Predicting the Taxation of Prediction Markets‪.‬

I. INTRODUCTION Taxation is to the study of law what derivatives are to the study of finance: a subject matter that is both very complicated and very important. Each field is heavily technical and of little concern to most laymen. Further, the set of rules governing the taxation of derivatives is still largely unsettled. At the intersection of these two complicated fields is a new kind of purported financial instrument, a product of the internet that has been actively marketed to the masses. Generally called "prediction markets," websites host a trading system where members of the public can stake real money on their predictions concerning the occurrence or nonoccurrence of future events. Participants are able to buy and sell contracts, the value of which is directly tied to the probability of the occurrence of an event. The contracts are priced between zero (representing the perceived impossibility of an event's occurrence) and one (indicating that the market considers the event to be an established certainty). In effect, the participants in these prediction markets are betting on the occurrence of a well-defined event, the nature of which is limited only by the human imagination. Some of the most popular contracts seem to be based on political outcomes.