Derek Stevens owns a few casinos in Las Vegas. He tweeted this out the other day.

In Prediction Markets (which we are being told isn’t Sports Gambling but are sports contracts) you are required to pay income tax on all Unrealized Gains every December 31 due to Mark To Market accounting of Section 1256 for contracts? Is that correct ??

The IRS hasn’t ruled on prediction markets. Here is a ten-minute vid explaining it.

Let’s apply some consistency, which courts and accountants love.

The CFTC has said prediction markets are legal. The establishment sports betting industry is challenging the ruling in state courts. State gambling regulators have ruled against the way prediction markets operate as they pertain to sports gambling. Gambling has long been regulated by the states, not the federal government. It’s similar to other industries, like insurance.

Seasoned commodity traders are well aware of what Mr. Stevens is talking about. Section 1256 applies directly to them.

Let’s look at a real-world example. Ole Miss beat Georgia last night in the Sugar Bowl. Here is a link to the price action on Kalshi. But, the salient example is where the market closed on December 31, 2025. Georgia had a 70% chance of winning, and Ole Miss 30%.

Assume you bought Georgia at some price lower than 70%. That means you had a winning trade on as of midnight Dec 31. In commodity trading, we’d call that an open position.

The IRS says all open positions must be marked to market, and then income tax paid.

Why?

In the tax reform bill of 1986, the US government eliminated the loophole on commodities. Prior to that bill becoming law, you could shelter your entire yearly income by using a sophisticated commodity spread. To simplify, you’d enter into the spread in December and post a huge loss, negating any tax you owed on income. In the first few days of January, you’d unwind the spread and get the gain back. It was purely a paper thing.

On trading floors, the spread decks would fill and be huge as the tax spread played out. Any commission and money you lost by giving up the edge on the bid/ask spread was cheaper than paying tax.

That ended.

Instead, you owed tax at a 60/40 split. 60% of your tax was the income bracket you would normally be in based on your income, and 40% was the capital gains tax rate. The blended rate usually worked out to around 22% for most people. The blended rate was a compromise. It recognized the risk involved with commodity trading, along with the bona fide economic value of having commodity markets operating meant for economic growth.

Uncle Sam always gets his piece.

One year, I had a huge position with a very large gain in it. On December 31, it was marked to market, and I owed the tax. During the first week of January, the entire position went against me, and I lost almost 2/3 of the gain. Didn’t matter to the IRS; I owed the tax.

If you sustain big losses trading, you can carry those forward against future income, paying less tax. These are called “tax loss carry forwards”.

If we want consistency across markets, and I think we do. We’d want to apply the same tax law to prediction markets that we do in commodity trading markets. This is especially true if the prediction market advocates want to win the day when the cases get rolled up into the Supreme Court. You cannot have your cake and eat it too.

In our example above, if you had bought Georgia at a price lower than 70%, you owe the tax on the gain as long as you haven’t closed your position. You owe it at 60/40.

The game was played yesterday, and the Dawgs got beaten. You lost 100% of your wager. You still owe the tax. But you get a tax loss carry forward. Some salve on the wounds of Georgia bettors. Hotty Toddy.

Again, my disclaimer is that I am not a tax attorney, nor am I a CPA. Consult your own people for your own personal advice. But, if you apply simple logic to the problem, you can see your way clear to paying taxes the way the Tax Reform Act of 1986 instructed them to be paid as they pertain to commodity trading regulated by the CFTC.