Prediction Market Taxes Explained: How to Report Your Winnings to the IRS

Jesse M. Cox Chief Editor

Fact checked by:
Mike Goodpaster Last Verified
22/07/2026

All prediction market gains are taxable in the United States. Every dollar you profit on Kalshi, Polymarket, or any other platform must be reported to the IRS, regardless of whether you receive a 1099 form. The complication is not whether you owe taxes. It is how to classify the income, and the IRS has issued zero formal guidance on this specific question as of the time of writing.

This page covers the three possible tax classifications, what forms each platform issues, how to keep records, how losses can be deducted, the OBBBA sports betting rule that may affect sports contract deductions, and how to file. This is educational information only, not tax advice. Your situation depends on your individual circumstances, and consulting a CPA who understands prediction markets before you file is strongly recommended.

The Key Rule: All Gains Are Taxable, Even Without a 1099

Under IRC Section 61, all income from whatever source is taxable unless specifically excluded by law. Prediction market gains are not excluded. This means:

• If you made money on Kalshi and received no 1099, the gains are still taxable.
• If you made money on Polymarket, which issues no tax forms to US users, the gains are still taxable.
• The IRS's increasing capability to trace cryptocurrency transactions through blockchain analysis means assuming Polymarket profits are invisible carries real audit risk.
• The reporting obligation is entirely yours. Waiting for a form that may not arrive is not a valid approach.

The IRS can audit returns going back three years in standard cases and six years when a substantial underreporting is suspected. Starting records from your first trade is far simpler than reconstructing them later.

The Three Tax Classification Approaches

As of the time of writing, the IRS has issued no Revenue Ruling, Private Letter Ruling, or FAQ specifically addressing prediction market contract classification. Tax professionals are using three different approaches, each with a different tax bill on the same gains. The right approach for your situation depends on which platform you used, your trading volume, and your overall tax position. This is why working with a CPA who follows prediction market tax developments is important.

Approach 1: Short-Term Capital Gains (Most Common)

Most tax professionals treating prediction market income conservatively report net gains as short-term capital gains taxed at ordinary income rates (10% to 37% depending on your bracket). This is the most defensible approach because virtually all prediction market contracts are held for less than a year, placing them in the short-term category. Short-term capital gains are reported on Schedule D (Form 1040).

The practical result is that prediction market gains are effectively taxed at your marginal income tax rate, the same rate as your salary or wages. On $10,000 in net prediction market gains, someone in the 24% bracket owes approximately $2,400 in federal tax plus applicable state tax.

Approach 2: Section 1256 Contract Treatment (Aggressive)

Section 1256 of the IRC provides favourable treatment for certain regulated futures contracts, applying a 60/40 split where 60% of gains are taxed at the lower long-term capital gains rate and 40% at the short-term rate regardless of holding period. The effective combined federal rate for most traders is around 26 to 28% rather than up to 37% under straight short-term treatment.

Some tax professionals argue Kalshi contracts could qualify for Section 1256 treatment because Kalshi is a CFTC-regulated Designated Contract Market. For more on what a Designated Contract Market is and how Kalshi is regulated, see our CFTC prediction markets guide.

However, Section 1256 specifically enumerates the contract types it covers, and event-based prediction market contracts are not among them. Many tax attorneys believe this blocks Section 1256 for Kalshi entirely. Polymarket does not qualify under any reading of Section 1256 because it operates outside CFTC oversight.

If you are considering Section 1256 treatment, talk to a tax professional before you file and consider attaching a Form 8275 disclosure explaining your position to reduce the risk of penalties if the IRS later disagrees.

Approach 3: Gambling / Wagering Income (Generally Least Favourable)

A minority of tax professionals classify prediction market gains as gambling income, reported on Schedule 1 (Form 1040), Line 8b. Gambling losses can only offset gambling winnings, not other capital gains or ordinary income, and there are additional restrictions on loss deductibility that make this the least tax-efficient classification for traders who also have losses. Most tax professionals avoid this approach for CFTC-regulated platform income, though it is a more plausible classification for platforms operating outside US regulatory oversight.

What Forms Each Platform Issues

Understanding what documentation your platform provides is the starting point for your filing. This does not tell you how to classify the income, but it tells you what records the platform has created for you. For a full breakdown of how each platform works, see our Kalshi review and Polymarket review.

The OBBBA Sports Betting Loss Cap

The One Big Beautiful Bill Act, signed into law in July 2025, includes a provision capping sports betting loss deductibility at 90% starting with the current tax year. This means traders who net a loss on sports betting can only deduct 90% of those losses, with the remaining 10% non-deductible.

Whether Kalshi sports event contracts (game winner contracts, player props, season futures) qualify as "sports wagering" under this rule is currently unresolved. For context on what types of sports contracts are available and what categories they cover, see our sports prediction markets overview.

The IRS had not issued guidance on this point as of the time of writing. The stakes are meaningful: a trader who loses $10,000 on Kalshi NFL contracts could only deduct $9,000 rather than the full $10,000 if the sports wagering classification applies. Tracking sports event contract activity separately from other prediction market categories is sensible until guidance arrives, so you can apply the correct treatment once the IRS clarifies its position.

How to Keep Records

Good recordkeeping is the foundation of accurate prediction market tax reporting. The IRS can audit returns going back three years (six if substantial underreporting is suspected). Starting records from your first trade is far easier than reconstructing them later.

For each trade, you need to record:

• Date opened (when you bought the contract)
• Date closed or resolved (when you sold early or when the market resolved)
• Contract description (what the market was asking, which platform, what outcome)
• Purchase price (what you paid per contract multiplied by the number of contracts)
• Sale or settlement price ($1 for a correct resolution, $0 for incorrect, or the market price if sold early)
• Net gain or loss per trade

Kalshi's P&L tool exports trade history. For Polymarket, you need to pull transaction history from your wallet activity or use a third-party crypto tax platform that can read on-chain USDC transaction data. Services like CoinLedger and Koinly can import Polymarket activity from on-chain data.

How Losses Are Treated

Prediction market losses can work in your favour at tax time, but the rules differ depending on how you classify the income.

• Under capital gains treatment: Losses offset capital gains dollar for dollar. If you have gains elsewhere in your portfolio, prediction market losses reduce that tax liability. If your losses exceed your gains, you can deduct up to $3,000 of net capital loss against ordinary income per year. Remaining losses carry forward to future years.
• Under gambling treatment: Gambling losses can only offset gambling winnings, not other capital gains or ordinary income. This is a significant restriction that makes gambling classification particularly costly for traders with net losses.
• Under the OBBBA 90% cap (if applicable to your sports contracts): Your gross loss pool for sports event contracts is capped at 90% deductibility before the general capital loss rules apply. The exact interaction with standard capital loss carryover rules is still being clarified.

State Taxes

Most US states with an income tax apply it to investment gains, which includes prediction market profits. State tax rates vary significantly and the state-level classification of prediction market income may differ from your federal treatment. For the current state-by-state picture on where prediction markets are accessible, see our guide on where prediction markets are legal in the US.

• No state income tax: Florida, Texas, Nevada, Washington, Alaska, South Dakota, Wyoming, Tennessee (on earned income), and New Hampshire (on earned income) have no income tax or do not tax investment gains. Prediction market profits are not subject to state tax if you live in these states.
• High state rates: California taxes investment gains at up to 13.3%, the highest marginal rate in the country. New York and New York City combined can reach 14.8%. If you live in a high-tax state, the state bite can be as large as the federal tax on smaller gains.
• Check your state's gambling vs investment classification: Some states classify gambling income differently from capital gains, with implications for deductibility and rates. If your state classifies prediction market income as gambling, confirm whether that changes your state filing approach.

The Most Defensible Filing Approach

Given the IRS's silence on formal guidance, most tax professionals advise a conservative approach that is easy to defend if questioned. For traders who use both platforms, our Kalshi versus Polymarket guide covers the key differences that affect how you should track your activity. The general recommendation from multiple CPAs familiar with prediction markets is:

1. Calculate your net gain or loss across all prediction market trading for the year.
2. Report net gains as "Other Income" on Schedule 1 (Form 1040), Line 8z, with a description like "Prediction market earnings: Kalshi" or "Prediction market earnings: Polymarket."
3. Alternatively, report on Schedule D as short-term capital gains if that treatment aligns with how your CPA advises classifying the trades.
4. If considering Section 1256 treatment for Kalshi, attach Form 8275 (Disclosure Statement) explaining your position and the uncertainty. This does not guarantee you will win the argument, but it demonstrates good-faith disclosure and reduces the risk of penalties.
5. Keep records of every trade for at least six years.

Crypto-Specific Considerations for Polymarket

Polymarket trades in USDC on the Polygon blockchain. For a full explanation of how Polymarket is structured and funded, see our guide on how Polymarket works. For US tax purposes, USDC is treated as a cryptocurrency, which means Polymarket activity generates crypto tax obligations in addition to any prediction market income classification questions.

Converting dollars to USDC to fund Polymarket is generally not a taxable event if done at a 1:1 rate. Converting USDC back to dollars at a different rate creates a reportable gain or loss on the USDC itself. Trading on-chain generates transaction records that are publicly visible on the blockchain, and the IRS has demonstrated increasing capability to trace on-chain activity through subpoenas of exchanges and blockchain analysis tools.

Frequently Asked Questions on Prediction Market Taxes

This page is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex, change frequently, and depend on your individual circumstances. Consult a qualified tax professional before making any tax decisions.