how are prediction markets taxed (2026)

How prediction markets are taxed depends on which category the IRS eventually decides your contracts fall into, and right now that answer isn’t settled. Trading on platforms like Kalshi, Polymarket, Robinhood, and Interactive Brokers can be treated as capital gains and losses, as gambling winnings, or as Section 1256 contracts, each with different rates, deduction rules, and reporting requirements. The IRS hasn’t issued specific guidance for event contracts, so the treatment you use today could be challenged later.

Why prediction market taxes are unsettled

Kalshi launched in 2018 and Polymarket in 2020, both offering “event contracts” that pay out based on whether something happens, an election result, a Fed rate decision, a sports outcome, or the weather. The Commodity Futures Trading Commission (CFTC) regulates many of these contracts as derivatives, similar to futures. That’s different from gambling, which states regulate individually.

That regulatory label matters because the tax code taxes different financial instruments differently. A stock trade, a casino bet, and a futures contract each have their own tax rules. Event contracts don’t fit neatly into any single bucket, and the IRS hasn’t published a revenue ruling or notice that says which bucket applies. Tax professionals are filling the gap with judgment calls, not settled law.

The three ways prediction market income could be taxed

1. Capital gains and losses

Under this approach, a Kalshi or Polymarket contract is treated like a stock or bond. If you hold a position for one year or less before it resolves, any gain is a short-term capital gain, taxed at your ordinary income rate (up to 37% for top earners in 2025). Because most event contracts resolve within days, weeks, or months, almost all prediction market gains would count as short-term under this method.

Losses under this treatment first offset gains of the same type (short-term losses against short-term gains). If your losses exceed your gains for the year, you can deduct up to $3,000 against other income and carry the rest forward to future tax years. This method doesn’t require itemizing deductions, which makes it more favorable for taxpayers who take the standard deduction.

2. Gambling winnings and losses

Because prediction markets let users bet yes/no on outcomes with a defined payout, some practitioners argue the activity looks more like gambling than investing, regardless of how the CFTC classifies the underlying contract. Under this treatment, winnings are taxable income reported in full, and losses are only deductible if you itemize.

Itemizing has real costs: only about 10% of taxpayers itemized for tax year 2022, according to the Tax Policy Center. If you take the standard deduction, gambling-style treatment means you’d owe tax on every winning bet with no offset for losing ones. Even itemizers face a cap: losses can only offset gains up to the amount won that year. Starting in 2026, the One Big Beautiful Bill Act reduces that offset further, allowing itemizers to deduct only 90% of gambling losses against gambling winnings, so a taxpayer with $100,000 in gains and $200,000 in losses could only offset $90,000 rather than the full $100,000.

3. Section 1256 contracts

A third possibility treats event contracts like regulated futures contracts under Internal Revenue Code Section 1256. This section applies to certain exchange-traded derivatives and comes with two notable features: a 60/40 blended tax rate (60% taxed as long-term capital gains, 40% as short-term, regardless of how long you actually held the position), and mark-to-market treatment, meaning open positions are taxed as if sold at year-end even if you haven’t closed them.

The 60/40 split is generally more favorable than ordinary short-term capital gains treatment for higher earners, since a portion of the gain gets the lower long-term rate. Whether Kalshi and Polymarket contracts actually qualify as Section 1256 contracts is itself contested, since that classification typically applies to contracts traded on a “qualified board or exchange,” and not every prediction market platform clearly meets that definition.

How platforms report your activity

Tax forms you receive don’t always resolve the underlying ambiguity. Some prediction market operators issue Form 1099-MISC or 1099-B, while others may issue nothing at all for smaller accounts, depending on volume and platform policy. A 1099-B typically suggests capital gains treatment, since that’s the form used for broker transactions in securities and regulated futures contracts.

Regardless of what form you get, you’re responsible for reporting income accurately. Getting a 1099 (or not getting one) doesn’t determine the correct tax category, and the IRS can recharacterize income even if a platform reported it a certain way.

What to do as a prediction market trader

• Keep detailed records. Track every contract you buy, the price paid, the resolution date, and the payout or loss. Platforms may not give you complete year-end summaries.
• Talk to a tax professional familiar with derivatives or gambling tax law. James Creech, a principal at Baker Tilly’s specialty tax practice, has noted that traders are often taking on tax positions without realizing the risk involved.
• Pick a consistent method and apply it uniformly. Mixing treatments across different trades on the same platform, without a clear rationale, increases audit risk.
• Watch for IRS guidance. Given the rapid growth in trading volume, an IRS notice or ruling addressing event contracts specifically could arrive and change the analysis for a given tax year.
• Consider state tax rules separately. States that tax gambling winnings differently from capital gains, or that disallow gambling loss deductions altogether, add another layer of complexity on top of federal treatment.

State-level wrinkles

Federal uncertainty is only half the picture. States set their own rules for gambling income and losses, and some don’t allow gambling loss deductions at all, even for itemizers who can claim them federally. If your state treats prediction market contracts as gambling while you report them federally as capital gains, you could face inconsistent treatment across your state and federal returns. Check your state’s specific guidance on wagering income before assuming your federal approach carries over.