Gambling regulation: three authorities, one industry, and a tax nobody expected

Three authorities divide this industry and the division is the whole subject. States license operators, set tax rates on their revenue and decide what may be offered within their borders - which is why legality, product range and price differ from one state line to the next. Congress does not license anyone but sets the federal tax treatment of winnings and losses, which reaches every bettor in every state. And a federal commodities regulator oversees event contracts, which are traded on exchanges under a framework that was not written with betting in mind.

That third category is where prediction markets sit, and the distinction is legal rather than cosmetic. An event contract is a derivative traded on a designated exchange with a clearing house behind it; a wager is a licensed transaction with a bookmaker who is the counterparty. The economic experience can look identical to a participant while the regulator, the counterparty structure and the tax treatment are entirely different.

Whether that distinction holds is itself a traded question. The board carries a contract asking whether sports prediction markets end up taxed as gambling - which is precisely a bet on whether the categories are collapsed. It is unusual and slightly recursive: a prediction market pricing the probability that prediction markets are reclassified.

State licensing exists to raise revenue and to bound harm, and the rate structure shows which motive dominates where. Tax rates on sportsbook revenue run from 6.75 per cent in Nevada and Iowa to 51 per cent in New York, New Hampshire, Oregon and Rhode Island - a spread so wide that identical businesses have completely different economics depending on the state line. Illinois went further and introduced a tiered structure, taxing lower-revenue operators at 15 per cent and the largest at 40, making it the first state to apply a progressive model to the sector.

The federal tax rules exist to define income, and the 2026 change did something unusual within that. Under the provision taking effect for tax year 2026, gambling losses are deductible only up to 90 per cent of winnings. The consequence is that a bettor who wins and loses the same amount over a year - who is exactly even - now has taxable income they never received. The term that has attached itself to this is phantom income, and it is accurate.

The harm rationale is what the licensing regime is publicly justified by, and the figures behind it are specific. Between one and two per cent of American adults - two to four million people - will experience a gambling disorder at some point, and a further three to five per cent will report a subclinical problem. Nearly twenty million adults report problem gambling behaviours, with men reporting them at roughly double the rate of women. Those numbers are why state licences carry funding obligations for problem gambling programmes, and they are the argument every tightening of the rules is built on.

Federal tax changes arrive as statute and are unambiguous once enacted, which is what makes the deduction contract tractable. The 90 per cent limitation is in the law and applies for tax year 2026 unless it is changed; the change would have to be a further act of Congress, published the same way. There is no discretionary route here - no agency can rescind it and no ruling can reinterpret it away.

The repeal effort therefore has a visible, checkable path, and its current position is the whole of the analysis. A bill to restore full deductibility has been introduced. As of March 2026 no repeal bill had reached a floor vote. In May 2026 the House Rules Committee declined to advance it as an amendment to that year's defence bill, and it sits with the tax-writing committee. Every one of those is a matter of public record, and the contract asking whether the cap is repealed before 2027 resolves on whether that sequence completes.

State-level changes appear in state legislatures and gaming commissions, and they move far faster and more often than the federal rules. That is where rate changes, product approvals and advertising restrictions actually happen, and it is why a national view about gambling policy is usually less useful than watching four or five specific states.

For the event-contract question, the relevant record is the federal commodities regulator's docket and the court cases around it. A reclassification would show up there or in statute rather than in an announcement, and the existing guide on prediction market taxes covers the individual side of that question.