Robinhood, Kalshi, and Crypto.com will soon hear from the Supreme Court whether or not their sports contracts can be exempt from paying federal wagering tax on the grounds that they’re not gambling.
The companies, which haven’t been collecting wagering tax from their booming prediction markets, are set to receive a decision on their main argument at the same time.
Robinhood asked the Supreme Court on September 10 to review its Ninth Circuit loss to Nevada’s gambling commission, and that case is now due for Nevada’s response on December 7.
Crypto.com’s derivatives arm followed on September 11 over its own Nevada loss, while New Jersey wasn’t happy with Kalshi and filed its own petition to the Supreme Court on September 2, appealing Kalshi’s Third Circuit win.
Responses in all three cases are now all due on December 7.
The US Supreme Court has broad discretion over the timing of its rulings and hasn’t published its winter schedule, but using history as a rough guide, substantive opinions typically arrive during the months of December and January.
Justices also have three related cases before them on which they are able, but aren’t obligated to, opine.
No tax collected on event contracts
Robinhood disclosed in its October 28 quarterly report that it has “not collected or remitted federal excise tax on event contracts.” That’s fine, provided the Supreme Court rules favorably.
Forced to disclose the full truth in an SEC filing, however, Robinhood warned that an unfavorable tax ruling “could be material” and could even make event contracts “uneconomical.”
Most prediction market operators are battling state regulators and making various concessions to keep themselves away from casino or gambling classifications.
For example, Robinhood struck an October 26 deal to stop new sports contracts in Ohio while its legal appeals play out. These include at the Supreme Court with its upcoming December 7 deadline.
Justices of the Supreme Court aren’t set to rule on the narrow question of federal tax directly. However, the primary case involves the State of Nevada’s claim that Robinhood’s sports prediction markets are subject to state gambling laws.
Therefore, if the Supreme Court rules in Nevada’s favor, it would set powerful precedent and make it harder for Robinhood to argue that its prediction markets don’t involve bets or are tax-exempt.
Read more: Court rules prediction market Kalshi’s US election bets are legal
Supreme Court takes up Nevada prediction market challenge
Federal tax code defines a taxable wager to include sports or event bets placed with a business or person “engaged in the business of accepting such wagers.”
In brief, prediction market operators argue that they operate a marketplace for participants to trade with one another, not against the house with a systematic advantage, and are therefore not accepting taxable wagers.
Tax researchers at New York University argued that even if federal commodities rules, such as CFTC guidelines, override state casino or gambling laws, “it does not follow” that other federal tax laws are necessarily preempted.
Not collecting wagering tax is fine as long as they aren’t wagers
Robinhood admitted to investors that it doesn’t collect a federal wagering tax on its prediction markets. The trading app made the disclosure in its quarterly report filed on October 28.
Robinhood said, “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.”
“RHD” refers to Robinhood Derivatives, the futures brokerage unit that offers its event contracts.
Robinhood added that it’s still evaluating its exposure to those and other tax regimes, “including federal excise tax” such as sections 4401 and 4421 of the Internal Revenue Code.
Section 4401 imposes a 0.25% excise tax on wagers that the accepting state authorizes.
A booming, ‘tax free’ industry
For context, Robinhood reported $173 million in event contracts revenue last quarter, more than six times its haul a year earlier. Customers traded a record 16.4 billion contracts between between $0.01 and $0.99 apiece.
On October 5, researchers at New York University’s Tax Law Center concluded that sports event contracts are probably taxable wagers.
The only thing that made their devastating paper slightly less devastating is that it didn’t literally mention Robinhood by name. Otherwise, the news was as bad as it could get for Robinhood, Kalshi, and Crypto.com.
The paper read, “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.
“These include the federal excise tax on sports and contest wagers, ordinary income tax treatment for winnings, and limitations on deductions for gambling losses, among other rules.”
Meanwhile, Robinhood tells its customers, “Taxes related to event contracts are your sole responsibility, including reporting on your personal tax return.”
Got a tip? Send us an email securely via Protos Leaks. For more informed news and investigations, follow us on X, Bluesky, and Google News, or subscribe to our YouTube channel.