IRS Issues Warning: Stick to Sports Betting
David Genge Published 21/08/2026
The Internal Revenue Service (IRS) is issuing a warning to people who like to bet. They are advising people to stick to sports betting sites and avoid playing sports-event contracts on prediction market sites. While the IRS didn't use that exact wording in a recent release cautioning people about the dangers of illegal gambling, they did tell people that the wisest path to take was to stick to state-licensed gambling platforms that are legal in their jurisdiction.
State gambling regulators across the country are having great success in winning court injunctions that federally regulated prediction market sports-event contracts are offering illegal sports betting in their states.
The IRS is cautioning people not to partake in illegal gambling
It isn't often that one federal organization puts another on the spot, but that's kind of what the IRS did with its recent advice to taxpayers about how they should spend their gambling dollars. The Commodity Futures Trading Commission (CFTC) is the federal regulator of prediction market sites. The CFTC has aggressively defended the right of these sites to offer sports-event contracts in states with regulated sports betting, and in states in which sports betting is still against the law. They insist that these sports-event contracts are derivative swaps and not sports betting, since there is no house taking any cut from the trades.
State gambling regulators and state attorneys general have taken umbrage at this claim. They've argued in court that these sports-event contracts are nothing more than illegal sports betting. Judges in states like Michigan, Connecticut, Washington, and Nevada have agreed, ruling in favor of the states.
The IRS - perhaps unintentionally - seems to be on board with these rulings as well. Again, let's be clear. The media release about illegal gambling from the IRS doesn't specifically mention prediction markets or sports-event contracts.
However, the IRS did offer this piece of advice: "When placing bets, use state-licensed gambling platforms that are legal in your jurisdiction."
The IRS discusses the fallout from illegal gambling
Much of the IRS release dealt with the inherent dangers that come from illegal gambling activities. The IRS Criminal Investigation (IRS-CI) division warned that illegal gambling often fuels other financial crimes.
"During the past year, IRS-CI initiated 54 illegal gambling investigations involving $11.5 million that were linked to an estimated $126 million in laundered funds," the release noted.
The IRS-CI has maintained an 84% conviction rate in prosecuted illegal gambling cases. Defendants were sentenced to an average of 37 months in prison.
"Illegal gambling isn't just about placing unlawful bets," IRS-CI Chief Jarod Koopman said in the release. "Our investigations routinely uncover money laundering and tax crimes tied to illegal gambling operations. Following the money allows us to dismantle larger criminal networks."
Offshore sportsbooks also come under fire
Sports bettors were also cautioned about the inherent danger that can result from wagering on sports at offshore online sportsbooks. These are betting sites that take American customers but are regulated in countries other than the USA.
"Steer clear of offshore and crypto-based gambling platforms that attract anonymous users by avoiding Know Your Customer protocols and financial reporting obligations," the release warned. "Make sure to report all gambling winnings as taxable income to avoid civil and criminal penalties from the IRS, and never accept payment to place bets on behalf of someone else or gamble to obscure the source of funds.
"You could find yourself in the middle of a money laundering conspiracy."
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