Iowa Implements Strict Regulations and Taxes on Prediction Markets
Iowa Legislation Proposes New Rules for Prediction Markets
Iowa legislators have introduced Senate File 2085, a comprehensive proposal that would regulate prediction market platforms within the state. This plan introduces costly licensing requirements, a novel tax framework, and significant revisions in how traders’ earnings from these markets will be taxed.
Regulating Prediction Markets to Increase State Revenue
Prediction markets allow users to speculate on outcomes ranging from sports events and elections to government decisions and economic indicators. While these platforms often operate under the oversight of federal authorities like the Commodity Futures Trading Commission, Iowa lawmakers argue that state regulations are necessary because these markets increasingly resemble gambling activities.
Central to the bill is a permit system requiring companies to obtain approval from the Iowa Department of Revenue before offering event-based contracts to residents. The initial permit would entail a $10 million fee, followed by annual renewals costing $100,000 each. These permits would expire annually at the end of June.
Beyond licensing fees, the legislation proposes a 20% tax on “adjusted revenues,” calculated by subtracting payouts from the total fees paid by traders and determining the portion attributable to Iowa users through a specific formula. Revenues from both the licensing and the new tax will be directed to the state’s general fund.
Changes in Tax Treatment of Prediction Market Earnings
The bill also modifies Iowa’s approach to taxing income from prediction markets. Earnings and losses from contracts linked to real-world events will no longer follow some of the federal tax rules applied to derivatives for state tax purposes. Instead, traders will need to separately calculate their profits for Iowa, add back income earned through these contracts, and limit deductible losses to 90% of gains if they itemize deductions. Prediction market platforms will be required to withhold state income tax on profits exceeding $600.
These tax provisions are scheduled to take effect beginning in early 2026, potentially impacting those who have traded in prediction markets during the current year.
Support and Concerns Regarding the New Legislation
Proponents of the bill argue that these measures will bring clarity and appropriate regulation to a rapidly evolving industry. However, critics note that the legislation lacks common gambling safeguards such as self-exclusion options and visible resources for addiction support. There are also concerns that the high fees could drive smaller companies out of the market.
Context: Similar Actions in Other States
Iowa’s initiative aligns with moves by other states to regulate prediction markets. For example, lawmakers in New York have introduced their own proposals targeting sports prediction contracts, while courts in Massachusetts and Tennessee continue to deliberate whether these platforms constitute gambling under state law.
