Intro
On Sept. 16, the Federal Open Market Committee raised its policy rate a quarter point. The decision, approved unanimously 12-0, brought the target range to 3.75%–4% and marked the first hike since July 2023. Updated projections showed a strong majority of officials expect another increase before year-end.
Two weeks earlier, that outcome was not the consensus. On Aug. 15, a contract on Kalshi paying $1 if the Fed raised rates in September traded at 26 cents. By Sept. 2 the same contract was 58 cents. Days later, Polymarket had the 25-basis-point increase at 51.5% and Kalshi at 54%, while CME FedWatch derived from fed funds futures rather than event contracts sat near 66%.
Background
An event contract pays a fixed amount if a stated outcome occurs and nothing if it does not. Regulators describe prediction markets as information-aggregation vehicles, on the theory that contract prices reflect participants’ collective beliefs about whether an event will happen.
The category is no longer small. Total trading volume across CFTC-designated contract markets exceeded $25 billion in 2025, spanning macroeconomic indicators, politics, weather and sports.
The macro side is the part that most resembles conventional derivatives. Kalshi lists intraday markets on CPI (monthly, annual and calendar-year), core CPI, PCE inflation, the unemployment rate, payrolls, GDP growth, recession probability and the federal funds target meeting by meeting several of which, according to a Federal Reserve working paper studying the venue, had no previously traded derivative at all.
In simple terms: a fed funds futures contract expresses a view on the average rate over a month. A prediction market contract expresses a view on what the committee announces. They track each other closely. They are not the same instrument, and they are not supervised the same way.
Three Regulatory Paths
1. Commodities law. Kalshi, Crypto.com, the CME-backed FanDuel Predicts platform and the onshore Polymarket entity operate as designated contract markets under the Commodity Futures Trading Commission. A U.S.-based prediction market must hold a DCM license, a process requiring demonstrated compliance with hundreds of Commission regulations and 23 core principles. FanDuel and CME launched their joint platform in December, offering contracts on the S&P 500, Nasdaq-100, oil and gas prices and key economic indicators.
Those exchanges are self-regulatory organizations in their own right. The CFTC’s March staff advisory described DCMs as front-line regulators expected to take proactive steps to keep their markets compliant, meaning much of the day-to-day surveillance happens at the exchange rather than the agency.
2. Securities law. In June, Cboe Global Markets launched Cboe Predicts binary option contracts on the Mini-S&P 500 Index listed as XSPBW and XSPBX. A trader takes a “yes” position paying $100 if the index settles at or above a specified level, or $0 otherwise, or the “no” side. The contracts are distributed through Interactive Brokers, with Charles Schwab expected to follow.
One clarification worth making, because it is a common confusion: Cboe is not a regulator. It is an exchange and, like the DCMs above, a self-regulatory organization. The distinction that matters is the product’s legal wrapper. These are securities options that trade within the same regulatory framework as U.S.-listed options, under Securities and Exchange Commission oversight, and they clear through the Options Clearing Corporation the same clearinghouse handling most listed U.S. equity options inside ordinary brokerage accounts.
That routing is the point. By structuring the product as a security option rather than an event contract under commodity legislation, Cboe sidesteps the jurisdictional dispute between the CFTC and state gaming authorities that other prediction market venues are currently litigating. Interactive Brokers now offers access to Kalshi, CME Group and ForecastEx alongside it four venues, two federal regulators, one brokerage screen.
3. No U.S. regulator at all. Research reported in June found that U.S.-accessible activity outside CFTC oversight is dominated by on-chain protocols including Polymarket, Opinion, Limitless, Overtime and Predict, which the firm attributed to the absence of KYC requirements and the anonymity of cryptocurrency wallets. These platforms geofence the United States on paper. In practice, Americans reach them.
Examples
The scale of that third bucket is contested but not trivial. A study by Rutgers professor and CFTC Innovation Advisory Committee member Harry Crane estimated Americans were responsible for up to $34 billion in offshore prediction market volume in the 12 months ending April 2026, and projected as much as $133 billion annually by 2030. The study was commissioned by the Coalition for Prediction Markets, an industry group whose members include Kalshi, Crypto.com and Coinbase a sponsorship readers should weigh. It is an advocacy estimate built on blockchain analytics, not a government series.
The pricing gaps between venues are real and persistent. In April, CME fed funds futures priced roughly a 73% probability of zero cuts in 2026 while Kalshi priced about 40% the same central bank, two very different distributions. Operators attribute part of the gap to structure: futures embed risk premia and hedging demand, while event contracts are direct positions on the outcome, and quoted figures are captured at different moments.
Impact
Here is the finding most likely to surprise readers following the prediction-market fight in the headlines: the contracts that look most like futures are the ones federal regulators are arguing about least.
Under the CFTC’s June 10 proposed rulemaking, event contracts based on economic indicators (CPI, GDP, jobless claims, unemployment), financial indicators (the federal funds rate, mortgage rates, broad-based stock indices) and foreign exchange rates generally fall outside the scope of the Special Rule the Dodd-Frank provision covering contracts that involve unlawful activity, terrorism, assassination, war or gaming. Those contracts remain subject to other requirements, including the prohibition on listing contracts readily susceptible to manipulation. Comments closed July 27.
The public fight is about sports. In August, a unanimous Ninth Circuit panel held that states may regulate prediction markets, breaking with an April Third Circuit ruling that allowed Kalshi to keep operating in New Jersey, and roughly 20 states are in active litigation over the question. A CFTC spokesman said the Ninth Circuit had “invented a new and atextual exception to the CEA.” New Jersey asked the Supreme Court to resolve the split, and sports contracts typically represent 80% or more of these platforms’ weekly volume.
Rate and inflation contracts are not what state gaming boards are chasing.
Wall Street’s Underused Hedge
The institutional case for these contracts is not speculation. It is basis risk.
Kalshi CEO Tarek Mansour has pointed to 2016 as the illustration: Wall Street desks shorted the S&P 500 as a proxy for a Trump victory and lost money when equities rallied despite the election outcome. The desks were right about the event and wrong about the hedge. Institutions already hedge recessions, elections, rate decisions and geopolitical shocks, but they do it indirectly, through instruments that only approximate the risk.
In simple terms: if the exposure is “the Fed hikes in September,” a fed funds futures position is a proxy for that risk. A contract that settles on the announcement itself is the risk. Kalshi’s institutional pitch is exactly that hedge a business risk by trading the event that creates the exposure rather than a proxy for it, and use the market-implied probability to price insurance, value a deal or mark a position.
The CFTC’s proposed rule treats this as a live consideration rather than marketing. Among the general public-interest factors the Commission would apply is whether a contract provides hedging or price-basing utility and yields economically useful information.
The money has started to move. Kalshi’s institutional trading volume rose 800% over six months while annualized trading activity more than tripled to $178 billion, and in May the firm confirmed a $1 billion raise led by Coatue at a $22 billion valuation. Those figures are company-reported.
The plumbing is being built around it:
- Tradeweb agreed in February to bundle Kalshi data into institutional macro datasets and build trading functionality letting clients hold event contracts alongside government bonds, swaps, credit and ETFs in one portfolio interface.
- Cantor Fitzgerald is extending block-trade access on Kalshi to roughly 3,000 institutional clients, having completed its first block trade earlier this year, with Susquehanna International Group serving as market maker. Susquehanna’s Joe Grubb expects “large institutional risk transfer” to be the next growth area.
- Phillip Capitalannounced on Sept. 15 that it will clear client Kalshi activity as a futures commission merchant, which the firm framed as reducing basis risk and enabling more precise hedging of complex economic outcomes.
- Jump Trading has reportedly taken equity stakes in both Kalshi and Polymarket in exchange for providing liquidity, hiring roughly 20 staff for the business, and ETF issuers have filed with the SEC to launch prediction market products.
Underused, then, is a matter of degree and the reasons it remains so are worth naming.
Part of it is history repeating. Between 1992 and 2008, CFTC-registered exchanges already listed event contracts on regional insured property losses, bankruptcy counts, temperature volatilities, corporate mergers and corporate credit events. The instruments existed. They never scaled.
And Nobody Has Decided How the Gains Are Taxed
The tax code has not caught up either. A trader who correctly called Wednesday’s hike does not know with certainty what kind of income the profit is.
The IRS has issued no revenue ruling, notice, private letter ruling or formal guidance addressing whether prediction market event contracts qualify under Section 1256 of the Internal Revenue Code. Three characterizations are each defensible, and they produce materially different bills:
- Section 1256 treatment, under which 60% of net gains are taxed as long-term and 40% as short-term regardless of holding period, reported on Form 6781, with open positions marked to market on Dec. 31. On $50,000 in net gains, that is roughly $13,400 in federal tax versus about $18,500 at short-term rates in the top 2026 bracket.
- Ordinary income, the conservative position.
- Gambling income, now the least favorable of the three, because under the One Big Beautiful Bill Act only 90% of losses can be offset against winnings.
The obstacle to the favorable treatment is the same argument that gives the CFTC its jurisdiction. Dodd-Frank added Section 1256(b)(2)(B), which excludes swaps and similar agreements from Section 1256 and the CFTC’s own product filings classify event contracts as swaps. That swap characterization is what the Third Circuit relied on in April and what federal prosecutors built this year’s insider trading charges on. Practitioners who take the 60/40 position generally describe it as aggressive and recommend filing Form 8275 to disclose it.
The securities route looks different on this question too. Standard XSP options are explicitly marketed for their Section 1256 treatment as broad-based index options, and a listed-options position generates a year-end Form 1099-B with a single aggregate figure. Whether the new XSP binaries inherit that treatment is not something Cboe has publicly addressed, and traders should not assume it.
The event contract version arrives with far less paper. Kalshi does not provide a complete transaction-level tax statement for event contract trades, though it may issue Forms 1099-INT for cash balance interest and 1099-MISC for referral credits. Robinhood, which routes its prediction market orders through Kalshi, provides an Event Contracts Annual Statement that it labels as not a substitute tax reporting form. Offshore platforms issue nothing, and trades settled in stablecoins are also crypto dispositions.
Analysis
The accurate version of “unregulated” is narrower than the phrase suggests, and more interesting.
Federal law reaches the trader even where it does not reach the venue. In April, SDNY and the CFTC brought parallel actions against Army soldier Gannon Van Dyke, alleging he used a VPN to reach Polymarket’s offshore platform, bought roughly $33,934 of contracts tied to the capture of Venezuelan President Nicolás Maduro, and profited more than $400,000. A month later, the same offices filed against a Google software engineer, Michele Spagnuolo, over trading on a decentralized platform using confidential corporate information.
But the jurisdictional foundation is still being litigated. The CEA charges rest on the premise that these contracts are swaps within the meaning of the statute, and defense teams in both cases are challenging whether Polymarket contracts qualify as regulated swaps at all. A ruling against the government there would ripple well past insider trading and, by extension, back into the tax question.
The gaps on regulated venues are procedural, not absent. The proposed rule preserves self-certification, letting an exchange list a contract before Commission review, and while the CFTC may request that trading be suspended during review, exchanges are not required to comply. If no order issues within 90 days, the contract may continue trading. NexfinityNews assesses that for macro contracts the sharper integrity question is settlement-source dependency these markets resolve on figures produced by federal statistical agencies no exchange controls but that is our analysis, not a Commission finding.
Conduct rules are tightening at the margin. In August the CFTC told regulated platforms to avoid American-style gambling odds, reminding firms not to use deceptive practices to list, solicit or advertise the products.
Conclusion
The premise that prediction market wagers resemble futures contracts is correct, and federal courts and the CFTC have largely embraced it that is precisely the argument that these instruments are swaps, and why the agency claims them.
The premise that they sit outside regulation is true only for a specific tier: offshore, wallet-funded venues that block U.S. users on paper and are used by Americans in practice. Elsewhere the supervision exists, but it is fragmented the same economic exposure answering to the CFTC on one screen and the SEC on the next.
Key Takeaways
- The Fed hiked to 3.75%–4% on Sept. 16; prediction markets and fed funds futures priced that outcome differently for weeks beforehand.
- Kalshi, CME/FanDuel, Crypto.com and onshore Polymarket are CFTC-regulated exchanges. Cboe Predicts contracts are SEC-regulated securities options cleared by the OCC a deliberate routing around the commodities-law fight. Offshore on-chain venues answer to no U.S. agency.
- Cboe is an exchange and self-regulatory organization, not a regulator; the same is true of the CFTC-licensed venues, which the Commission calls front-line regulators of their own markets.
- Under the CFTC’s June 2026 proposal, contracts on the fed funds rate, CPI, GDP and stock indices fall outside the Special Rule entirely the public-interest fight is about sports and gaming.
- Institutional adoption is accelerating Kalshi’s institutional volume rose 800% in six months, with Tradeweb, Cantor Fitzgerald, Phillip Capital and Susquehanna building access but the hedging use case has existed on CFTC exchanges since the 1990s without scaling.
- An industry-commissioned study put U.S. volume on offshore platforms at $11 billion to $34 billion over 12 months; treat the figure as an advocacy estimate.
- The IRS has issued no guidance on event contract taxation. Section 1256, ordinary income and gambling treatment are all defensible, and the swap classification that anchors CFTC jurisdiction cuts against the favorable 60/40 result.
- Two 2026 prosecutions establish that insider trading law can reach trades placed on offshore venues though defendants are contesting whether the contracts are swaps at all.
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