The U.S. Commodity Futures Trading Commission (CFTC) has fired a regulatory warning shot across the bow of the booming prediction market industry. These recent actions signal a major shift that could fundamentally change how your profits and losses from platforms like Polymarket and Kalshi are taxed, moving them from a legal gray area toward treatment as regulated financial products.

The CFTC Just Put Prediction Markets on Notice—Here's Why It Matters for Your Taxes

Prediction markets have exploded from a niche hobby into a multi-billion dollar industry. After the 2024 U.S. election market on Polymarket saw a staggering $3.68 billion in trading volume, it was clear these platforms had hit the mainstream. The growth has been astronomical, with regulated platform Kalshi reporting revenues of $260 million in 2025, a nearly tenfold increase from the previous year. As of March 2026, both Polymarket and Kalshi are projected to have valuations nearing $20 billion (panewslab.com).

Despite this massive growth, the tax treatment of these activities has remained dangerously ambiguous. Are your winnings taxed like a lucky casino bet or like a savvy stock trade? The difference is significant, impacting your tax rates, your ability to deduct losses, and your overall reporting obligations.

This is where the CFTC comes in. By taking formal steps to regulate prediction markets, the agency is strongly signaling that it views these "event contracts" as financial derivatives, not lottery tickets. As one legal analysis firm noted, prediction market contracts are increasingly being framed as the next evolution of futures contracts (whitecase.com). This classification has profound implications for your tax bill.

What Did the CFTC Do? A Breakdown of the New Guidance

On March 12, 2026, the CFTC made two significant moves that put the entire industry on notice. These weren't final rules, but they clearly map out the agency's intentions.

1. Advanced Notice of Proposed Rulemaking (ANPRM)

The CFTC issued an ANPRM, which is a formal request for public comment on how a federal regulatory framework for prediction markets should look (mondaq.com). This is the first step in creating new, binding regulations.

The agency is asking for input on critical questions, including:

Should certain contracts be banned because they are "contrary to the public interest"?
Should traders with insider knowledge of an event be prohibited from participating?
Should platforms be allowed to offer trading on margin?

The very act of asking these questions shows the CFTC is treating these markets with the same seriousness it applies to traditional commodity and derivatives exchanges.

2. Staff Guidance and Assertion of Jurisdiction

Alongside the ANPRM, the CFTC’s Division of Market Oversight released guidance stating its view that "event contracts" can fall under the definition of a "swap"—a type of derivative regulated under the Dodd-Frank Act (crowell.com).

Most importantly, the CFTC asserted that it has "exclusive jurisdiction" over these event contracts (webiis08.mondaq.com). This is a direct challenge to state-level regulators who might view these platforms as online gambling and a clear statement that the federal government sees them as financial markets. The surge in applications for Designated Contract Market (DCM) status—more than doubling in the past year—further highlights the industry's push for federal clarity.

The Billion-Dollar Question: Are Prediction Markets Investing or Gambling?

How the IRS ultimately treats your prediction market activity hinges on whether it's classified as gambling or as trading property (like stocks or crypto). The tax outcomes are worlds apart.

The Case for Gambling

If your activity is deemed gambling, the tax rules are harsh:

Income: Winnings are taxed as "Other Income" at your ordinary income tax rate, which can be as high as 37% (for the 2026 tax year).
Losses: You can only deduct losses if you itemize your deductions on Schedule A. Furthermore, your deductible losses cannot exceed your total winnings for the year. If you have $5,000 in winnings and $8,000 in losses, you can only deduct $5,000 of those losses, and the remaining $3,000 is lost forever. There are no carryovers for excess gambling losses.

The Case for Investing (Capital Assets)

If your contracts are treated as capital assets, like stocks or cryptocurrencies, the rules are much more favorable:

Income: Gains are taxed as capital gains.
Rates: If you hold the contract for more than one year, you benefit from lower long-term capital gains rates of 0%, 15%, or 20% (for the 2026 tax year). If held for a year or less, it's taxed at your ordinary income rate.
Losses: Losses can be used to offset capital gains from any source (stocks, crypto, etc.). If your losses exceed your gains, you can deduct up to $3,000 of the excess against your ordinary income each year. Any remaining losses can be carried forward to future tax years.

The CFTC's intervention strongly pushes the needle toward the "investing" classification, which could save traders a significant amount of money and simplify their tax strategies.

Three Potential Tax Futures for Your Prediction Market Gains

As the regulatory dust settles, your prediction market taxes will likely fall into one of three scenarios. The outcome will depend entirely on the final rules from the CFTC and subsequent guidance from the IRS.

Here’s a comparison of the potential tax treatments:

Feature	Scenario 1: Gambling	Scenario 2: Standard Capital Gains	Scenario 3: Section 1256 Contracts
Gain Character	Ordinary Income	Short-Term or Long-Term Capital	60% Long-Term, 40% Short-Term Capital
Tax Rates	Your marginal income tax rate (up to 37%)	0%/15%/20% (long-term) or ordinary rates (short-term)	Blended rate based on the 60/40 split
Loss Treatment	Itemized deduction, limited to winnings	Offsets capital gains + $3,000 vs. ordinary income	Offsets capital gains + $3,000 vs. ordinary income. Can be carried back 3 years.
Holding Period	Irrelevant	Crucial (determines short vs. long-term)	Irrelevant (always 60/40)
Year-End Rule	Taxed only when contract resolves	Taxed only when contract resolves/is sold	Mark-to-Market: Taxed on Dec 31 value

Scenario 1: Status Quo (Treated as Gambling)

This is the current, most conservative interpretation in the absence of clear guidance. The IRS could argue that because the outcomes are based on speculative events, they are wagers. This results in the least favorable tax treatment, especially for traders with net losses.

Scenario 2: Standard Capital Gains (Treated like Crypto/Stocks)

This scenario treats each prediction contract as a piece of property. You buy it, its value changes, and you realize a gain or loss when the contract resolves or you sell your shares. Your holding period is critical, determining whether your gains are taxed at lower long-term rates or higher short-term rates. This is a likely outcome and is far better than the gambling treatment.

Scenario 3: Section 1256 Contracts (The Futures Treatment)

This is the most complex but potentially most beneficial outcome. If the CFTC officially regulates prediction markets as futures exchanges, the contracts traded on them could qualify for special tax treatment under Internal Revenue Code Section 1256.

This treatment has two unique features:

The 60/40 Rule: All gains and losses are automatically treated as 60% long-term and 40% short-term capital gains, no matter how long you held the contract. For active, short-term traders, this is a massive tax advantage, as it effectively gives them a lower blended tax rate.
Mark-to-Market Rule: All open positions are treated as if they were sold for their fair market value on December 31. This means you pay tax on unrealized gains each year but also get to deduct unrealized losses.

This scenario would align prediction markets with other federally regulated derivatives markets and offer significant tax benefits to many participants.

How to Prepare for the Changes Today

With so much uncertainty, what can you do now to protect yourself? The single most important action is to keep meticulous records.

Regardless of which tax scenario becomes law, the IRS will require a detailed history of your transactions. You must track:

The date you purchased shares in a contract
The cost basis of those shares (how much you paid)
The date the contract resolved or you sold your shares
The proceeds you received
Any fees paid on the platform

Crucially, you must also track the tax implications of the cryptocurrency you use to trade. If you use a stablecoin like USDC to buy a contract, the IRS considers that a "disposition" of the USDC. This is a taxable event, and you may have a small capital gain or loss on the stablecoin itself.

This is where a dedicated crypto tax software becomes essential. While final rules are pending, you can import your transaction history from exchanges and platforms like Polymarket directly into dTax. Our platform can help you tag and categorize these trades, track your cost basis, and account for fees. When the IRS provides definitive guidance, you'll have all the data organized and ready to calculate your liability accurately under the correct framework.

What Happens Next in the Federal vs. State Showdown?

The CFTC's assertion of "exclusive jurisdiction" is a major development in the tug-of-war between federal agencies and state regulators. Currently, several states are investigating or taking action against prediction markets, often viewing them through the lens of state-level gambling or securities laws.

Federal regulation would likely preempt these state-level efforts, creating a single, unified framework for the entire country. This is the outcome platforms have been pushing for, as evidenced by Polymarket's strategic return to the U.S. market in late 2025 after engaging with the CFTC (panewslab.com).

However, the rulemaking process is slow. The public comment period for the ANPRM is just the beginning. It could be 2027 or later before we see a final, comprehensive rulebook from the CFTC, with IRS guidance to follow. Until then, the market exists in a state of regulated uncertainty.

The direction of travel is clear: prediction markets are being pulled into the orbit of mainstream finance. For traders, this means more legitimacy and clearer rules are on the horizon, but it also means the days of treating taxes as an afterthought are over.

This article is for informational purposes only and does not constitute tax advice. The tax treatment of prediction markets is complex and subject to change. Please consult with a qualified tax professional to discuss your specific situation.

Frequently Asked Questions

If I won money on Polymarket in 2025, how should I report it on my taxes filed in 2026?

Because there is no definitive IRS guidance specifically for decentralized prediction markets, taxpayers are in a difficult position. Some choose to report winnings as "Other Income" (the gambling treatment), while others report trades as capital gains and losses (the property treatment). The property treatment is arguably more consistent with the CFTC's view, but it's not without risk until the IRS formalizes its position. A tax professional can help you evaluate the options based on your personal risk tolerance and overall financial situation.

Does the 60/40 rule for Section 1256 contracts apply to prediction markets right now?

No, not automatically. For an asset to receive Section 1256 tax treatment, it must be a specifically defined product (like a regulated futures contract) traded on a qualified board or exchange. The CFTC's recent actions are the first step toward potentially making this happen in the future, but as of today, prediction market contracts do not qualify for the 60/40 rule.

What if I use crypto like USDC to trade on a prediction market? Does that create a separate tax event?

Yes, absolutely. The IRS treats cryptocurrency as property. When you use crypto—even a stablecoin like USDC—to purchase shares in a prediction market, you are technically "selling" or "disposing" of that crypto. This is a taxable event. You must calculate the capital gain or loss on the crypto you spent, which is the difference between its value when you spent it and its value when you acquired it (your cost basis). Tools like dTax are designed to automate this tracking, connecting to your wallets and exchanges to calculate the cost basis for every crypto transaction.