Prediction markets show a 94% probability the Federal Reserve will cut interest rates on Wednesday. In the past 24 hours alone, $14 million has traded on the December decision across the two major prediction markets, with $310 million in all-time volume.

Polymarket shows 94% odds of a 25-basis-point reduction, with $28.2 million in open interest. Kalshi odds have the cut at 93%, with $7.2 million in open interest. Open interest reflects the $35 million currently at stake across both markets; volume counts every buy and sell, including traders who have since exited their positions.

24-hour and open interest figures per DeFi Rate tracker. All-time volume from Polymarket and Kalshi API.

For comparison, Polymarket’s October Fed decision market closed at $252.5 million in total volume—making December’s $287.1 million about 14% higher.

Markets weren’t always this confident

The current consensus masks sharp swings. When October’s FOMC minutes dropped on November 19, Polymarket’s “no change” outcome spiked above 60%. The minutes showed “strongly differing views” among committee members, with Powell having called a cut “not a foregone conclusion.”

Two Fed officials reversed the move. New York Fed President John Williams said in a November 21 speech in Santiago, Chile that he sees “room for a further adjustment in the near term.” Governor Christopher Waller also backed continued easing. Within 48 hours, the odds surged from roughly 40% to above 70%.

Even so, Bank of America economists expect at least two dissenting votes Wednesday. In October, Governor Stephen Miran voted for a larger 50 basis point cut while Kansas City Fed President Jeffrey Schmid preferred no cut at all.

What to watch this week

The Federal Open Market Committee meets Tuesday and Wednesday. Chair Jerome Powell will announce the decision Wednesday at 2:00 p.m. ET, alongside updated economic projections.

A cut would bring the federal funds rate target range from 3.75-4.00% to 3.50-3.75%, marking the Fed’s third consecutive quarter-point reduction following cuts in September and October. The central bank held rates steady through the first five meetings of 2025 before beginning to ease in September.

The December meeting includes an updated Summary of Economic Projections and the closely watched “dot plot,” which shows where each FOMC participant expects rates over the coming years.

Markets are already suggesting a pause could follow. Polymarket shows 68% odds the Fed holds rates steady at its January 28 meeting. Kalshi shows a January hold at 65%.

Unless it’s repealed, a new tax provision capping the losses gamblers can deduct at 90% takes effect on Jan. 1, 2026. Meanwhile, prediction markets are rising in prominence.

A potential result of this dynamic: A migration of big gamblers — professionals and whales, alike — from regulated sportsbooks to prediction markets in the new year.

While debate intensifies about whether trading on prediction markets is betting or investing, many gamblers intend to lean on the latter notion, which, if it holds, means such trading will be treated as any other CFTC-regulated financial instrument, not like sports wagers, and 100% of losses can be used to offset gains.

Under the 90% rule, snuck into the One Big Beautiful Bill Act signed into law by President Trump on July 4, it’s possible to lose money gambling and still owe money in taxes. A break-even gambler who puts $2 million into play in 2026 (wins $1 million, loses $1 million) will owe $37,000 in gambling tax (safely assuming he’s in the top federal tax bracket).

For pro gamblers, the rule makes their careers untenable.

“Eighty percent of the handle in the [regulated sports betting] market is generated by professional syndicate play and whale VIP play,” American Bettors’ Voice board member Adam Robinson told DeFi Rate. “I believe this tax loss provision is going to incentivize those who are responsible for 80% of regulated handle to look elsewhere. …

“Next year is a do-or-die moment,” Robinson stressed. “If the tax loss provision is not repealed, prediction markets will be the place folks go.”

For what it’s worth, there’s just a 12.5% chance the law will be repealed before the calendar flips to 2026, according to Kalshi odds as of this writing.

“[Much of my day is] telling my clients how they should be tracking their income and losses and expenses so that they’re ready to go on 1-1-26,” said Gary Kondler, a Las Vegas-based accountant who handles taxes for professional and recreational bettors.

Pay Me Now or Pay Me Later?

The IRS has yet to make a ruling or issue guidance on how prediction markets will be treated. But knowing what we know now – betting with sportsbooks means the 90% cap definitely applies, while trading on prediction markets means it may not apply — it’s clear to Robinson which path bettors should take.

“Anyone who understands the tax risk of regulated sportsbook play in the United States, if this isn’t repealed, is figuring out how to move all of their action to federally licensed products where nothing is settled,” Robinson said. “Accountants are not by and large recommending their clients follow the OBBB’s tax laws provisions for event contracts.”

This could be, however, a ‘pay-me-now or pay-me-later’ situation. Several years from now, after gamblers move their action to prediction markets, the IRS may decide that such “trading” is “gambling” after all.

“There is an answer, but it’s in the future,” cautions Captain Jack Andrews, a pro gambler, player advocate and founder of Unabated. “You can guess however you think it should go, and if you’re wrong, you pay penalties and interest on being wrong in retrospect.

“It’s one of these deals where you’re right until you’re wrong, and when you’re wrong, you’re gonna pay for it.”

The time frame for a determination is probably lengthy. Tax returns for 2026 are not due until April 2027. From there, an audit is still 12 to 18 months away, and after some back-and-forth between a taxpayer and his accountant and the IRS, an appeal and a hearing in tax court could be next.

“We may not be looking at a ruling until 2029, 2030,” Kondler commented, “and that’s a big kind of headache for me to try to navigate right now. That’s three or four years of me putting in tax returns until an actual court case and a revenue procedure come out of this, because in my opinion, this is going to be sparking red flags all over the place.”

Audit Risk

Russell Fox, another Vegas-based gambling tax specialist, is having the same conversation with his clients. Fox believes that, based on the “form vs. substance” principle on which the IRS operates, the agency will ultimately decide that trading on prediction markets is indeed gambling.

“We have to look at what’s the underlying activity for prediction markets,” Fox explained. “If you’re predicting the outcome of, oh, let’s just say, ‘will it rain today in Las Vegas,’ … that’s a prediction, that’s a contest. Pretty well-defined. If I’m going to predict who’s going to win tonight’s basketball game … it sounds like sports betting to me.

“And I think that’s how the IRS will eventually – note the word ‘eventually’ – rule.”

He added, “The issue is unfortunately going to be – and I do explain this to all my clients – in an audit situation, it is more likely than not the IRS is going to rule that it’s still a wagering activity.”

Elaborated Truman State assistant professor of accounting Andrew Greiner, former head of FanDuel’s tax-legal division, “I’ve never seen any authority say that just because a transaction might qualify as (a 1256 contract, as some assume trades on prediction markets do) means it can’t also be wagering.”

One Size Does Not Fit All

Fox and Kondler agree that different types of taxpaying gamblers are treated differently by IRS.

“How it should be treated will depend on the individual taxpayer, but right now, most taxpayers can use whichever way is most beneficial to them,” Fox said. “Based on unsettled law and the fact that there are various different doctrines and tax that would probably allow it, this is going to be a very much facts-and-circumstances issue for each taxpayer.”

Added Kondler, “There’s gonna be a lot of different ways that this income can be handled, the same way a gambler can file their tax return four different ways – whether it’s an amateur gambler, professional gambler, whether they have a partnership or an S corporation.

“And I think in a similar situation, it’s gonna be, ‘Hey, what can we do with this Kalshi income to make the most sense on your tax return? And remember, this would only be uncovered in an audit. …

“I’m not gonna tell you that I have one dead set avenue that I want to go down right now.”

Choosing The Path

To Robinson, pro bettors face this choice: “Do I commit fraud [by not abiding by the letter of the new tax rule], or do I move to a platform where I can make a reasonable judgment about the tax treatment of this activity and continue to proceed accordingly?”

For his betting group, it’s an obvious choice.

“On my team, we are planning for zero – zero – regulated action next year,” he declared. “We are putting everything, in all of our investment and systems and processes, into algorithmic, API-based action with exchanges and prediction markets.

“We’re willing to take that risk. If we report regulated play to the letter of the law, if this isn’t repealed, I know what next year’s gonna look like. It means we have to beat the market by 10% just to break even. It’s not gonna happen.”

While a bill has been filed in the New York State Assembly to restrict prediction markets on multiple fronts, Senator Joseph Addabbo’s support is critical to its passage.

Assemblyman Clyde Vanel went it alone in introducing NY AB 9251 on Friday, Nov. 7. The legislation does not yet have a co-sponsor in the Senate.

As Chair of the Senate’s Racing, Gaming & Wagering Committee, Addabbo has championed pro-gambling legislation in New York, and he wants the state to be proactive in dealing with prediction markets.

“I’m glad to see my friend Clyde Vanel introduced this. We could have waited on the sidelines to see what the CFTC would do,” Addabbo told DeFi Rate over the phone on Monday. “I don’t do that. I don’t like to wait on the sidelines.”

Prediction Markets Bill Needs NY State Senate Co-Sponsor

Addabbo had already been consulting with attorneys about how the state can protect itself and its residents from prediction markets.

He told us last month that while he prefers further regulation at the federal level, he’s been planning on firing up the discussion when the new legislative session begins in January.

Vanel’s bill, though, hastens those conversations.

“We were talking to our legal counsel to see what can be done,” Addabbo said this week, “and now that this bill came out, I will ask my legal counsel to look at it.”

“It does need a Senate sponsor. If we feel it’s something that’s A) within our jurisdiction and B) it would matter — like it would make some sense to do – I’ll talk to my friend [Assemblyman Vanel] to see if I can carry it in the Senate.”

How Does NY Bill Address Prediction Markets?

The sports event contracts prediction markets offer are central to the legal, and now legislative action states are taking against these companies, Kalshi first and foremost. The contracts are indistinguishable from sports bets, states claim, meaning prediction markets are illegally circumventing state regulation and taxation.

NY AB 9251 would ban prediction markets from offering “athletic market events”, including horse racing and prop bets.

As outlined by Daniel Wallach on X, the bill would also:

• Ban market makers, which provide most of the liquidity on prediction markets and are often institutional, not peers in purported “peer-to-peer” trading. Susquehanna International Group (SIG), for example, is Kalshi’s primary market maker
• Authorize the state attorney general to impose major financial penalties on violators.
• Implement multiple player protection and responsible gaming measures such as marketing restrictions, an age minimum of 21, a ban on credit cards funding accounts.

Responsible gaming and protecting New Yorkers from addiction and predatory practices have always been top of mind for Addabbo.

“I do like the intent of the bill,” Addabbo said.

“What’s interesting is the bill went to the Consumer [Affairs and] Protection Committee, not the [Standing Committee on Racing and Wagering], but it is a consumer protection bill more so than a gaming bill.”

States vs. Prediction Markets: Can Legislation Be Effective?

While several states, New York included, are battling Kalshi in court, the legislative path has been less explored.

A legal sticking point is whether state law is pre-empted by federal law, since prediction markets are regulated under the CFTC.

The legislative process can also be quite cumbersome.

“To address an issue legislatively is not the most efficient way to do things sometimes because of the time frame it takes to do something legislatively,” Addabbo explained.

“I would like to have a conversation with the gaming commission to see if, administratively, that’s another way that we can address the situation, by having them set up some administrative guard rails.

“But nevertheless, I like the fact that at least we in the state are looking at ways to address this and not waiting for the federal government.”

Prediction markets are dangerously blurring the line separating gambling and investing, Schwab CEO Rick Wurster cautioned this week.

CFTC-approved prediction markets can certainly be used as legit financial instruments, but it’s their venture into sports, and the messaging behind it, that’s causing concern. Sports event contracts, synonymous with sports wagers, are being offered on an increasing number of financial trading platforms.

“Only 5% of the people that go on gambling apps pull out more money than they put into the gambling app — it is the opposite of the benefits of being a long-term investor,” Wurster said during his keynote at Schwab IMPACT in Denver on Wednesday, per Investment News.

“I hope as an industry, we’re able to tell the story to clients about the difference between gambling and investing. I just don’t want young people in our country that think that betting on the Monday Night Football game is equivalent to being invested for the long term in stocks and bonds.”

Sports are driving the growth

There are contracts on prediction markets that can serve as valuable financial hedges for sophisticated investors. Long on Bitcoin? Take a “no” position on the currency’s price on Kalshi. Invested in bonds? Buy the “yes” on the Fed cutting interest rates in December on Polymarket.

While there are tens of millions of dollars being traded in these markets, sports is the main driver of prediction markets’ exponential growth.

Sports accounts for around 90% of the trading volume on Kalshi. Robinhood is trumpeting prediction markets’ positive impact on the company’s financials, and it’s no secret that football is the key ingredient.

Annualized revenues from prediction market jumped to $115 million in Q3, up from $45 million in Q2, and according to Chair & CEO Vlad Tenev, volume has doubled every quarter since Robinhood launched prediction markets with the 2024 Presidential Election. In fact, there were 2.5 billion contracts traded in October, more than all Q3 combined.

Posing a question during Robinhood’s earnings call about changing consumer behavior, Deutsche Bank’s Brian Bedell connected the dots. “We’ve seen a big increase in volume, obviously, in September with the NFL and college games added,” Bedell noted (via Motley Fool).

In response, Tenev spoke of the diversity of contracts being offered, specifically mentioning culture and entertainment markets while omitting sports.

Prediction markets’ sports messaging is problematic

What’s troubling to many observers is that prediction markets, depending on their audience, promote the sports betting aspect of their platforms while pushing the narrative that sports contracts are solid investment vehicles.

Here’s the sports landing page on Crypto.com:

And in an August press release announcing that NFL and college football markets were being added to the platform, Robinhood said, “Unlike sports betting, where the firm sets a line, event contracts leverage the power and rigor of financial market structure and are offered in a marketplace where buyers and sellers interact to set the price.”

The reality is that trading sports contacts on a prediction market is generally as risky as placing bets on a sportsbook app. While “peer-to-peer” trading is part of the story prediction markets are trying to tell, institutional market makers are typically on the other side of the trade.

“You’ve seen an incredible rise on these financial services apps of people gambling on sports,” Wurster continued in his keynote. “In fact, if you log into some of the well-known financial services apps on a Monday to check your balances, you are likely to get a pop up alert asking you if you want to bet on Monday Night Football. The challenge I see with this is that investing over the long run pays off.”

Charles Schwab invested in Kalshi

While the top executive of his namesake company is sounding the alarm on prediction markets’ sports offerings, Charles Schwab was an early investor in Kalshi.

In a release dated Feb. 17, 2021, Kalshi announced a $30 million capital raise in which Schwab participated. The funding came after the CFTC approved Kalshi as a Designated Contract Market.

Kalshi didn’t start offering sports contracts until January 2025, about four years later.

At the time of the February 2021 funding, Kalshi was valued at $120 million. The company announced last month a $300 million investment at a valuation of $5 billion.

Brian Armstrong didn’t break the financial system. He didn’t crash Coinbase’s stock, he didn’t announce a surprise acquisition, and he didn’t reveal a new token launch. All he did was say a few words at the end of the company’s quarterly earnings call last week.

“Bitcoin, Ethereum, blockchain, staking, Web3.”

And yet those words settled prediction markets on both Kalshi and Polymarket. Instantly.

If this sounds ridiculous, that’s because it is. And as funny as the moment may have looked online (and it was funny, in a crypto-Twitter way), it exposed a deeper problem that prediction markets are going to have to confront sooner rather than later.

We’re now watching markets where the person being bet on can simply choose the outcome by speaking.

That is not forecasting, and it turns prediction markets into something more like a parlor trick.

“lol this was fun” — Sure, but fun for who?

Armstrong himself played it off lightly on X:

“lol this was fun — happened spontaneously when someone on our team dropped the link in the chat.”

The response from most Polymarket and Kalshi users was jubilation. People literally thanked him for “the gift.” One called him “The GOAT Brian.”

But not everyone was laughing.

Jeff Dorman, CIO at Arca and a person with a long track record of trying to get institutions to take crypto seriously, came out and said the quiet part loudly:

“You need your head examined if you think it’s cute or clever that the CEO of the biggest company in this industry openly manipulated a market.

“It’s not fun working tirelessly for eight years trying to educate institutional investors on the value of crypto investing as an investable asset class, and working to help them gain comfort in this industry, while one of the supposed “leaders” openly mocks the industry with crap like this. Not to mention the damage caused by constant failures in token launches on their platform, and an unwillingness to differentiate real companies with tokens from the memecoin and VC extraction tokens).”

The Problem Isn’t the Words — It’s the Structure

My deeper issue isn’t even with Armstrong personally. It’s the concept of “mention markets.”

Prediction markets have always sold themselves as collective intelligence — the wisdom of crowds. In theory, they’re a cleaner signal than polls or analysts. People bet real money, so their incentives should reflect what they believe will actually happen.

But mention markets flip that logic on its head.

The outcome isn’t determined by reality. It is determined by the decision of one person, in the moment.

If the CEO, politician, athlete, candidate, or celebrity being bet on can decide the outcome just by saying or not saying something, the market becomes inherently manipulable.

It doesn’t matter if the volume is $80,000 or $800 million. The fairness breaks immediately.

Prediction Markets Work Best When Nobody Controls the Outcome

Election markets are useful.

Macroeconomic event markets are useful.

Sports performance markets are useful.

But mention markets? They encourage the worst version of the game.

If prediction markets are going to succeed, they have to protect their signal. The value is in trust. The idea that these markets reflect actual expectations, not theatrics.

Armstrong’s moment didn’t break anything, but it showed how easy it would be to break something later (maybe that was his point).

A prediction market is only as strong as the uncertainty behind it.

And when one person can flip the outcome with a sentence, the uncertainty disappears, along with the meaning of the market itself.

As prediction markets rise in prominence, Polymarket CEO Shayne Coplan and Kalshi’s Tarek Mansour represented a new generation of financial exchanges on Monday’s SEC-CFTC joint roundtable in Washington, DC.   

Despite these companies’ ascent being largely driven by the sports markets they offer, sports event contracts were not discussed during an hour and 15-minute discussion, the second of the day’s three panels.

Instead, moderators and panelists stuck mainly to the theme of “Regulatory Harmonization Efforts” between the two agencies, and the presence of Coplan and Mansour served to reinforce their claim that the contracts they offer are bona fide financial products.

“It is really refreshing and inspiring to see how far we’ve come in terms of regulators willing to have us here, willing to have us engage,” Mansour said in his opening remarks.

Update: A day after the roundtable, the CFTC publicly acknowledged sports prediction markets for the first time. In an advisory note to staff, the CFTC warns that prediction market participants should be aware of potential legal and regulatory action by states (h/t Sportico’s Dan Bernstein). In a footnote, the agency says it “has not, to date, made a determination regarding whether [self-certified sports] contracts involve an activity enumerated or prohibited” under the Commodity Exchange Act.

Kalshi, Polymarket fans of self-certification

In addition to allowing prediction markets to offer what states, tribes, and many others in the gambling industry believe is too close to sports betting to be distinguished from it, another criticism of the CFTC is its self-certification process. 

The two are clearly related.

As a designated contract market (DCM), for example, Kalshi files a self-certification letter when it wants to offer a new product. Unless the agency objects, the company can list the product in 24 hours. We’ve seen this play out as Kalshi has added football point spreads, over/under totals, player props, and parlays to its platform.

Mansour trumpeted prediction markets as a new category of financial instruments that are going mainstream among retail investors. Kalshi offers the most markets in the industry, per Mansour, on pace for around 2,000 this year.

A cumbersome approval process like the SEC’s would hamper such innovation, he suggested.

“Retail is asking for increasingly more dynamic products,” Mansour stressed. “They want things on a monthly, weekly, sometimes daily, sometimes even hourly basis. … The world is evolving, and in some ways, we need some of these rules to evolve. So we are obviously big fans of self-certification.”

Kalshi and Polymarket disagree on plenty of things, but Mansour and Coplan are on the same page regarding self-certification.

“Once you build something on a blockchain, it’s very difficult to map that to the existing regulatory matrix, and I think that’s where exemptive authority comes in,” said Coplan, whose platform is a crypto-based exchange.

“The innovators know about, ‘OK, how can we go and build this, how can we go and implement a smart contract that provides investor protection,’ a lot better than any regulator is gonna know, obviously. 

“I think that puts the onus on players like us and other players in the space to go and get inventive, do what we do best, be innovative, and come up with solutions that both embody the sort of spirit of the rules that you see in traditional financial regulation, whether that be with the CFTC [or] the SEC, with what’s capable of the technology.”

Incumbents want level playing field

CME Group chairman Terry Duffy was among the panelists pushing back on the difference in the SEC’s treatment of incumbents like himself, compared to the path of little resistance the CFTC lays out for the innovators.

“I’d really like to understand why [innovation] would be exempt, [when they are] essentially the same products that core institutions have been trading for years,” Duffy probed.

“I appreciate the innovation up on this panel, and I think it’s critical to the future, but you cannot have a double standard whether it’s in derivatives or securities. You have to have a single standard.”

Duffy recalled pulling an application that sat in front of the SEC for six years after he filed it in 2016, a sharp contrast to the CFTC’s 24-hour self-certification process.

“When we talk about these innovation exemptions, a lot of them are the exact same products that are being traded today under a different name, under a different regulatory regime. Maybe you can’t make it fit on the blockchain, but that’s not the problem of the core institutions.”

If the panel brushed up against sports betting at all, it was when Duffy noted CME’s joint venture with FanDuel. The announcement of the partnership in August made no mention of sports, but it would be difficult to convince most gambling industry observers that sports is not on the companies’ radar.

“I love innovation. Love it. Can’t go forward [without it]. I just did the deal with FanDuel, as you know, I’m all in on this stuff,” Duffy continued. “At the same time, you can’t exclude incumbent players in a different way.”

Countered Coplan, “If you want young entrepreneurs to pursue the American dream, to innovate in American finance, and build products that can be competitive on a global scale as well as in America, it’s net negative from a regulatory perspective to drive that offshore.”

Duffy likes Kalshi, except for the fees

Regulatory inconsistencies aside, incumbents on the panel lauded the energy and innovation being injected into finance.

“It’s really wonderful to have folks like yourselves up here and participating in the discussion about how we go forward,” Duffy said to Mansour, Coplan, and Arjun Sethi, co-CEO of crypto exchange Kraken.  

“I am massively excited about the future, massively excited,” Duffy exclaimed.

He even shared an anecdote about himself, a Kalshi user, likening – inadvertently perhaps – the prediction market to gambling.

“I was on Tarek’s market all week, and like a junkie – I was in Las Vegas with a bunch of clients – the casino never saw me because I was on his platform the whole time screwing around.”

Mansour asked if Duffy made money trading on Kalshi.

“You made money. I broke even. A lot of fees over there, buddy,” Duffy responded light-heartedly. “People bitch at me all the time about the fees, I gotta take the opportunity. A lot of fees on that Kalshi thing.”

That’s a complaint about Kalshi growing louder from the sports betting crowd, too.