Current Regulatory Status (Nov 2025): Following the Kalshi v. CFTC court victory in late 2024, election markets are currently legal and regulated in the US. The CFTC's ability to ban them as "gaming" was overturned. However, state-level challenges remain active. Always check the latest platform-specific restrictions.
#Definition
The Commodity Futures Trading Commission (CFTC) is an independent US federal agency that regulates derivatives markets including futures, options, and swaps. For prediction markets, the CFTC serves as the primary federal regulator, determining which platforms can legally offer event contracts to American traders.
The CFTC's authority over prediction markets stems from the 2010 Dodd-Frank Act, which gave the Commission explicit power to approve or prohibit "event contracts" (derivatives that pay based on whether specific occurrences happen). This regulatory oversight creates a stark divide in the US prediction market landscape: platforms with CFTC approval (like Kalshi) operate legally with full consumer protections, while offshore platforms (like Polymarket before its 2025 return) have faced enforcement actions and been forced to block US users.
#Why It Matters in Prediction Markets
CFTC regulation determines whether Americans can legally trade on prediction markets and what protections they receive. Trading on CFTC-approved platforms provides legal certainty; users cannot face prosecution, their funds are segregated and protected, market manipulation is prohibited and surveilled, and formal dispute resolution exists. Without CFTC approval, platforms must either block US users entirely or risk enforcement action and penalties.
The regulatory landscape shifted dramatically between 2023-2025. A September 2024 federal court decision limited the CFTC's authority to prohibit election contracts, ruling that elections are not "gaming" under federal law. This opened the door to billions of dollars in legal political betting. Meanwhile, the Trump administration's 2025 CFTC leadership announced a "pivot to common-sense regulation" reversing prior restrictive policies. However, state gambling regulators have challenged the CFTC's jurisdiction, creating ongoing federal-state conflicts that affect platform operations and trader access.
For traders, the CFTC's role affects everything from tax reporting (CFTC-regulated platforms issue 1099 forms) to position limits (Kalshi caps individual market exposure at $25,000 for standard accounts) to geographic access (platforms approved for US users cannot serve most foreign countries without separate authorization).
#Regulatory Landscape Map
#How It Works
#The CFTC's Statutory Authority
The CFTC derives its prediction market authority from Section 5c(c)(5)(C) of the Commodity Exchange Act, enacted through the 2010 Dodd-Frank Wall Street Reform Act. This provision allows the Commission to prohibit event contracts based on specific criteria. A contract may be prohibited if it involves terrorism, assassination, war, gaming, or activity unlawful under state or federal law AND is contrary to the public interest. Both conditions must be satisfied for prohibition.
Congress's legislative intent, expressed in floor statements by Senators Feinstein and Lincoln, aimed to "prevent the creation of futures and swaps markets that would allow citizens to profit from devastating events and also prevent gambling through futures markets." The CFTC implemented this authority through Regulation 40.11 in 2011, establishing a 90-day review process for potentially prohibited contracts.
#Designated Contract Market Registration
To legally serve American traders, prediction market platforms must obtain Designated Contract Market (DCM) designation from the CFTC. A DCM is a CFTC-approved exchange that must comply with 23 core principles covering market integrity, governance, financial resources, and consumer protection.
The registration process requires:
- Submitting Form DCM with detailed exhibits on corporate structure, governance, regulatory capabilities, system safeguards, and financial resources
- Demonstrating ability to prevent market manipulation and enforce trading rules
- Establishing customer fund segregation
- Creating comprehensive rulebooks and surveillance systems
- The CFTC has 180 days to approve, deny, or conditionally approve
KalshiEX LLC became the first prediction market to receive DCM designation on November 4, 2020. This approval meant Kalshi could offer event contracts to all Americans with no arbitrary user limits or investment caps, unlike academic platforms that operated under restrictive no-action letters.
DCM obligations mirror those for traditional commodity exchanges: 24/7 market surveillance, anti-manipulation rules prohibiting wash trading and front-running, segregated customer funds, and detailed regulatory reporting. Kalshi uses IC360 surveillance software and must file regular reports with the CFTC on trading activity, financial condition, and rule enforcement.
#Self-Certification and Special Review
DCMs can list new products through "self-certification" under CFTC Regulation 40.2. The exchange files notice with the Commission no later than the business day before listing, certifying the product complies with the Commodity Exchange Act and CFTC regulations. Contracts can go live immediately without prior CFTC approval.
For event contracts, however, the CFTC may invoke special review authority under Regulation 40.11(c) if staff believes a contract may involve enumerated activities like gaming. The Commission begins a 90-day review period and requests the exchange suspend listing. The agency must issue an order approving or disapproving within 90 days.
This process created the regulatory clash over Kalshi's congressional control contracts in 2023. Kalshi self-certified the products, but the CFTC initiated review and ultimately prohibited them, leading to federal litigation that overturned the prohibition.
#The Public Interest Test
When evaluating whether contracts are "contrary to the public interest," the CFTC considers multiple factors:
- Economic purpose and hedging utility for commercial participants
- Risk of manipulation based on contract design and market structure
- Whether participants could profit from harm to persons or groups
- National security implications
- Whether the contract draws the CFTC into regulatory areas outside its expertise (elections, sports)
- For political contracts specifically, election integrity concerns
This standard grants substantial discretion. The CFTC used it to prohibit Nadex's political contracts in 2012 and Kalshi's congressional control contracts in 2023, though the latter prohibition was overturned by federal court in 2024.
#Examples
#Example 1: CFTC-Regulated Platform (Kalshi)
A trader opens a Kalshi account by providing government ID and Social Security Number. After identity verification, they deposit 175 total cost).
If the Fed raises rates by 50+ basis points, each contract pays 500 in proceeds and $325 profit. Kalshi reports this on a 1099-B form. The trader's funds are held in segregated accounts protected under CFTC Part 190 bankruptcy rules. If the trader disputes market resolution, formal CFTC complaint procedures exist.
The entire process mirrors traditional stock trading: clear order book with price-time priority, instant electronic settlement, transparent pricing, and regulatory oversight.
#Example 2: Unregistered Platform Enforcement (Polymarket 2022)
In January 2022, the CFTC filed charges against Blockratize Inc. (doing business as Polymarket) for operating an illegal, unregistered facility for event-based binary options. Polymarket had offered 900+ event markets without DCM or Swap Execution Facility registration.
The settlement required:
- $1.4 million civil monetary penalty
- Wind down all non-compliant markets by January 14, 2022
- Full fund redemption for users
- Permanent cessation of CEA violations
Polymarket responded by blocking all US IP addresses and operating exclusively for non-US users. The platform continued globally but excluded Americans for over three years, until securing CFTC approval for US return in September 2025.
#Example 3: No-Action Letter Withdrawal (PredictIt 2022)
PredictIt operated from 2014 under CFTC no-action relief granted to Victoria University of Wellington for academic research. The relief imposed strict limits: $850 maximum per person per contract, 5,000 traders per event, not-for-profit operation, and academic research purpose.
On August 4, 2022, the CFTC abruptly withdrew the relief, stating the University had not complied with terms. PredictIt users sued, and the Fifth Circuit Court of Appeals ruled in July 2023 that no-action letter withdrawal constitutes reviewable final agency action under the Administrative Procedure Act. The court found the CFTC's explanation likely arbitrary and capricious, issuing a preliminary injunction. PredictIt continues operating under this injunction while litigation proceeds.
#Example 4: Political Contract Litigation (Kalshi 2023-2025)
In September 2023, the CFTC prohibited Kalshi's congressional control contracts (predicting which party would control the House and Senate) after a 90-day review. The Commission found the contracts involved gaming under state law prohibitions on election betting and were contrary to public interest given limited hedging utility and election integrity concerns.
Kalshi sued in November 2023. On September 6, 2024, Judge Jia Cobb ruled for Kalshi, finding elections are not "games" under ordinary dictionary definitions and the CFTC exceeded its statutory authority. The CFTC appealed but ultimately dismissed the appeal in May 2025 under the Trump administration, leaving the pro-Kalshi decision standing.
Kalshi immediately listed congressional and presidential contracts that processed billions in volume during the 2024 election cycle.
#Risks, Pitfalls, and Misunderstandings
#Misconception: "CFTC Approval Means Complete Legal Safety"
CFTC registration provides federal regulatory compliance but doesn't guarantee state-level legality. Multiple states (Nevada, New Jersey, Pennsylvania, Michigan, Massachusetts, Ohio, Illinois, Montana, Arizona, New York) have challenged CFTC-regulated platforms, arguing federal law doesn't fully preempt state gambling regulation.
Kalshi has secured preliminary federal court injunctions against Nevada and New Jersey, with judges finding likely federal preemption, but these cases remain in litigation. State-federal jurisdictional boundaries are not yet settled law.
#Risk: Accessing Offshore Platforms as US Person
Americans who use VPNs to access Polymarket (before its September 2025 CFTC approval) or other offshore platforms face legal risks:
- Violates platform terms of service
- Potentially violates federal derivatives regulations
- No consumer protections or legal recourse for disputes
- Tax reporting obligations still exist but platform issues no forms
The FBI's November 2024 raid of Polymarket's CEO investigated potential US user access, though the investigation ended without charges in July 2025. Individual trader enforcement is rare but legally possible.
#Misconception: "No 1099 Form Means No Tax Reporting"
All prediction market winnings are taxable income regardless of documentation. Offshore platforms issue no tax forms, but this doesn't eliminate tax obligations; it simply shifts the burden entirely to traders to calculate and self-report accurately.
The IRS hasn't issued specific guidance on prediction market tax treatment. CFTC-regulated platforms currently treat winnings as trading income on 1099 forms, allowing loss offsets. But without formal IRS guidance, the correct classification (trading income vs. gambling income) remains uncertain, potentially requiring amended returns if future guidance changes treatment.
#Pitfall: Conflating "Event Contracts" with "Gambling"
The CFTC regulates prediction markets as derivatives under the Commodity Exchange Act, not gambling. Event contracts are structured as futures on excluded commodities (occurrences and contingencies), with peer-to-peer market pricing rather than house odds.
However, this classification is disputed. State regulators argue prediction markets are gambling requiring state licenses. The September 2024 Kalshi court decision found elections aren't gaming, but this doesn't resolve whether sports outcomes or other events constitute gaming. The legal boundary between derivatives and gambling remains contested, creating regulatory uncertainty.
#Risk: Regulatory Volatility
The 2023-2025 period demonstrated how rapidly the regulatory landscape can shift. In September 2023, the CFTC prohibited Kalshi's political contracts. By October 2024, Americans were legally trading billions on those same contracts after a federal court decision. By May 2025, the CFTC voluntarily dismissed its appeal under new Trump administration leadership.
Future administration changes, Congressional action, or appellate court decisions in pending state litigation could shift policy again. Regulatory stability cannot be assumed.
#Practical Tips for Traders
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Verify platform CFTC status: Check the CFTC's official list of registered DCMs at cftc.gov. If a platform isn't listed and operates in the US, it's likely violating federal law.
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Maintain detailed transaction records: Track every trade with dates, amounts, cost basis, and proceeds. This documentation is essential for tax reporting and potential IRS audits, especially if using platforms that issue no forms.
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Understand position limits: CFTC-regulated platforms like Kalshi impose $25,000 exposure limits per market for standard accounts. These limits prevent catastrophic losses but also cap potential profits, requiring diversification across multiple markets.
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Report all income regardless of forms: File Schedule 1 with your tax return reporting net prediction market profits even if you receive no 1099. Consult a tax professional for substantial trading activity.
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Review state-specific restrictions: Even on CFTC-regulated platforms, some states may claim jurisdiction over certain contract types (especially sports). Monitor ongoing litigation and state enforcement actions that could affect access.
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Use CFTC complaint procedures for disputes: CFTC-regulated platforms provide formal dispute resolution. File complaints through the CFTC's website if you believe a market was resolved incorrectly or funds were mishandled.
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Monitor regulatory developments: Subscribe to CFTC press releases and follow prediction market industry news. Regulatory changes can affect platform operations, contract availability, and legal obligations with minimal notice.
#Key Regulatory Timeline
- 2012: Nadex (North American Derivatives Exchange) designated as a Contract Market.
- 2020: Kalshi receives DCM (Designated Contract Market) license, becoming the first fully regulated event contract exchange.
- Jan 2022: Polymarket settles with CFTC for $1.4M and agrees to block US users.
- Sep 2023: CFTC denies Kalshi's application for "Congressional Control" markets. Kalshi sues.
- Sep 2024: Kalshi wins lawsuit against CFTC. Court rules that election markets do not involve "gaming" or "unlawful activity."
- Oct 2024: Kalshi (and later Interactive Brokers/ForecastEx) launches legal election markets in the US.
This timeline highlights the rapid shift from "prediction markets are illegal gambling" to "prediction markets are regulated financial derivatives."
#Related Terms
- Prediction Market
- Designated Contract Market (DCM)
- Binary Market
- Kalshi
- Polymarket
- Event Contract
- Commodity Exchange Act
- Self-Certification
- Market Manipulation
- Regulatory Arbitrage
#FAQ
#What's the difference between CFTC-regulated and offshore prediction markets?
CFTC-regulated platforms like Kalshi require full identity verification, segregate customer funds, implement market surveillance, report winnings to the IRS via 1099 forms, and provide legal consumer protections including dispute resolution. Offshore platforms typically require no identity verification, settle in cryptocurrency, issue no tax forms, and offer no legal recourse for disputes. Trading on CFTC-regulated platforms is federally legal for Americans; accessing offshore platforms as a US person may violate federal derivatives regulations and platform terms of service.
#Can the CFTC prohibit any prediction market contracts it wants?
No. The CFTC can only prohibit contracts under Section 5c(c)(5)(C) of the Commodity Exchange Act if two conditions are met: (1) the contract involves terrorism, assassination, war, gaming, or activity unlawful under state/federal law, AND (2) the contract is contrary to the public interest. A September 2024 federal court decision limited this authority further, ruling that elections are not "gaming" and the CFTC exceeded its authority by prohibiting Kalshi's congressional control contracts. The scope of CFTC prohibition authority remains contested, especially for sports and other event types.
#Do I have to pay taxes on prediction market winnings even without a 1099?
Yes. All prediction market winnings are taxable income regardless of whether you receive tax forms. The IRS requires reporting of all income, and platforms issuing no forms (like offshore exchanges) don't eliminate tax obligations; they simply shift the burden entirely to you to calculate and report accurately. Current best practice is to report net profits on Schedule 1 and maintain detailed transaction records. The IRS hasn't issued specific guidance on whether prediction markets should be treated as trading income or gambling income, creating some classification uncertainty.
#Why did Polymarket have to pay $1.4 million to the CFTC?
In January 2022, the CFTC charged Polymarket with operating an illegal, unregistered facility for event-based binary options. Polymarket had offered 900+ event markets to Americans without obtaining required Designated Contract Market or Swap Execution Facility registration. The settlement required a $1.4 million civil penalty, winding down all markets, blocking US users, and ceasing CEA violations. Polymarket operated exclusively offshore until September 2025, when it received CFTC approval to return to the US market after acquiring QCX, a licensed derivatives exchange.
#Can states ban prediction markets that the CFTC has approved?
This question is currently being litigated in federal courts. Multiple states have issued cease-and-desist letters to CFTC-regulated platforms, arguing prediction markets are gambling requiring state licenses. Kalshi secured preliminary injunctions in federal court against Nevada (April 2025) and New Jersey (May 2025), with judges finding likely federal preemption; the Commodity Exchange Act likely supersedes state gambling laws for CFTC-registered platforms. However, these cases haven't reached final resolution, and the federal-state jurisdictional boundary remains unsettled law as of November 2025. The outcome will significantly affect prediction market availability across different states.