Summary: Everything you need to explain prediction markets to Uncle Bob this holiday season - from the legal revolution and tax implications to betting on aliens and Taylor Swift.
Introduction: The Turkey, The Wine, and The Price of Truth
You are going home for the holidays. You are going to sit at a table with people you love, or at least people you are contractually obligated to share a meal with due to shared genetic material, and you are going to eat turkey that is slightly too dry and drink wine that is slightly too sweet. And at some point, between the second helping of stuffing and the inevitable argument about who is supposed to do the dishes, someone—let's call him Uncle Bob—is going to ask you about your job, or your investments, or what you've been reading lately.
And you, being a sophisticated consumer of financial news and perhaps a person who spends entirely too much time on the internet, are going to want to talk about Prediction Markets.
You should probably not do this. It is generally better to talk about the weather, or sports, or how much you enjoyed the turkey. But you are not going to do that. You are going to talk about how the efficient market hypothesis has finally come for the concept of "truth," and how you can now short-sell the probability of aliens existing before 2027. You are going to try to explain that while the rest of the world sees "gambling," you see "event contracts." You see price discovery.
Here is the thing about prediction markets in late 2025: They are no longer just a weird internet hobby for libertarians who want to bet on assassination attempts. They are now a multi-billion dollar asset class regulated by the CFTC, integrated into the Bloomberg Terminal of the human soul, and arguably the only reason anyone knew what was going to happen in the 2024 election before the cable news anchors did.
This guide is intended to help you explain this to Uncle Bob without sounding like you have joined a cult, although, to be fair, the line between "financial innovation" and "cult" is always a bit blurry. The goal is to walk him through the legal revolution, the tax apocalypse that is about to destroy his DraftKings habit, and the sheer absurdity of a financial system that now prices the probability of Donald Trump saying the word "tampon" in real-time.
--• Part I: What Are We Even Talking About? (The "It's Not Gambling" Defense)
The first thing you have to explain is that prediction markets are not technically gambling. Well, they are gambling in the sense that you put money down and if you are wrong you lose it and if you are right you get more money back. But in the eyes of the law—specifically the eyes of the United States Court of Appeals for the D.C. Circuit—they are Event Contracts.
The Binary Option Structure
When Uncle Bob bets on the Cowboys to cover the spread, he is dealing with a bookmaker who charges a "vig" (a fee) and sets the odds to ensure the house wins. When you trade on a prediction market like Kalshi or Polymarket, you are trading a binary option.
Here is how you explain it: Imagine a contract that pays out exactly $1.00 if an event happens, and $0.00 if it does not. If the market thinks there is a 60% chance the event happens, that contract trades at 60 cents. If you buy it at 60 cents and the event happens, you get $1.00. You made 40 cents profit. If you buy it at 60 cents and the event doesn't happen, you get $0.00. You lost 60 cents.
There is no "house." There is just an order book. If you want to buy "Yes" at 60 cents, someone else has to be willing to buy "No" at 40 cents (or sell you the "Yes"). It is a market. It is Wall Street for people who have opinions about things other than the price of corn futures.
The Regulatory Moat (Why Uncle Bob Can Do This Now)
For a long time, you couldn't really do this in America because the Commodity Futures Trading Commission (CFTC) viewed it as "gaming," which is against the public interest. The CFTC likes corn futures. They understand why a farmer needs to hedge the price of corn. They did not understand why a hedge fund manager needs to hedge the probability of which party controls the Senate.
Then came Kalshi. Kalshi is a regulated exchange. They sued the CFTC. And in 2024, they won.
!Kalshi Logo
The court ruling in KalshiEx LLC v. CFTC is the reason we are here. The court essentially said that "gaming" involves playing a game. An election is not a game. It is a serious political contest (theoretically). Therefore, betting on it isn't "gaming" under the Commodity Exchange Act; it is trading an event contract based on political control. The CFTC lost, the appeals court refused to stay the ruling, and suddenly, election markets were legal in the United States.
This opened the floodgates. Following Kalshi's victory, Polymarket—which had been banished to the offshore realms of blockchain and crypto—managed to claw its way back into the US via a "reverse merger" strategy, acquiring a CFTC-licensed entity to operate legally.
!Polymarket Logo
So now, in December 2025, you have:
• Kalshi: The fully regulated, bank-transfer-friendly US exchange where you can bet on the Fed Rate. • Polymarket: The crypto-native giant that does billions in volume and operates as a Designated Contract Market (DCM) via its acquisition. • DraftKings & The Rest: Even the sports betting apps are launching "prediction" products because they realized that if they call a bet a "derivative," they might get better tax treatment (more on that later).
--• Part II: The Tax Angle (Or, Why Uncle Bob Should Stop Using DraftKings)
This is the part where you provide actual value to your relatives. You see, the government passed something called the "One Big Beautiful Bill Act" (OBBBA) in July 2025. It has a terrible name, but it has very specific implications for anyone who gambles.
The Phantom Income Problem
Starting in 2026, the OBBBA changes how gambling losses are deducted. Previously, if you won $10,000 on slots and lost $10,000 on poker, you netted to zero (if you itemized). You paid no tax on the winnings because the losses offset them.
Under the new law, you can only deduct 90% of your losses against your winnings.
The Math of the Screw-Job:
| Item | Amount | |------|--------| | Winnings | $100,000 | | Losses | $100,000 | | Net Profit | $0 (You broke even) | | Taxable Income in 2026 | $10,000 |
You lost money (or broke even), but the IRS treats you as if you made $10,000. This is called "Phantom Income," and it is terrifying.
The Prediction Market Loophole
However—prediction markets like Kalshi and Polymarket argue that they are not gambling. They are financial exchanges regulated by the CFTC. The contracts are derivatives.
If you trade derivatives: • They are generally treated as capital gains/losses (or ordinary income depending on trader status), but you typically get to net your wins and losses fully. • You do not suffer the "90% cap" that applies to wagering.
Coinbase and Kalshi are currently litigating/lobbying to ensure this distinction holds, arguing that trading on the outcome of the CPI (Consumer Price Index) is functionally no different than trading a binary option on the S&P 500.
So, tell Uncle Bob: "If you bet on the Cowboys on a sportsbook, you are gambling and the IRS will crush you with phantom income tax. If you buy a 'Yes' contract on the Cowboys on a CFTC-regulated prediction market, you are a sophisticated derivatives trader managing risk, and your tax bill might not bankrupt you."
It is regulatory arbitrage at its finest.
--• Part III: The 2024 Election and "The French Whale"
You cannot talk about prediction markets without talking about the 2024 Election. This was the moment the "Wisdom of Crowds" theoretically beat the "Wisdom of Pundits."
The Narrative
Leading up to November 2024, the polls were tight. Nate Silver was stressed. The New York Times needle was jittery. But on Polymarket, Donald Trump was a clear favorite. The media screamed "Manipulation!" They said it was biased crypto-bros pumping their bags.
And then there was Théo.
!French Whale Tweet
Théo was a French trader (a "whale") who bet roughly $30 million on Trump winning. He didn't just bet on Trump winning; he bet on Trump winning the popular vote, the swing states, the whole thing. He used multiple accounts. He was accused of trying to rig the perception of the election.
In a 60 Minutes interview (because of course he went on 60 Minutes), the Polymarket CEO Shayne Coplan had to explain that Théo wasn't a political operative. He was just a guy with a high-conviction trade.
The Result: • Théo made about $85 million in profit. • The markets correctly called the swing states faster than the TV networks. • The "manipulation" turned out to be "private information" or at least "better analysis."
The lesson here is not that markets are always right. It is that markets incentivize people to be right in a way that "being a pundit on CNN" does not. If a pundit is wrong, they get invited back to explain why they were wrong. If Théo was wrong, he would have lost $30 million. That clarifies the mind.
--• Part IV: The Weird Stuff (Culture, Aliens, and Taylor Swift)
Now that you have established the legal and financial superiority of these markets, you must address the fact that people are using this sophisticated financial infrastructure to bet on absolute nonsense.
The "Matt Levine" view of the world is that everything is a security if you squint hard enough. Prediction markets prove this.
1. The Taylor Swift Economy
There are markets on Polymarket asking if Taylor Swift will announce a pregnancy in 2025. There are markets on whether her wedding Instagram post will be the most liked post in history.
!Taylor Swift Marriage Market
• The Market: "Taylor Swift x Travis Kelce get married by...?" • The Volume: Hundreds of thousands of dollars. • The Implication: People are doing fundamental analysis on pop star relationships. They are tracking jet movements. They are analyzing lyrics. This is arguably more diligent research than most people do when buying Tesla stock.
2. Aliens vs. Bitcoin
This is my favorite statistic of late 2025.
!Aliens Confirmation Market
In December 2025, the market implied probability of the U.S. government confirming the existence of aliens was roughly 6-7%.
The market implied probability of Bitcoin hitting $200,000 by year-end was roughly 5%.
Takeaway: The market believes it is statistically more likely that we are not alone in the universe than it is for Bitcoin to double in the next two weeks. That is a price signal. I don't know what it signals—perhaps that Bitcoin is heavy or that the government is leaky—but it is a signal.
3. The Elon Musk Index
There are markets on how many times Elon Musk will tweet in a week.
!Elon Musk Tweets Market
• The Trade: "Elon Musk tweets Nov 28–Dec 5: 240–259." • The Mechanics: Traders have to scrape his X (formerly Twitter) feed, account for deleted tweets, and account for retweets. It is high-frequency trading applied to the attention span of a billionaire.
The "Tampon" Incident: There was a market on whether Donald Trump would say the word "tampon" in an interview. He didn't say it for an hour. The "No" shares rallied. Then he said it. The "Yes" shares went to $1.00. Returns of 14x were made in seconds. This is the dumbest efficient market in history.
--• Part V: The "Serious" Markets (Macroeconomics and The Fed)
If Uncle Bob thinks betting on aliens is silly, tell him about the CPI Markets.
Every month, the Bureau of Labor Statistics releases the inflation data (CPI). For minutes before that release, the S&P 500 is frozen in terror. But on Kalshi and Polymarket, people are trading the number.
!CPI Inflation Market on Kalshi
• The Market: "CPI for November 2025." • The Mechanism: Traders aggregate private data—rents, gas prices, grocery costs—and bet on the specific number (e.g., 2.8% year-over-year). • The Result: The prediction markets often move before the official release, or at least predict it better than the bank consensus. In late 2025, Kalshi's inflation markets signaled a "hotter" or "cooler" print days in advance, acting as a leading indicator for the actual bond market.
Institutions like Susquehanna and Intercontinental Exchange (ICE) (the owners of the New York Stock Exchange) are invested in these platforms because they realize this data is valuable. If you can know what the inflation number is going to be 24 hours before the government says it, you can make a lot of money in the bond market.
So, Uncle Bob, it's not "betting on inflation." It is "hedging your purchasing power against the degradation of the currency using binary derivatives."
--• Part VI: When It Goes Wrong (The Dispute Problem)
You must also be honest. Sometimes these markets break. The problem with an "event contract" is that someone has to decide if the event happened.
The Venezuelan Election Debacle
In Venezuela, the incumbent (Maduro) claimed he won. The opposition—and the rest of the world—said he lost.
• The Market Question: "Who will win the Venezuelan Presidential Election?" • The Problem: The contract usually says "per the official announcement." The official announcement said Maduro. But the truth (according to the crowd) was the opposition. • The Resolution: UMA token holders (who vote on disputes for Polymarket) were lobbied to vote for the opposition, overriding the "official" source because the official source was corrupt. It was a mess. It showed that "truth" is subjective when there is money on the line.
The Government Shutdown Fake-Out
There was a market on a US Government shutdown. Congress passed a bill to avert it. But the President hadn't signed it by midnight.
• The Technicality: Technically, funding lapsed for a few hours. • The Reality: The government didn't shut down operations. • The Market: Polymarket displayed a banner saying "If not signed by midnight, resolves YES." The odds of a shutdown skyrocketed to 98% after the deal was made but before the signature. People who bet on "common sense" lost money to people who bet on "technicalities."
--• Part VII: Market Structure Deep Dive
Note: This section is for the cousin who took one Economics class.
1. Liquidity and The Order Book
The interesting thing about prediction markets is that they are relatively illiquid compared to stocks.
• The Montana Senate Race: On Kalshi, the total volume for a Senate race might be $75,000. • The Implication: A wealthy donor could, in theory, spend $50,000 to buy "Yes" shares, push the probability to 99%, and then use that "market signal" to generate news headlines ("Candidate X is surging!"). • The Counter: This is expensive. If you push the price to 99 cents when the real probability is 50%, arbitrageurs (like Théo) will happily sell you those shares and take your money. Manipulation is just a donation to people who are paying attention.
2. The "Reverse Merger" of Polymarket
Polymarket wanted to be legal in the US. They didn't apply for a new license; that takes forever. They bought QCX, a tiny exchange that already held a license. It's the corporate equivalent of buying a beat-up house because it has a grandfathered permit to build a skyscraper.
3. Financial Engineering vs. Gambling
The key distinction—and the reason Coinbase is suing regulators—is the "underlying asset."
• Gambling: The event is the game (Entertainment). • Finance: The event is a risk factor (Hedging).
Kalshi's Argument: A homeowner in Florida betting on "Hurricanes in 2025" is not gambling; they are hedging their property value. A business owner betting on "Corporate Tax Rate Hikes" is hedging their P&L. Therefore, these are economic tools, not casino games.
--• Part VIII: Conclusion (What to Tell Uncle Bob)
So, when Uncle Bob asks if he should put his retirement money into a prediction market bet that the Detroit Lions will win the Super Bowl:
1. Tell him it's legal now. (Thanks to Kalshi and the 5th Circuit). 2. Tell him it might be tax-advantaged. (Compared to FanDuel, thanks to the OBBBA). 3. Tell him it's dangerous. (Because whales like Théo know more than he does). 4. Tell him about the aliens. (Because it's funny).
Prediction markets are the commoditization of certainty. They take the amorphous anxiety of "what will happen next year" and turn it into a price ticker. And if there is one thing we learned in 2025, it's that people will trade absolutely anything if you give them a ticker and a "Buy" button.
Happy Holidays.
--• Data Appendix: The State of the Markets (Dec 2025)
| Market | Platform | Odds/Price | Volume | Notes | |--------|----------|------------|--------|-------| | Aliens Confirmed by 2027 | Kalshi | ~9% | Low | "Outcome verified from White House" | | Bitcoin $100k (2025) | Polymarket | ~52% | $81M | Whales betting on year-end rally | | Trump Releases Epstein Files | Polymarket | 65% | $3M | High volatility on news cycles | | CPI Inflation (Nov 2025) | Kalshi | N/A (Resolved) | High | Correctly predicted softer print | | Taylor Swift Pregnant 2025 | Polymarket | 1% | $2M | The "Nothing Ever Happens" trade |
Key Regulatory Timeline
• Sept 2024: Kalshi wins summary judgment vs. CFTC; election markets open. • July 2025: "One Big Beautiful Bill Act" signed; caps gambling loss deductions at 90% starting 2026. • Late 2025: Polymarket receives CFTC approval for intermediated US access via QCX acquisition. • Dec 2025: DraftKings launches "DraftKings Predictions" to compete as a CFTC-regulated product.
--• Disclaimer: This is for educational and entertainment purposes only. Prediction markets involve financial risk. Only invest what you can afford to lose.