According to a recent outlook from Coinbase, upcoming U.S. tax changes set to take effect in 2026 could significantly alter the economics of traditional gambling.
The exchange argues that the new rules may create so-called “phantom income” for gamblers, increasing their tax burden even in losing years and potentially driving activity toward prediction markets instead.
New Tax Rules Raise Costs for Traditional Gamblers
The changes stem from a provision in President Trump’s “One Big Beautiful Bill Act,” signed into law in mid-2025. Beginning January 1, 2026, the legislation modifies how gambling losses can be deducted against winnings.
Under the new framework, gamblers will only be allowed to deduct up to 90% of their losses against 100% of their winnings. This marks a shift from the current system, which allows losses to be fully deducted up to the amount of winnings.
Coinbase highlights that this creates the risk of “phantom income.” For example, a bettor who records $100,000 in winnings and $100,000 in losses over a year would still owe taxes on $10,000 of income, despite having no net profit. For active or professional gamblers, this change could sharply raise effective tax rates and, in some cases, render regulated U.S. gambling economically unattractive.
The exchange warns that these conditions may push high-volume bettors toward offshore platforms or unregulated markets, increasing regulatory and consumer-protection risks.
Why Prediction Markets May Gain an Edge
Coinbase argues that prediction markets stand to benefit from this shift due to their different tax treatment. Unlike traditional gambling winnings, many prediction market contracts are structured as financial instruments rather than wagers.
Regulated platforms such as Kalshi classify their contracts as commodity futures under Section 1256 of the U.S. tax code. This classification allows participants to fully offset losses against gains without itemizing deductions, an important distinction for most taxpayers.
In addition, losses from prediction market trading can be used to offset up to $3,000 of ordinary income per year, with any remaining losses carried forward indefinitely. Coinbase notes that this flexibility sharply contrasts with the new restrictions imposed on gambling losses.
Regulatory Stakes and Strategic Implications
Coinbase’s analysis also reflects its broader strategic positioning. The company has been vocal in its efforts to ensure prediction markets fall under the exclusive jurisdiction of the Commodity Futures Trading Commission, rather than state gambling regulators. A federal framework, the company argues, would provide clearer rules and more consistent tax treatment.
As the 2026 tax changes approach, Coinbase expects the disparity between gambling and prediction market taxation to become more apparent. If implemented as written, the rules could reshape where speculative activity flows, favoring markets structured as financial instruments over traditional betting venues.
For traders and policymakers alike, the shift highlights how tax policy, not just regulation, can influence the future structure of U.S. wagering and speculative markets.
