Do I Have to Pay Taxes on This?

You jumped on the Barack Obama bandwagon early, and you're currently counting your Intrade earnings as you smile from ear to ear while checking the latest poll numbers. Obama's 14-point margin in today's NY Times poll (and his 80.3 price on Intrade today, his highest ever) seems so insurmountable that you're less concerned at this point about any so-called Bradley Effect than you are about one other pesky question about your profits: Do I actually have to pay taxes on this?

This was the question I posed last year to Philip Cleary, my good friend, who also happens to be a tax law expert and attorney at the IRS. At my urging, Philip decided to investigate the issue in depth in a law review article, which was recently published in the Virginia Tax Review. His paper, which is available in its entirety here, is the first of its kind - a thorough legal analysis of how prediction market investments should be treated under current tax law. Should they be treated as mere gambling earnings or taxed like other tangible commodities?

Philip is the first to acknowledge that the tax treatment of prediction markets is complicated. As a result, he is far more qualified to explain his paper than I, which he has graciously agreed to do in a forthcoming post. In the meantime, here is his Bottom line: 

"Prediction derivatives are logically seen as instruments of finance and taxed as their natural predecessor forward contracts based on tangible commodities. This approach is the correct one under current tax law."

"Prediction markets simply do not follow in the stead of online poker and off-track betting. They are targeted to different markets. The events of prediction markets are not one-time games but are connected to the socioeconomic events which shape our well-being. Even the nature of the return is more like that of financial instruments and not some oversized jackpot. Whereas wagering involves vice, prediction derivatives exhibit genuine social usefulness. At the very least, they help disseminate useful information."

Do you agree with Philip's approach? Have you been paying taxes on Intrade investments? Let us know in the comments.

The Next Step: Prediction Market Business Ideas

Silicon Alley Insider, which has recently become as obsessed with prediction markets as we are (Politickr likes to take at least some credit for this, dating back to its early days at SAI last year), is out with a few suggestions about how to turn prediction markets into an even bigger business:

• Provide political stock options to campaign employees -an admittedly far better motivator than pizza for overworked staffers on all those long nights (A good idea considering Politickr has learned from several very high-level campaign strategists that trading in markets like Intrade has become a popular hobby among staffers during this election cycle)
• Policy Hedges - SAI's post doesn't mention it, but there are already several startups in the works planning to do just this. By repackaging trading stats and selling them to lobbyists and hedge funds, companies are hoping to make money off those eager to hedge on policy.
• Campaign Financing - Does it make sense to give my gas money to this guy?Do certain events/strategies lead fat cats to give more? Individuals and campaigns alike could look to the markets to make funding decisions.   

Here are some more ideas we've been toying wth:

• Campaign Resource Allocations - McCain's recent decision to pull his dwindling resources out of Michigan, where he was seeing ever-diminishing returns, was likely made on the basis of polls. In the future, however, market analysis could provide much greater clarity on these types of questions. 
• Vetting VPs and Strategies - Currently, political prediction markets only ask questions like whether Romney or Palin will be picked as McCain's number two. One could imagine markets that examine the effects of rumors and other pereceived weaknesses on the campaign, which would be helpful to strategists war-gaming October surprises.
• Opposition Research - Does it make sense to spend money digging up dirt on a potential competitor who can't seem to raise money? Is it a good idea to bring up your opponent's tenuous ties to a 1960s radical at a time when voters are clamoring for change? Instead of asking focus groups, the campaigns could ask the markets.   

As political prediction markets explode in popularity, a host of cottage industries will inevitably develop. Since Politickr is already planning a few of its own, we don't want to give away the farm. But here are a few ways to take advantage of the boom:

• Political Prediction Market Consultants - The pollsters of the 21st Century, perfectly suited for the 24-hour news cycle. There's nothing the cable networks like more than charts and numbers. Some day, campaigns will hire consultants to run their internal markets and keep track of their options. Some day, these specialists will appear along side the James Carvilles of the world doing campaign analysis.
• Prediction Market News Agency - This is an idea I've been pushing with Henry Blodget at Silicon Alley Insider. With Intrade, IEM, Betfair, Hubdub, iPredict, Predictify, Hollywood Stock Exchange, News Futures, Media Predict, and others generating data daily on people's tastes in everything from politics and entertainment to tech and media, someone should be analyzing the info and generating stories for public consumption. After all, what good is having tomorrow's political news today if there's no one writing the article? This is what Politickr hopes to offer as soon as possible, provided it can secure funding.
• Equity Research for Political Prediction Markets - Traders are thirsty for info that can't be gleaned from reading The New York Times. Politickr can only track so many pundit predictions. Who will emerge as the Morningstar of political trading?
• Trading Training Sessions - Wherever Politickr goes, it talks up the potential of political prediction markets. Most people are intrigued, but very few have ever heard anything about them. To that end, they need to learn more and feel more comfortable before they invest. Politickr plans to start offering training sessions and meetups for beginners in coming days.
• New Markets - If the CFTC, which is currently weighing whether to grant markets full legal status in the US, goes as far as Politickr hopes, the impact will be enormous. New, U.S.-based trading exchanges will proliferate. Real money markets will emerge to help lawyers track the potential success of lawsuits, to assist tech companies in designing the next hot gadget, to predict which restaurants will succeed and even which amateur porn stars will make it big. While many of these markets already exist, participation is limited by the fact that traders can't yet put real money on the line in the US. 
  
• Prediction Market Think Tank and Lobbyists - The research suggests that prediction markets are more accurate than polls, but more studies are always needed. Someone needs to speak for the industry and lobby legislators on its behalf. 

If you, like us, are convinced that there's huge growth potential here, we strongly urge you to join us. We are working on many of these ideas, as well as one other highly secretive plan that we're keeping under wraps for now. We need your help and your ideas! If you're interested in getting involved, leave a comment, drop us an email, or join our Political Prediction Markets group on Facebook - Let's move the industry forward!

Will Dems Reach 'Magic 60'? Traders Say Not So Fast

After an early fall fraught with fear of another quadrennial collapse, even the most white-knuckled Democrats are beginning to believe the latest polls that show victory finally within reach.

Obama, of course, will make history however he winds up in Washington. But with Intrade currently projecting that he could win 364 electoral votes (and maybe as many as 375, if he wrests Indiana from the Republican column for the first time since 1964), Obama could even come close to Clinton's 1996 drubbing of Dole (379-159). As a result, some sanguine strategists and pollsters are beginning to whisper about another once-unthinkable objective: Reaching the magical 60 mark in the Senate.

Stuart Rothenberg, editor of the nonpartisan Rothenberg Political Report, told CNN that the filibuster-proof margin is no longer a fantasy. "It's the perfect storm," he said. "You've got Republican voters angry at Republicans, many Americans just petrified about the future...wanting change. And right now change appears to be coming in the form of Democrats."

Even the much-maligned Mark Penn seems to think that Democrats are capable of mounting the type of landslide necessary to usher in their first ironclad margin in the Senate since 1977.

While Larry Sabato, director of the Center for Politics at the University of Virginia, predicted Democrats will reach 60 seats. Senator Chuck Schumer, the head of the Democratic campaign operation in the Senate, was still hedging his bets.

The chances, he said, are "better than they were two weeks ago."

For the Democrats' dream to become a reality, they will need to win nine of 12 Republican-held Senate seats. 

Schumer is focusing on the following: Va., Ore., Minn., N.H., N.C., N.M., Colo., Alaska, Ky. 

Although the latest polls put Democrats within striking distance in all those states, political traders at Intrade aren't yet quite as convinced. Democrats enjoy commanding leads in the markets in seven of those states, but traders believe Coleman and McConnell will hang on and deny Democrats their magic number. Furthermore, while "Democrats to Hold 56-60 seats after the 2008 election" is currently trading at 62.1 (a solid bet by all indications) on Intrade, "Democrats to Hold 61-65 seats" is only trading at 8.

Here's the latest comparison between Real Clear Politics and Intrade:

Virginia:

Poll Average: Warner +28.2

Intrade: Warner +86

Oregon

Poll Average: Merkley +.8

Intrade: Merkley +19.5

Minnesota:

Poll Average: Franken +2.2

Intrade: Coleman +4

New Hampshire:

Poll Average: Shaheen +5.4

Intrade: Shaheen +45.5

North Carolina:

Poll Average: Hagan +2.3

Intrade: Hagan +29

New Mexico:

Poll Average: Udall +17.7

Intrade: Udall +74

Colorado:

Poll Average: Udall +6

Intrade: Udall +57

Alaska

Poll Average: Begich +2.8

Intrade: Begich 24.5

Kentucky:

Poll Average: McConnell +6.5

Intrade: McConnell +54.6

Traders of Art Learn Art of Trading?

Investors spooked by the stock market are increasingly putting their money in paintings, wine, and stamps instead of stocks and bonds. But for those of us still a couple million short of a Monet, Intrade will soon be offering a more affordable alternative: Futures contracts based on the art market.

According to a report in the Financial Times, Art afficionados will be able to pony up as early as today on Intrade for shares starting at $30 and priced according to the Mei Moses All Art index.

Next up: Futures in bottles of Bordeaux?

   

How Low Can He Go? McCain Hits New Bottom

John McCain, whose stock has been tumbling along with the DOW, reached a new low on Intrade this morning when he briefly dipped below 30 for the first time since July. While he bounced back this afternoon to 30.5 in pre-debate trading, McCain's stock is now down close to 25 points from its early September high and at the lowest point since the financial crisis exploded three weeks ago.

In the last week alone, Clusterstock, which has been keeping one eye on the bloodbath on Wall St. and the other trained on the Republican candidate's collapse in the futures market, has featured the following headlines: "McCain Plummets with Stocks," "McCain Stock Collapse Resumes," "McCain's Stock Collapses," and "McCain Hits New Low."

With the latest Gallup tracking poll showing Obama up by 9 points, matching his highest lead to date in the campaign, and with the Real Clear Politics average putting him a healthy 5.5 points ahead, McCain needs nothing short of a complete Obama collapse in tonight's debate to recover on Intrade.

Nigel Eccles, the founder of Hubdub, pointed out in a web post that McCain's election prospects may be even worse than Intrade purports.

"Intrade is the only market maker showing McCain at above 30%," he said. "Betfair, ourselves (Hubdub) and UK bookmakers are showing him at around 23% and falling fast."

In a recent lengthy article in The New York Times on John McCain's ties to gambling, Jo Becker and Don Van Natta Jr. described the Republican nominee as an old hand at the craps table.

"For much of his adult life, Mr McCain has gambled as often as once a month, friends and associates said, traveling to Las Vegas for weekend betting marathons," they said. 

One has to wonder, however, if even gambler McCain would bet on his own stock in the current climate.

Intrade Launches Bloomberg Contract

One day after The New York Times reported that NYC Mayor Michael Bloomberg will seek to amend the cty's term-limit law to run for a third term, Intrade launched a contract on whether his legal maneuvering will succeed.

Since two-thirds of New York City Council members also face the prospect of being forced out of office by term limits, there's little doubt the legislature is inclined to back the bill. 

The only stumbling block, of course, could be irate constituents, who roundly rejected a similar attempt by Rudy Giuliani to prolong his stay in 2001. 

It should come as no surprise that Giuliani has already expressed support for the measure. Much more importantly, Bloomberg has already received the backing of The New York Daily News, The New York Post, and The New York Times.

In a glowing editorial today, the New York Times wrote:

"Term limits are seductive, promising relief from mediocre, self-perpetuating incumbents and gridlocked legislatures. They are also profoundly undemocratic, arbitrarily denying voters the ability to choose between good politicians and bad, especially in a city like New York with a strong public campaign-financing system, while automatically removing public servants of proven ability who are at a productive point in their careers."

"Go for it, Mike," wrote the edtiorial board of The New York Daily News. "Go for it wholeheartedly, without reservation." In rare agreement with its tabloid rival, The New York Post featured Mayor Mike in a crown on its cover with a headline blaring "Mike The III." 

The New York Post editorial said the mayor's decision was timely "because Wall Street's turmoil means hard times for New York City" and wise "because no one in public life is better equipped to deal with such troubles than Mayor Bloomberg."

 The Bottom Line - Bet big on Bloomberg. The politically popular mayor, backed by his hometown newspapers and legislators also looking to keep their jobs, will parlay his business expertise into a third term.

How Long Will OneSeason Last?

OneSeason.com, a sleek new sports prediction market exchange, may be of limited interest to strictly political traders, who are about as likely to buy and sell Kobe Bryant and A-Rod shares as they are to trade financials these days. Still, even if November 4 is your Super Bowl, there is good reason to pay close attention to this new sports predicton site.

That's because OneSeason appears to be the first real-money prediction market operating out of the United States without explicit approval from the CFTC. As of this morning, the site is currently accepting credit cards and Paypal accounts from U.S. citizens eager to buy initial public offerings in baseball, basketball, football, and hockey teams and players, whose values will not be based on game outcomes, but rather determined solely on the basis of public perception of their worth.

Launched today in San Francisco by Michael Sroka, a 27-year-old entrepreneur determined to combine his obsession with sports and his love of trading, OneSeason does not seem to be affiliated with an educational institution. Unlike the Iowa Electronic Markets, therefore, it will seemingly be unable to claim an academic exemption under the 2006 Unlawful Internet Gambling Enforcement Act.  

Thus, the question is how long the site will be able to remain in operation in the United States accepting real money. From the legal small print on its website, it appears that OneSeason will argue that it is not a gambling operation because its sports stock prices are not based on the outcomes of events. Still, will that be enough to differentiate it from Intrade, which is currently still prohibited by the Gambling Act from accepting American credit cards? After all, OneSeason plans to make its money through trading fees.

Will the CFTC look the other way? If so, it could signal the beginning of a revolution and pave the path for a slew of new political trading and other real-money prediction sites? Let us know what you think.