Iowa Moves to Heavily Regulate Prediction Markets With New Licensing and Tax Framework

A Comprehensive Regulatory Proposal

The Iowa Legislature is considering Senate File 2085, a bill designed to establish a robust regulatory structure for prediction market platforms offering event-based contracts to Iowa residents. The initiative reflects growing concern among state officials that these markets, while often federally regulated, are increasingly similar to traditional gambling activities and therefore warrant state-level intervention.

At the core of the proposal is a permit system administered by the Iowa Department of Revenue. Under the bill, companies would be required to secure state approval before offering prediction market products. The initial permit fee is set at a substantial $10 million, followed by annual renewal fees of $100,000. Each permit would be valid for one year, expiring at the end of June.

New Taxation Aimed at Boosting State Revenue

Beyond licensing, the legislation introduces a new tax targeting prediction market operators. The bill proposes a 20% levy on “adjusted revenues,” calculated by deducting trader payouts from total fees and then applying a formula to determine the share attributable to Iowa-based users. All proceeds from both licensing fees and taxation would flow into Iowa’s general fund, underscoring the state’s revenue-driven rationale behind the measure.

Changes to How Traders Are Taxed

Senate File 2085 also reshapes the tax treatment of individual earnings from prediction markets. Profits and losses from contracts tied to real-world events would no longer follow certain federal derivative tax rules at the state level. Instead, traders would be required to recalculate their gains specifically for Iowa tax purposes.

The bill limits deductible losses to 90% of gains for taxpayers who itemize deductions and mandates that platforms withhold state income tax on profits exceeding $600. These provisions are slated to take effect in early 2026, potentially affecting participants who are already active in these markets.

Industry Reaction and Ongoing Debate

Supporters of the proposal argue that it provides long-overdue clarity for a fast-growing sector and ensures that the state captures appropriate tax revenue. Critics, however, warn that the legislation omits standard responsible gambling protections, such as self-exclusion mechanisms and addiction support resources. Others point to the steep licensing costs as a barrier that could exclude smaller or emerging operators from the market.

Part of a Broader National Trend

Iowa’s move is not occurring in isolation. Other states are also examining prediction markets more closely, with New York lawmakers advancing similar proposals related to sports-based contracts and courts in states like Massachusetts and Tennessee weighing whether these platforms should legally be classified as gambling. Together, these actions suggest that prediction markets across the U.S. may soon face a much tighter regulatory environment.