You made money on prediction markets this year — congratulations. Now comes the less exciting part: taxes. Prediction market taxation is still a gray area in some respects, but the rules have become clearer in 2026 as the IRS and CFTC have provided more guidance. This guide covers what US traders need to know about reporting prediction market gains, platform-specific considerations, and strategies to minimize your tax burden legally.
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and vary by individual circumstance. Consult a qualified tax professional for guidance specific to your situation.
Are prediction market gains taxable?
Yes. The IRS considers prediction market profits taxable income. If you buy a contract for $0.40 and it resolves at $1.00, the $0.60 profit is taxable. If you sell a contract at $0.70 that you bought at $0.50, the $0.20 gain is taxable. There are no exemptions for prediction market trading.
The real question isn't whether you owe taxes, but how your gains are classified — and that's where it gets interesting.
How prediction market gains are classified
The tax classification of prediction market gains has been one of the most debated topics in event contract trading. There are three possible treatments, and which one applies depends on the platform and the nature of the contract:
1. Section 1256 contracts (60/40 split). CFTC-regulated event contracts traded on designated contract markets (like Kalshi) may qualify for Section 1256 treatment. This is the most favorable classification:
- 60% of gains are taxed at the long-term capital gains rate (0%, 15%, or 20%)
- 40% of gains are taxed at the short-term capital gains rate (your ordinary income rate)
- This applies regardless of how long you held the contract
- The blended rate for most traders works out to roughly 25-28%, compared to 32-37% for ordinary income
We cover this in depth in our Section 1256 analysis. This classification is not guaranteed for all contracts — consult your tax advisor.
2. Short-term capital gains. If Section 1256 does not apply, gains from contracts held less than one year are taxed as short-term capital gains at your ordinary income tax rate. This is the most common treatment for contracts that don't qualify for the 60/40 split.
3. Gambling income. If the IRS considers your activity gambling rather than trading, gains are reported as "Other income" on Schedule 1. This is the least favorable treatment because you can only deduct gambling losses up to the amount of gambling winnings, and you cannot use capital loss carryforward rules. Most active traders on CFTC-regulated platforms can argue against this classification, but casual traders should be aware of the risk.
| Classification | Tax Rate | Loss Treatment | Best For |
|---|---|---|---|
| Section 1256 (60/40) | ~25-28% blended | Up to $3K/year net loss deduction, 3-year carryback | Active traders on CFTC-regulated exchanges |
| Short-term capital gains | 10-37% (ordinary income rate) | Up to $3K/year net loss deduction, carry forward indefinitely | Traders on non-1256 platforms |
| Gambling income | 10-37% (ordinary income rate) | Only deductible against gambling winnings | Casual, infrequent participants |
Kalshi tax reporting
Kalshi is a CFTC-regulated designated contract market, which makes tax reporting relatively straightforward:
- 1099 forms: Kalshi issues 1099-B forms for traders who meet IRS reporting thresholds. You'll receive this form by mid-February showing your gross proceeds and cost basis for the year.
- Section 1256 eligibility: Contracts traded on Kalshi may qualify for Section 1256 treatment (the favorable 60/40 split). Kalshi has stated that their contracts are "regulated futures contracts" for tax purposes, though the IRS has not issued explicit guidance confirming this for all event contract types.
- Mark-to-market: Under Section 1256, open positions are treated as if sold at fair market value on December 31 ("marked to market"). This means unrealized gains/losses in open positions at year-end are included in that year's taxes.
- Record keeping: Even with 1099-B forms, keep your own records. Download your full transaction history from Kalshi's settings page at the start of each year.
For a deeper dive on Kalshi-specific taxes, see our Kalshi tax breakdown.
Polymarket and crypto platform tax considerations
Polymarket operates on the Polygon blockchain, which adds a layer of complexity:
- No 1099 forms: As of 2026, Polymarket does not issue 1099 forms to users. You are still responsible for reporting all gains and losses. The IRS has been increasing enforcement around crypto-based platforms.
- Crypto on-ramp/off-ramp events: Converting USD to USDC (to deposit on Polymarket) and USDC back to USD (to withdraw) can create separate taxable events if the value of USDC changes between transactions. In practice, USDC is pegged to $1, so the impact is typically negligible — but track it anyway.
- Section 1256 likely does NOT apply: Because Polymarket is not a CFTC-regulated designated contract market, the 60/40 split is almost certainly unavailable. Gains are most likely short-term capital gains or gambling income.
- DeFi tracking tools: Use crypto tax software like Koinly, CoinTracker, or TokenTax to automatically import your Polymarket transaction history from the blockchain. Manual tracking across hundreds of trades is error-prone.
- US access: As of 2026, Polymarket is not officially available to US residents. If you've traded there, you're still obligated to report all gains to the IRS.
Record keeping tips
The IRS can audit returns going back three years (six in some cases). Good records are your defense:
- Export everything. Download your full trade history from every platform at the start of each tax year. Don't rely on the platform to keep your records — services shut down, lose data, or restructure.
- Track per-trade data. For each trade, record: date entered, date exited/resolved, cost basis (price paid + fees), proceeds (resolution payout or sale price), and net gain/loss.
- Separate by platform. Keep Kalshi and Polymarket records in separate tabs or files. They have different tax implications and you may need to report them differently.
- Log your fees. Trading fees on Kalshi are part of your cost basis (they increase it) and reduce your taxable gains. Don't overlook them.
- Screenshot resolution details. If a contract resolves in a way that seems ambiguous, screenshot the resolution announcement. Disputes can arise, and having documentation protects you.
- Use a spreadsheet or tool. At minimum, maintain a spreadsheet. For active traders, dedicated tax software that can import from prediction market platforms will save hours.
Tax-loss harvesting with prediction markets
Tax-loss harvesting — selling losing positions to offset gains — is a legitimate strategy for prediction market traders:
How it works: If you have $500 in realized gains from winning trades, but you're holding a contract that's currently at a $200 unrealized loss, you can sell that losing contract before year-end. The $200 realized loss offsets your gains, and you only pay tax on $300 net.
Key rules for prediction markets:
- Wash sale caution: The wash sale rule prevents you from claiming a loss if you buy a "substantially identical" security within 30 days. Whether this applies to prediction market contracts is unclear. Two contracts on the same event with different resolution dates might be considered substantially identical. Play it safe and wait 31 days before re-entering a similar position.
- Mark-to-market override: If your contracts qualify for Section 1256, all positions are marked to market at year-end anyway. Tax-loss harvesting is less relevant because unrealized losses are already recognized. However, you can still harvest losses mid-year if you want to generate losses to offset other income (like stock gains).
- Net losses: If your total prediction market losses exceed your gains, you can deduct up to $3,000 per year against ordinary income and carry forward the remainder. Under Section 1256, you can also carry losses back three years for a refund.
Year-end strategy: In December, review all your open positions. Identify any that are significantly underwater and consider selling them to realize the loss. Then re-evaluate whether you want to re-enter after the new year. This simple practice can meaningfully reduce your annual tax bill.
Don't forget estimated taxes
If you're a profitable prediction market trader, you may owe estimated quarterly taxes. The IRS expects you to pay as you earn, not just once at filing time. If you owe more than $1,000 at year-end beyond what was withheld from other income (like your salary), you may face underpayment penalties.
Quarterly estimated tax deadlines for 2026:
- Q1: April 15, 2026
- Q2: June 15, 2026
- Q3: September 15, 2026
- Q4: January 15, 2027
Use IRS Form 1040-ES to calculate and pay estimated taxes. A simple approach: set aside 30% of your net prediction market profits each quarter and pay it with your estimated tax voucher.
State tax considerations
Don't forget state income taxes. Most states tax prediction market gains at your ordinary income rate. A few key notes:
- No state income tax: If you live in Texas, Florida, Nevada, Wyoming, Washington, Alaska, South Dakota, Tennessee, or New Hampshire (limited), you only owe federal taxes on prediction market gains.
- High-tax states: California (up to 13.3%), New York (up to 10.9%), and New Jersey (up to 10.75%) add significant state tax burden on top of federal.
- State restrictions: Some states where Kalshi is not available may also have unclear tax treatment. Check our state restrictions guide for availability.
Important reminder: This guide provides general information about prediction market taxation. Tax law is complex, evolving, and varies by individual circumstance. Always consult a qualified CPA or tax attorney who understands event contracts and digital assets before making tax decisions.
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