Defining the Scope

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Prediction Market Taxes: A Guide to Kalshi & Polymarket (2026)

Yes, winnings from prediction markets like Kalshi and Polymarket are taxable income in the United States. The challenge isn't if you owe tax, but how that tax is calculated. With no specific IRS guidance, reporting your gains and losses correctly requires navigating a significant tax gray area.

The Billion-Dollar Question: How Are Prediction Market Winnings Taxed?

Prediction markets are no longer a niche hobby. In early 2026, the regulated US platform Kalshi saw a rolling 30-day trading volume of approximately $6.7 billion across nearly half a million active markets monacocpa.cpa. Meanwhile, over 12 billion event contracts were traded on Robinhood in 2025, with orders routed to Kalshi's exchange.

With billions of dollars changing hands, the IRS is paying attention. Every trade you make—whether you buy a "Yes" share on the outcome of an election or a "No" share on a key inflation report—is a financial transaction with tax consequences. When a market resolves and you collect your winnings, you have realized taxable income.

The problem is that the platforms you trade on don't do the tax work for you. Unlike a traditional stock brokerage that sends a comprehensive Form 1099-B detailing your gains, prediction market platforms provide incomplete or no tax documentation for your trading activity monacocpa.cpa. This leaves the entire burden of calculation and reporting squarely on your shoulders.

Why Prediction Market Taxes Are a Gray Area

The core of the issue is a lack of clear rules. The IRS has not issued specific guidance on the taxation of event contracts or prediction market winnings cryptotax.tips. This silence forces taxpayers and their advisors to interpret existing, decades-old tax law and apply it to this new technology.

As one tax professional notes, prediction market activity involves acquiring and disposing of a "transferable contractual right," not just receiving a simple cash payout camusocpa.com. The nature of that right—and how it's regulated—is what determines its tax character.

Because the rules are unsettled, even tax professionals may disagree on the most appropriate way to report these transactions. The path you and your advisor choose will depend on your specific trading activity, the platform you use, and your tolerance for risk.

Three Potential Tax Treatments for Your Winnings

In the absence of direct guidance, there are three primary frameworks for characterizing prediction market income. Each comes with vastly different tax rates and reporting requirements.

1. Capital Gains and Losses

This is the standard treatment for gains on property, such as stocks, bonds, and cryptocurrency. Under this framework, your prediction market contract is a capital asset.

Short-Term Capital Gains: If you hold the contract for one year or less, your net profit is taxed at your ordinary income tax rate, which can be as high as 37% in 2026.
Long-Term Capital Gains: If you hold the contract for more than one year, your profit is taxed at preferential long-term rates of 0%, 15%, or 20%, depending on your income.

For on-chain platforms like Polymarket, where you are trading crypto assets (USDC and position tokens), this is the most widely accepted treatment. Each trade is a disposition of one crypto asset for another, triggering a capital gain or loss calculation pm.wiki.

2. Section 1256 Contracts (The 60/40 Rule)

This is a special, more favorable tax treatment reserved for certain financial instruments, including regulated futures contracts. Because Kalshi is regulated by the Commodity Futures Trading Commission (CFTC) as a Designated Contract Market (DCM), many tax professionals argue its contracts qualify for Section 1256 treatment predictionhunt.com.

This treatment has two major benefits:

The 60/40 Rule: All gains and losses are treated as 60% long-term and 40% short-term, regardless of how long you held the contract. For a trader in the highest tax bracket, this results in a blended maximum rate of around 26.8%—a significant saving compared to the 37% short-term capital gains rate.
Mark-to-Market: Open positions are "marked to market" at year-end, meaning they are treated as if they were sold at their fair market value on the last business day of the year. This simplifies reporting, as you don't have to track individual holding periods.

While this is a strong argument for Kalshi traders, the IRS has not officially confirmed that event contracts qualify.

3. Gambling Income

The least favorable option is to classify winnings as gambling income. Under this treatment:

Winnings are taxed as "Other Income" at your ordinary income tax rate.
Losses can only be deducted if you itemize your deductions on Schedule A.
Crucially, you can only deduct gambling losses up to the amount of your gambling winnings. You cannot use excess gambling losses to offset other income.

This treatment is generally applied to platforms like PredictIt, which operates under an academic no-action letter and issues a Form 1099-MISC for net winnings over $600 pm.wiki.

Platform by Platform: What to Expect at Tax Time

The platform you use is the single biggest factor in determining your likely tax reporting obligations.

Platform	Regulatory Status	Likely Tax Treatment	Tax Forms Provided
Kalshi	CFTC-Regulated (DCM)	Section 1256 Contracts	Limited 1099-INT, 1099-MISC, 1099-DA. No comprehensive form for event contract trades.
Polymarket	Offshore, Decentralized	Capital Gains (Crypto)	None. You are entirely on your own.
PredictIt	Academic Exemption	Gambling Income	1099-MISC for net winnings > $600.

Kalshi: The Regulated Contender

As a CFTC-regulated exchange, Kalshi operates within a formal US regulatory framework. This status is what opens the door for potential Section 1256 tax treatment. However, Kalshi does not currently provide a comprehensive Form 1099-B that details the cost basis and proceeds for all your event contract trades predictionhunt.com. They provide transaction exports, but you or your tax software must process this data to calculate your final gain or loss and report it on the correct form (either Form 6781 or Form 8949).

Polymarket: The DeFi Wildcard

Polymarket operates on the Polygon blockchain, a public ledger. Trades are made using the stablecoin USDC. From a tax perspective, this makes every single action a potentially taxable crypto transaction.

Buying a position: You swap USDC for a position token. This is a disposition of USDC, which may have its own small gain or loss.
Selling a position: You swap a position token back for USDC. This is a disposition of the position token, resulting in a capital gain or loss.
Market resolution: Your winning position tokens are automatically redeemed for USDC. This is also a disposition of the position token.

Because Polymarket is decentralized and issues no tax forms, users face what one analyst called a "manual math nightmare" predictionhunt.com. You must track the cost basis of every position token you acquire and the proceeds from every disposition.

How to Report Prediction Market Income Step-by-Step

While complex, reporting your prediction market activity is a manageable process.

Step 1: Gather Your Data Download your complete transaction history for the tax year from every platform you used. For Kalshi, this will be a CSV file. For Polymarket, you will need your public wallet address used for trading.

Step 2: Calculate Your Gains and Losses This is the most difficult step. You must match your buys and sells (or resolutions) for each individual market to determine your cost basis, proceeds, and resulting gain or loss.

This is where a crypto tax software like dTax becomes essential. You can connect your Polygon wallet directly or upload your Kalshi CSV file. dTax automatically imports your transactions, matches the corresponding buys and sells, and calculates your net gain or loss for the year, saving you hours or even days of spreadsheet work.

Step 3: Choose Your Tax Treatment (with a Professional) This is not a decision to make alone. Consult with a qualified tax professional who understands cryptocurrency and financial derivatives. They will help you review your trading patterns and the platform's characteristics to choose the most defensible tax position (Capital Gains, Section 1256, etc.).

Step 4: Fill Out the Correct IRS Forms Based on the treatment you and your advisor select, your gains and losses will be reported on one of the following forms:

For Capital Gains (Polymarket): Report each disposition on Form 8949, which then flows to Schedule D (Capital Gains and Losses). dTax can generate a completed Form 8949 for you.
For Section 1256 Contracts (Kalshi): Report your aggregate profit or loss on Form 6781 (Gains and Losses From Section 1256 Contracts and Straddles).
For Gambling Income (PredictIt): Report winnings on Schedule 1 (Form 1040), line 8b. Deductible losses are reported on Schedule A (Itemized Deductions).

Best Practices for Staying Compliant

Keep Meticulous Records: Do not rely on platforms to store your data indefinitely. Download your transaction history at least quarterly, if not monthly.
Understand the "No-1099 Problem": The absence of a tax form does not mean your income is invisible. The IRS is actively using blockchain analytics and can subpoena exchange data. Self-reporting is not optional.
Use a Dedicated Tax Tool: Manually calculating gains and losses for hundreds or thousands of trades is impractical and prone to error. Use a tool like dTax from the start to keep a running tally of your tax liability.
Consult a Crypto-Savvy Tax Professional: Given the legal ambiguity, professional guidance is critical. They can help you document your reporting position and represent you in the unlikely event of an audit.

Prediction market taxation is one of the most dynamic areas of tax law. By understanding the potential treatments and using the right tools, you can navigate tax season with confidence.

Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. You should consult with a qualified tax professional for advice specific to your circumstances.

Frequently Asked Questions

What if I only lost money on prediction markets?

How you can deduct your losses depends entirely on the tax characterization. If treated as capital losses (the likely scenario for Polymarket), you can deduct up to $3,000 in net capital losses against your ordinary income per year. Any remaining losses can be carried forward to future years. If treated as Section 1256 losses, the same rules generally apply. However, if they are gambling losses, you can only deduct them against gambling winnings from the same year; you cannot use them to offset any other type of income.

Are trades on Polymarket considered crypto-to-crypto swaps?

Yes. From the IRS's perspective, cryptocurrency is property. When you use USDC to buy a position token for a specific market, you are "disposing" of your USDC in exchange for a different asset (the position token). This is a taxable event. The gain or loss on your USDC is typically negligible, but the transaction establishes the cost basis for your new position token. Calculating this chain of events for every trade is a key complexity that crypto tax software is designed to solve.

Can the IRS see my Polymarket trades?

Yes. All transactions on the Polygon network are recorded on a public, immutable blockchain. While your legal name is not attached to your wallet address, government agencies can use advanced blockchain analysis tools to trace the flow of funds. They can often link anonymous wallets to real-world identities by analyzing transactions with regulated exchanges (like Coinbase or Kraken) where you completed KYC/AML verification. It is safest to assume your on-chain activity is traceable.