Supreme Court to Weigh Prediction Markets’ Tax and Gambling Claims

By Tom Whitfield

Three US Supreme Court petitions involving Robinhood, Crypto.com and Kalshi have responses due December 7, and the court has not published its winter schedule. The cases concern federal wagering tax and state gambling law, although the justices are not set to decide the narrow federal tax question directly.

What reached the Supreme Court?

Robinhood petitioned on September 10 to review its Ninth Circuit loss to Nevada’s gambling commission. Crypto.com’s derivatives arm followed on September 11 over its own Nevada loss, while New Jersey petitioned on September 2 to appeal Kalshi’s Third Circuit victory.

All three responses share the December 7 deadline. The court controls its ruling schedule, and history suggests substantive opinions typically arrive in December and January.

The justices also have three related cases before them. They may, but need not, issue opinions in those matters alongside the petitions.

What does the tax dispute cover?

Nevada’s claim centers on whether Robinhood’s sports prediction markets fall under state gambling laws. A Nevada victory would set powerful precedent and make it harder for Robinhood to argue that its contracts involve neither bets nor taxable wagers.

Federal tax law defines a taxable wager to include sports or event bets placed with a business or person engaged in accepting wagers. Prediction-market operators counter that they run a marketplace where participants trade with one another, not a house with a systematic advantage.

Robinhood stated in its October 28 quarterly filing with the Securities and Exchange Commission: “We have not collected or remitted federal excise tax on event contracts offered through RHD because we do not believe these contracts are subject to such tax.” Robinhood Derivatives, abbreviated RHD, operates as the futures brokerage unit that offers the contracts.

The company also warned that an unfavorable tax ruling could be material and make event contracts uneconomical. It continues evaluating exposure to other tax regimes, including federal excise tax under sections 4401 and 4421 of the Internal Revenue Code.

Section 4401 imposes a 0.25% excise tax on wagers that the accepting state authorizes. Robinhood separately tells customers that taxes related to event contracts are their sole responsibility, including reporting on personal tax returns.

Researchers at New York University’s Tax Law Center concluded on October 5 that sports event contracts probably are taxable wagers. They wrote: “We conclude that the best reading of the code is that sports event contracts on prediction markets appear to be ‘wagers’ and ‘wagering’ and subject to the federal tax rules that apply to sports gambling.”

The paper did not name Robinhood, although its conclusion addressed sports event contracts on prediction markets generally. The rules they identified also cover ordinary income-tax treatment of winnings and limitations on deductions for gambling losses.

NYU researchers also cautioned that even if federal commodities rules, including Commodity Futures Trading Commission (CFTC) guidelines, override state casino or gambling laws, other federal tax laws are not necessarily preempted. Their conclusion reaches the federal excise tax, while the petitions themselves concern state gambling classifications.

How large is the market at risk?

Robinhood reported $173 million in event-contract revenue last quarter, more than six times its year-earlier haul. Customers traded a record 16.4 billion contracts priced between $0.01 and $0.99 each.

Robinhood struck an October 26 deal to stop new sports contracts in Ohio while its legal appeals proceed. Most operators continue to contest state gambling classifications and make concessions to avoid them.

What happens next?

December 7 is the next fixed deadline, but it does not guarantee an opinion. If Nevada prevails, the result would strengthen its claim that Robinhood’s contracts fall within state gambling law, leaving the operators with a weaker federal tax defense.