now move on to the next round under the state’s Gaming Facility Location Board (GFLB). That board will start a fresh round of consideration, with a deadline of 1 December to make recommendations on awarding up to three casino licences. The commercial licences will be awarded by 31 December by the state gaming commission.”
Newsletter corner
Straight to the Point, Steve Ruddock: “The UK Gambling Commission has released a new study on illegal online gambling (the first in a series of reports), produced in collaboration with Yonder Consulting: ‘Illegal Online Gambling: Consumer Awareness, Drivers and Motivations’. The impetus of the study was to determine the appeal and risks of the black market. … As I suggested, the report concluded that most users don’t abandon regulated sites but supplement them with illegal activity. Motivations include superior odds and bonuses, unrestricted content, flexible payment options, avoiding limits (such as stake caps or ID checks), and easy access.”
Betting startups | How Pikkit went from launch to $10B in tracked bets in four years: When Pikkit launched in 2021, automated bet tracking was a novel idea. By logging in to a sportsbook once, users could sync every wager to their Pikkit account via its ‘BookSync’ technology—no manual entry required. For a while, that was enough to stand out. Today, co-founder Pranav Tadikonda agrees that while the feature has become table stakes amid a wave of other betting tools flooding the sector in recent years, he maintains that ‘automated bet tracking is what makes the product go.’”
“It makes it verifiable, it makes it trustworthy. But also it allows the user to actually spend the time… doing the things that they actually want to do,” Tadikonda said on The BettingStartups Podcast.
FanDuel’s Trusted Voices: Conversations About Betting is designed to equip adults, including parents and coaches, with tools and resources to talk to young people about gambling, including information on warning signs, risks and proxy betting. The program is led by retired professional basketball player Randy Livingston and his wife, basketball agent Anita Smith, who share their personal stories related to problem gambling, with the hope of preventing others from experiencing similar harms. Learn more and join the conversation here.