Last Updated on July 19, 2026 by Patrick Camuso, CPA
Quick answer (read this first):
What this article addresses: Can prediction market activity qualify as a trade or business, and what changes if it does. Trade-or-business status is possible, and the answer depends on the nature of the activity, how it is conducted, and how the underlying contracts are characterized. No bright-line threshold controls, and trade-or-business status is separate from the federal tax character of the underlying prediction-market contracts.
Why it matters: Business status can affect expense treatment, loss placement, applicable limitations, and reporting, but each of those consequences requires its own separate analysis. The consequences differ materially depending on whether the contracts are characterized as capital assets, wagering transactions, or ordinary income instruments, and that characterization is a separate question that status does not answer.
What is unsettled: No published IRS guidance or judicial decision directly resolves whether prediction-market activity qualifies as a trade or business. Reasonable analyses may reach different conclusions on the same facts. This article explains the frameworks and the relevant factors. It does not assert that any particular participant qualifies.
Who this applies to: The determination depends on specific facts including frequency, continuity, regularity, infrastructure, and profit motive, and requires individual analysis. The applicable framework depends on how the underlying contracts are characterized. Participants with mixed portfolios may face parallel analyses rather than a single unified determination.
Why This Question Matters Now
Whether prediction market activity constitutes a trade or business is a separate analytical question from the characterization question that most prediction market tax analysis addresses. Characterization determines what kind of income is produced, wagering income, capital gain, ordinary income. The trade or business question affects which allowance, placement, limitation, and reporting questions then apply to that income and what elections may be available, and each of those consequences requires its own analysis. The two questions are separate and distinct, they interact in their consequences, and each must be resolved on the applicable facts. The trade or business analysis produces materially different results depending on which characterization framework applies to the underlying contracts and what the participant’s actual activity looks like. For a detailed breakdown of how characterization affects loss treatment across all frameworks, see our prediction market loss deductions analysis.
The Three Characterization Contexts Under One General Standard
One general inquiry applies across all prediction market activity which is whether the activity is pursued with continuity and regularity and with a primary purpose of income or profit. No single volume, frequency, income, or full-time threshold controls. Sporadic or occasional activity ordinarily does not satisfy the continuity-and-regularity requirement, but the result remains facts-and-circumstances based. Managing one’s own investments is not a trade or business merely because the portfolio is large. Securities-trader authorities indicate by analogy that sufficiently continuous and regular trading may qualify, but no authority applies that rule directly to prediction-market contracts. In Commissioner v. Groetzinger, the Supreme Court confirmed that gambling can constitute a trade or business under the same general standard.
What differs is not the test but the instrument-specific analysis layered on top. Capital asset contracts require the additional determination that the taxpayer seeks profit from short-term price movements rather than outcome prediction, under the investor/trader distinction developed in the securities context. Wagering contracts apply the general test directly, as Groetzinger confirmed gambling can satisfy it without requiring the taxpayer to offer goods or services to others. Ordinary income contracts also apply the general test directly, with no instrument-specific overlay, because no case law addresses this scenario. Each path below assumes a separately determined characterization; trade-or-business status is separate from the federal tax character of the underlying prediction-market contracts, and status does not establish which characterization applies.
Path 1: Wagering contracts, professional gambler framework
Where the contracts at issue are characterized as wagering transactions under Section 165(d), a characterization this path assumes rather than establishes, the professional gambler question is whether the wagering activity itself is pursued with continuity and regularity and with a primary purpose of income or profit. Groetzinger involved this fact pattern and confirmed that gambling can constitute a trade or business without offering goods or services to others. This path requires no analogy to securities law and no instrument classification beyond the wagering determination itself.
What business status changes in this path is limited, and what it does not change matters more. If Section 165(d) applies, business status does not permit wagering losses to offset nonwagering income. Any deduction otherwise allowable for carrying on wagering transactions is treated as a wagering loss and remains subject to Section 165(d); the limitation restricts those deductions, it does not create them. For tax years beginning after December 31, 2025, the deduction equals 90 percent of wagering losses and may not exceed wagering gains. For an individual’s nonbusiness wagering activity, allowable wagering losses generally require itemizing. Placement may differ if the wagering activity is a trade or business, but Section 165(d) continues to apply.
The Groetzinger standard is a facts-and-circumstances determination with no bright-line test. The Supreme Court explicitly declined to establish a specific rule, noting that resolution requires examination of the facts in each case. The central factors are regularity, continuity, and profit motive, not the type of instrument traded, the amount wagered, or the platform used. Applying Groetzinger to prediction market activity requires a complete review of the individual taxpayer’s specific facts and cannot be resolved by reference to any general profile of prediction market traders. A prediction market participant who devotes substantial time to event contract trading, maintains detailed position records, implements systematic strategies, and derives a primary or significant portion of income from that activity may satisfy the Groetzinger activity-level criteria.
Path 2: Ordinary income contracts, general Section 162 business.
Where the contracts are characterized as ordinary income instruments, a characterization this path assumes rather than establishes, the general inquiry applies directly on the operational facts: continuity, regularity, and a primary purpose of income or profit, with no instrument-specific overlay. Ordinary character alone does not establish recognition, deductibility, placement, limitation, utilization, netting, or reporting form. An actual pre-resolution transfer of the contract right to another participant for consideration may be described as a sale. Treatment of a position held to resolution depends on the contract terms and platform mechanics.
If the general test is not satisfied, gains remain taxable, and for an individual, an otherwise allowable ordinary nonbusiness Section 165(c)(2) loss outside a sale or exchange is a miscellaneous itemized deduction currently disallowed under Section 67(h). Where an activity is a trade or business, qualifying expenses and otherwise allowable noncapital business losses require separate allowance, placement, limitation, and reporting analysis. Business status does not make all losses deductible against other income. For the full loss framework, see our prediction market loss deductions analysis.
Path 3: Capital asset contracts, investor/trader distinction.
This path exists and may produce favorable outcomes, but it is not the default for event contracts and should not be the starting point for analysis. It requires establishing capital asset treatment first, which is a separate and unresolved characterization question; treatment of a position held to resolution depends on the contract terms and platform mechanics. Only where capital treatment is affirmatively established does the investor/trader distinction apply, and that case law was developed for securities, with no direct authority for event contracts; it applies here only by analogy. Business status does not change capital character. Any Section 475 election requires separate statutory eligibility and is not produced by trade-or-business or trader status; no conclusion is adopted here that any prediction market contract qualifies.
None of these contexts is directly resolved by published IRS guidance or a judicial decision. The analysis applies established legal standards to a novel instrument class. Materially different contract categories or activities may require separate analysis; platform-level reporting does not determine whether one treatment applies. A participant whose book contains materially different contract categories may need separate analyses, each with its own documented basis.
What Trade or Business Status Actually Changes
Where an activity is a trade or business, ordinary and necessary expenses of carrying it on may be deductible, but each cost remains subject to its own allowance, timing, capitalization, allocation, and substantiation rules. Transaction costs, software, data, professional fees, home-office costs, and entity costs are examples that require separate classification; none becomes deductible automatically because the activity is a business, and if the activity is wagering, any deduction otherwise allowable for carrying on wagering transactions is treated as a wagering loss and remains subject to Section 165(d).
Capacity can change where an allowable item is reported, not whether it is allowable. For an individual’s nonbusiness wagering activity, allowable wagering losses generally require itemizing. Placement may differ if the wagering activity is a trade or business, but Section 165(d) continues to apply.
Self-employment tax requires a separate item- and taxpayer-specific analysis, and the net investment income tax requires a separate item- and activity-specific analysis. Trade-or-business status alone does not resolve either result; the outcome depends on the income item, the taxpayer, the activity, the entity, and the applicable statutory rules.
An otherwise allowable business loss may be limited under Section 461(l), with excess amounts generally entering the net-operating-loss rules. The interaction depends on the underlying item and other applicable limitations. Trade-or-business status does not mean business losses offset all other income without limit.
High volume, automation, two-sided quoting, liquidity provision, or full-time activity may be relevant facts, but none automatically establishes business, dealer, or market-maker tax status. Dealer status requires a separate statutory and factual analysis and is not established by trade-or-business status alone. Forming an LLC, partnership, or corporation likewise does not create trade-or-business status or determine the character of the contracts.
Return placement and forms depend on the taxpayer, entity, item, character, recognition, allowance, and applicable limitations. For a sole proprietor whose activity is a trade or business, business reporting may include a business schedule, but that is an example, not a rule. Contract results and expenses may require separate measurement and reporting rather than one combined annual result.
The Fact Profile That Supports Trade or Business Status
Trade or business status for prediction market activity is not self-evident from the volume of activity alone. The analysis is fact-specific and depends on the same factors courts have applied to securities and commodities traders.
Factors that support trade or business status include sustained, continuous trading activity throughout the year rather than episodic or seasonal participation; frequent transactions across multiple contract types and event categories; short holding periods consistent with profit-seeking from price movements rather than event speculation; documented profit motive with evidence of systematic strategy, position records, and performance tracking; infrastructure consistent with business activity including dedicated accounts, trading technology, data subscriptions, and time devoted to the activity; and for professional gambler status, the activity being a primary or significant source of income.
Factors that cut against trade or business status include infrequent transactions, participation limited to a single platform or contract category, holding contracts through resolution as a primary strategy rather than trading in and out of positions (relevant to the capital asset trader analysis only; not a factor in the professional gambler analysis, where holding to resolution is inherent in the nature of the activity), lack of documented methodology, and activity that is incidental to other professional or investment activity.
The fact profile that supports trade or business status varies depending on which framework applies and which contracts are at issue. A participant with a mixed portfolio may satisfy one framework for some contracts and a different framework for others, or may satisfy neither. Courts applying the trade or business standard have examined whether trading activity was sustained and continuous throughout the year; whether transactions were frequent across multiple contract types; whether holding periods were short and consistent with price-movement strategies; whether profit motive was documented through systematic strategy and performance records; whether the activity reflected dedicated infrastructure and time commitment; and whether the activity was a primary or significant source of income. Operational scale is treated the same way: high volume, automation, two-sided quoting, liquidity provision, formal agreements, and full-time activity may be relevant facts, but none automatically establishes business, dealer, or market-maker tax status. No single factor controls. The presence of any combination of these characteristics does not establish trade or business status, and the absence of some does not foreclose it.
The determination requires a complete review of the taxpayer’s specific facts and cannot be made without that analysis. A participant who believes their activity may satisfy the trade or business standard should obtain a documented professional analysis before taking that position on a return. An unsupported assertion of trade or business status without a defensible factual and legal basis creates accuracy-related penalty exposure under Section 6662.
Why the Determination Needs to Be Made Before Filing
Trade-or-business status is determined year by year on that year’s facts and may change when the facts materially change. It is not a position that can be switched opportunistically on materially unchanged facts, and it is not a position that can be asserted without a documented factual and legal basis. The determination should be supported by contemporaneous documentation and applied to the full scope of the relevant trading activity, with the reasons for any year-to-year change documented. The factors supporting or undermining the determination should be analyzed before the return is prepared, not assembled in response to a notice. Given the absence of directly resolving published guidance or judicial decisions, the analytical work required to support a defensible position is more extensive than in a settled area of law.
To the extent self-employment tax applies, estimated tax payments may be required throughout the year. A participant whose activity produces net income and who underpays estimated taxes may face underpayment penalties independent of the income tax analysis. Whether self-employment tax applies at all is the separate analysis described above.
The business status determination also has implications for how losses in prior years should be treated and whether amended returns are warranted for years where a defensible business status existed but was not claimed. For participants with mixed portfolios, materially different contract categories or activities may require separate analysis. A position that the wagering framework applies to one portion of a book does not resolve the trade or business question for the remainder, and each position requires its own documented factual basis. These are questions that require professional analysis before a position is taken, not after. For a full overview of how Camuso CPA approaches prediction market tax engagements, see our Prediction Market CPA page.
For participants who have not yet begun trading, contemporaneous documentation created before activity starts strengthens the factual record supporting a trade or business position. A written trading strategy, infrastructure documentation, capital allocation plan, and description of the profit mechanism all establish the business-like character of the activity from inception rather than requiring reconstruction from transaction records after the fact. For pre-launch systematic trading operations, the documentation built before the first trade is often more defensible under examination than documentation assembled from historical data. That pre-launch documentation period is also the right time to resolve the trade or business question, the characterization question, and the entity question, before any of them are constrained by activity that has already occurred.
One additional risk applies to casual or recreational participants without a documented profit motive. Where activity that is not characterized as wagering is determined to be an activity not engaged in for profit under Section 183, gains are taxable as ordinary income while the associated expenses are generally not deductible for individual taxpayers under current law, apart from deductions allowable without regard to profit motive under Section 183(b)(1). Activity characterized as wagering remains governed by Section 165(d). This risk is not relevant to systematic participants with documented profit objectives, but it is a real exposure for casual or recreational participants whose activity does not clearly demonstrate the characteristics of investment or business activity.
Our prediction market tax reporting services include characterization analysis for participants whose activity raises trade or business questions, evaluation of available elections where applicable thresholds may be met, and position documentation designed to accurately reflect and substantiate the factual basis for the reporting position taken. The trade or business analysis is fact-specific and should be completed before the return is filed, not after.
Frequently Asked Questions: Prediction Market Trade or Business Status
Can a prediction market trader qualify as being in a trade or business?
It can, depending on the facts and on how the underlying contracts are characterized. The general inquiry is whether the activity is pursued with continuity and regularity and with a primary purpose of income or profit. No single volume, frequency, income, or full-time threshold controls, and sporadic or occasional activity ordinarily does not satisfy the continuity-and-regularity requirement. Trade-or-business status is separate from the federal tax character of the underlying prediction-market contracts, so the consequences of status differ depending on whether the contracts are characterized as wagering transactions, ordinary income instruments, or capital assets, and each characterization is a separate determination. Materially different contract categories or activities may require separate analysis. Each determination is a facts-and-circumstances analysis that requires documented support. For a deeper analysis of the characterization question, see our article Are Prediction Market Profits Gambling Income?
What is the Groetzinger standard and how does it apply to prediction market traders?
Groetzinger articulated and applied the general standard: a taxpayer involved in an activity with continuity and regularity, and with a primary purpose of income or profit, may be engaged in a trade or business, and gambling can qualify without the taxpayer offering goods or services to others. The Court declined to establish a more specific test, holding that the facts of each case must be examined. Higgins supplies a limiting principle: managing one’s own investments is not a trade or business merely because the portfolio is large. Securities-trader cases indicate by analogy that sufficiently continuous and regular trading may differ from investing, but they are securities-context authorities, and no authority applies that rule directly to prediction market contracts. That same general standard governs all three characterization contexts in this analysis. No published IRS guidance or judicial decision directly resolves its application to prediction-market activity.
Does professional gambler status eliminate the 2026 gambling loss limitation?
No. If Section 165(d) applies, the limitation applies in both capacities. For tax years beginning after December 31, 2025, the deduction equals 90 percent of wagering losses and may not exceed wagering gains, and business status does not permit wagering losses to offset nonwagering income. Where measured wagering gains equal measured wagering losses under the taxpayer’s adopted, supportable methodology, the maximum deduction is 90 percent of measured losses, which can leave taxable wagering income despite economic break-even. Whether any resulting income affects self-employment tax requires a separate item- and taxpayer-specific analysis; trade-or-business status alone does not resolve that question.
When should I work with a CPA on the trade or business determination?
Before the return is filed. The determination requires documented contemporaneous analysis and cannot be reconstructed retroactively from trading records alone. Where an election with its own statutory eligibility requirements is under consideration, the evaluation should happen early, because eligibility and timing are separate questions with their own rules. Working with a CPA who has analyzed prediction market characterization questions specifically, rather than applying securities trader frameworks to event-based contracts, matters given the unresolved analytical dimensions of this question. Our Prediction Market Tax Guide covers the full characterization framework in detail.
The trade or business analysis for prediction market activity is unsettled law applied to a novel instrument class. No position in this article constitutes legal or tax advice. The applicable framework depends on the specific contracts, platforms, and facts of each individual taxpayer’s activity and requires a documented professional analysis before any position is taken on a return. For a full analytical framework covering prediction market tax characterization across all platforms and contract types, see our Prediction Market Tax Guide. For professional assistance analyzing trade or business status for your specific prediction market activity, our prediction market tax reporting services are available.
This article is provided by Camuso CPA for general informational purposes and does not constitute legal, tax, accounting, or investment advice. Tax laws and regulations are evolving rapidly and the information presented may not reflect current guidance. Reading this article does not create a CPA-client relationship. For advice on your specific situation, schedule a consultation with Camuso CPA.
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