What Are Prediction Markets - And Which Ones Are Legal in the US?

A prediction market is an exchange where people buy and sell contracts based on the outcome of real-world events. These are sometimes called event contracts. The price of a contract reflects the crowd's collective estimate of the probability that the event will occur.

The mechanics are simple. Every market is built around a binary question with a clearly defined resolution: Will the Federal Reserve cut rates at the June 2026 meeting? Will Michigan win the 2026 NCAA Championship? Will inflation exceed 3% by year-end? Will a government shutdown happen before September?

For each question, two contracts exist: Yes and No. Each contract is priced between $0.01 and $0.99 and pays out exactly $1.00 if your outcome occurs - or $0.00 if it does not. If you buy a 'Yes' contract at $0.65, you are paying 65 cents for the chance to receive $1.00 if the event happens. That price - $0.65 - is the market's implied probability: a 65% chance.

Prediction markets use an order book system - the same mechanism used by stock exchanges. Buyers post bids, sellers post asks, and trades execute when a buyer's price matches a seller's price. There is no house setting lines. No oddsmaker. No sportsbook deciding what the odds are. The price is set entirely by supply and demand from real traders.

On most operators, contracts trade in one-cent ($0.01) increments. The price to buy at the best ask and the price to sell at the best bid are often one penny apart on liquid markets - so entering and exiting quickly usually means paying that small spread to other traders, not paying a sportsbook-style vig baked into a single posted line.

This is what makes prediction markets fundamentally different from sports betting. At a sportsbook, the house sets the line and takes a cut regardless of outcome. In a prediction market, you are trading against other participants, not against the house. If you think the market is mispriced - if you believe the true probability is higher or lower than the current price - you can trade on that belief and profit if you are right.

Once the event concludes, the market settles. Winning positions receive $1.00 per contract. Losing positions expire at zero. You can also sell your position before settlement - locking in a profit if the price has moved in your favor, or cutting a loss if it has moved against you.

Prediction markets are not new. Political betting pools ran on Wall Street curb exchanges during every US presidential election from 1884 through 1940. The modern version began in 1988, when three economics professors at the University of Iowa created the Iowa Electronic Markets - a small-scale platform for trading on political outcomes. [2]

Those early markets consistently outperformed traditional polling. The logic was straightforward: when real money is on the line, people are incentivized to think carefully rather than offer uninformed opinions. Skin in the game improves forecasting.

The internet brought prediction markets to a broader audience. In 2001, the think tank DARPA briefly explored a 'Policy Analysis Market' that would let traders bet on geopolitical events - the project was cancelled after political backlash. In 2014, the CFTC granted a no-action letter to a platform called PredictIt, operated by Victoria University of Wellington, allowing limited academic-scale political trading. And then, in the early 2020s, two platforms changed everything: Kalshi and Polymarket.

Modern prediction markets cover a remarkably wide range of events. The major platforms in 2026 offer contracts across politics, macroeconomics, sports, weather, corporate milestones, and more.

Prediction markets are not just a way to wager on outcomes. They serve a genuine economic function that distinguishes them - at least in the eyes of regulators and economists - from pure gambling.

The price of a contract is a real-time, aggregated forecast. When the Polymarket odds for a presidential candidate hit 60%, that number represents the collective judgment of thousands of traders with real money at risk - arguably more informative than any single poll.

Price discovery: prediction markets absorb dispersed information from experts, insiders, data analysts, and casual observers alike. Whoever has the best information can profit by trading on it, which pulls that information into the public price.

Information aggregation: forecasts combine into one number everyone can see.

Hedging: a business that would suffer significant losses if a particular policy passes could buy event contracts on that policy passing, offsetting business risk. A farmer might buy a drought contract to hedge crop losses.

Forecasting accuracy: academic research consistently finds that prediction markets outperform expert consensus and polling averages, particularly for near-term political and economic events. The 2024 election cycle was the most visible demonstration of this at scale.

This is where things get complicated - and where the answer changes frequently. The legal status of prediction markets in the United States in 2026 is genuinely contested, with federal regulators, state attorneys general, and the courts all staking out different positions. Here is an honest summary of where things stand.

The key legal question is: are prediction markets gambling or financial derivatives? The answer determines who regulates them and whether they are legal.

The Commodity Futures Trading Commission (CFTC) - the same agency that oversees oil futures and agricultural commodities - has taken the position that prediction market event contracts are a type of derivative, specifically a 'swap' under the Commodity Exchange Act. Under this framing, they fall under federal financial regulation, not state gambling law.

In January 2026, new CFTC Chairman Michael Selig announced a four-part agenda explicitly supporting the development of prediction markets and event contract exchanges. [4] In March 2026, the CFTC issued an Advance Notice of Proposed Rulemaking - the first step toward creating a formal regulatory framework specifically for prediction markets, with a public comment period closing April 30, 2026. [3]

This is a significant shift. The CFTC under previous leadership had tried to restrict prediction markets. The current CFTC is actively working to legitimize them under federal oversight.

Status: Legal for all US residents · Regulated by: CFTC (Designated Contract Market)

Kalshi is the only prediction market that operates as a fully registered exchange under direct CFTC oversight. It spent years navigating the regulatory process to receive Designated Contract Market (DCM) status - the same classification that applies to major futures exchanges like the Chicago Mercantile Exchange.

After winning a landmark lawsuit against the CFTC in September 2024 - where the D.C. Circuit Court of Appeals ruled that the CFTC had exceeded its authority by banning political event contracts - Kalshi now offers markets on elections, sports, economics, weather, and more. [5]

In late 2024, Robinhood integrated Kalshi directly into its platform, giving over 100 million Robinhood users access to prediction markets without needing a separate account. As of early 2026, Kalshi offers 200+ active markets with more being added monthly.

Best for: US residents who want a straightforward, fully legal, regulated platform with USD deposits and withdrawals. No crypto wallet required.

Status: Limited US access, on waitlist · Regulated by: CFTC oversight in progress

Polymarket is the largest prediction market in the world by trading volume - it processed over $3.5 billion on the 2024 US presidential election alone. It runs on blockchain technology (the Polygon network), settling contracts in USDC (a US dollar-pegged cryptocurrency).

Polymarket has had a complex relationship with US regulation. In 2022, the CFTC brought an enforcement action against Polymarket for failing to register as a derivatives exchange and allowing US users to trade. Polymarket paid a $1.4 million settlement and geo-blocked US users. The Trump administration later abandoned further enforcement actions against it without charges. [7]

Polymarket is now re-entering the US market through QCEX, its US-registered exchange arm. As of April 2026, it operates a US app with an invite-code waitlist and is pursuing full CFTC registration. Its international platform - which is far larger and covers a much wider range of markets - remains unavailable to US users.

Best for: Users who want the broadest market selection and highest liquidity globally. For US residents, Kalshi is the more accessible option until Polymarket's full US rollout.

Status: Operational but legally uncertain · Regulated by: CFTC no-action letter (conditional)

PredictIt has operated since 2014 under a no-action letter granted by the CFTC to Victoria University of Wellington for academic research on political prediction markets. That letter allowed limited trading with significant restrictions: maximum of 5,000 traders per market; maximum $850 invested per contract; no institutional participation; markets limited to political topics; a 10% fee on profits and 5% fee on withdrawals.

In 2022, the CFTC moved to revoke the no-action letter, ordering PredictIt to shut down by February 2023. Legal challenges delayed the closure, and as of April 2026 PredictIt still operates - but under regulatory cloud that has suppressed trading volume and driven many users to Kalshi. The no-action letter could be revoked at any time, and multiple sources indicate PredictIt is shutting down in 2026. [8]

Best for: Political trading enthusiasts who are comfortable with the platform's uncertain future. New users are likely better served by Kalshi.

Several prediction market platforms operate entirely legally across all US states because they do not involve real money. These are used primarily for research, forecasting, and intellectual competition:

Examples include play-money and research platforms (such as Metaculus and Good Judgment Open) where you practice forecasting without staking cash.

These platforms have no legal complications and are excellent for developing forecasting skills. Metaculus and Good Judgment Open in particular have strong track records of forecasting accuracy and active communities of serious analysts. Neither requires any financial commitment.

Offshore Polymarket (international version): Using a VPN to access Polymarket's international site as a US resident violates Polymarket's Terms of Service and potentially CFTC regulations. Beyond the legal risk, there is a practical one: Polymarket can freeze and seize accounts of users found to be circumventing its geo-restrictions. The risk-reward is not worth it when Kalshi offers a legal alternative.

Unregistered platforms: A number of crypto-based prediction platforms operate without CFTC registration and actively solicit US users. These carry the same risks Polymarket faced in 2022 - enforcement action, account freezes, and funds at risk.

The central question - are prediction markets gambling or finance - is not settled. And the answer matters enormously, because gambling is regulated at the state level while financial derivatives are regulated federally.

On one side, the CFTC and the Trump administration argue that event contracts are swaps under the Commodity Exchange Act, placing them under exclusive federal jurisdiction. The CFTC has sued Illinois, Connecticut, and Arizona to block those states from enforcing their gambling laws against Kalshi and Polymarket. [6]

On the other side, states argue prediction markets are gambling by another name - that renaming a bet an 'event contract' does not change its fundamental nature. The New York Attorney General issued a pointed consumer warning in early 2026, calling prediction market platforms "bets 'masquerading' as event contracts." [4] Arizona went further and filed criminal charges.

The courts will ultimately resolve this. Georgia State University law professor Anthony Phillips has noted the central question will likely reach the Supreme Court: does a prediction market fit the legal definition of finance, or of gambling? Courts could plausibly come down either way.

Prediction markets are a relatively new financial technology and their tax treatment is still evolving. The current general guidance:

Platforms like Kalshi and PredictIt send annual 1099-MISC forms listing net profits as ordinary income. Winnings are taxed at your ordinary income rate - not capital gains rates.

Losses can be deducted up to $3,000 per year, with any excess carried forward to offset future winnings.

The One Big Beautiful Bill Act (2025) changed sports betting tax treatment - bettors can now deduct only up to 90% of losses on unsuccessful sports bets starting in 2026. How this applies specifically to event contracts on sports markets is still being clarified by the IRS. [9]

Crypto-settled platforms (like Polymarket's international version) introduce additional crypto tax complexities - each settlement could be treated as a taxable sale of cryptocurrency.

Always consult a tax professional for guidance on your specific situation. This is a fast-moving area and formal IRS guidance specific to prediction markets may emerge as the industry grows.

Many people encounter prediction markets for the first time through sports contracts and wonder how they differ from a standard sportsbook. The table summarizes the clearest structural differences, including how one-cent ticks and the bid-ask spread differ from vig in the odds.

Prediction markets use implied probability as their native language. A contract trading at $0.65 is a 65% implied probability. Converting between these prices and the odds formats used in traditional betting (American odds, decimal, fractional) is where HelpCalculate's tools become useful.

Unlike typical sportsbooks, which quote American, decimal, or fractional odds, prediction markets usually express uncertainty as percentages: implied probability from Yes/No contract prices. The Prediction Market Odds Converter translates between those percentage-style prices and the odds formats you already know from sportsbooks (and back).

The Betting Odds calculator converts between American odds (+150, -110), decimal odds (2.50, 1.91), and implied probability (40%, 52.4%). That maps cleanly onto prediction markets: a contract trading at $0.72 is equivalent to decimal odds of 1.39, or American odds of -260.

The Parlay Calculator is useful when you want to combine multiple prediction market positions. If you believe Fed rate cuts, a particular election outcome, and a sports result are all going to occur, and you want to understand the compounded probability of all three happening simultaneously, it does that math instantly.

These tools are free on HelpCalculate in the betting calculators section.