You made money on Kalshi last year. Or Polymarket. Or Robinhood. Now it's tax season, the filing deadline is April 15, and the IRS has issued zero formal guidance on how prediction market winnings should be reported. Two traders with identical profits could end up with completely different tax bills depending on how they classify their income. This isn't a hypothetical — it's happening right now to millions of people for the first time.
This guide breaks down the three possible tax treatments, what each platform actually reports to the IRS, the new 2026 rule that could create phantom taxable income for break-even traders, and what tax professionals are actually advising their clients to do.
Important: This is educational information, not tax advice. The IRS has not issued specific guidance on prediction market taxation. Consult a qualified tax professional for your individual situation.
The Core Problem: Nobody Knows
The IRS has not issued a Revenue Ruling, Private Letter Ruling, FAQ update, or any other formal guidance specifically addressing event contracts on CFTC-regulated prediction market exchanges. Not a single word.
This matters because prediction markets sit at the intersection of three different tax frameworks — gambling income, ordinary income, and financial derivatives — and the classification determines your tax rate, how you can deduct losses, what forms you file, and whether you could owe taxes even on zero actual profit.
Tax professionals agree on exactly one thing: prediction market profits are taxable income, and you must report them regardless of whether you receive a tax form. Beyond that, reasonable professionals disagree on virtually everything else.
The Three Possible Tax Treatments
Option 1: Ordinary Income (Most Conservative, Safest)
How it works: You report your net prediction market profits as "Other Income" on Schedule 1 (Form 1040), Line 8z. You write something like "Prediction market earnings" as the description. Profits are taxed at your ordinary income tax rate (10% to 37% depending on your bracket). Losses can offset gains dollar-for-dollar.
Why some advisors recommend it: This is the approach least likely to be challenged by the IRS. It treats prediction market earnings similarly to freelance income, prize winnings, or side hustle revenue. If the IRS eventually issues guidance that reclassifies your income, the worst case is that you overpaid and can amend your return.
The math: You win $10,000 and lose $7,000 across the year. You report $3,000 in net profit as Other Income. If your marginal tax rate is 24%, you owe approximately $720.
Who this works best for: Casual traders with modest profits who want the simplest, lowest-risk approach.
Option 2: Gambling Income (How Sportsbook Winnings Are Taxed)
How it works: You report gross gambling winnings as income on your tax return. Losses are deductible only if you itemize, and only up to the amount of your winnings. You cannot net wins and losses — they must be tracked separately.
The 2026 change (OBBBA): Starting with tax year 2026, the One Big Beautiful Bill Act caps gambling loss deductions at 90% of losses. This means if you win $20,000 and lose $20,000, only $18,000 of losses are deductible — leaving $2,000 in phantom taxable income on zero actual profit. This rule applies to 2026 tax returns (filed in early 2027), not to 2025 returns being filed now.
Why some advisors argue this applies: Multiple states classify prediction markets as gambling. The activity looks like wagering — you're putting money on whether something will happen. The per-session tracking requirement is burdensome but technically accurate for how many people use prediction markets.
The math (2025 tax year): You win $10,000 and lose $7,000. If you itemize, you report $10,000 in winnings and deduct $7,000 in losses. Net tax is on $3,000. If you don't itemize, you can't deduct the losses — you owe tax on the full $10,000.
The math (2026 tax year, under OBBBA): Same scenario, but only 90% of your $7,000 loss ($6,300) is deductible. You owe tax on $3,700 instead of $3,000 — even though your actual profit is the same.
Who this hurts most: Traders who don't itemize (they can't deduct any losses) and break-even or slightly profitable traders (the 90% cap starting in 2026 creates phantom income).
Option 3: Section 1256 Contracts (Most Favorable, Most Aggressive)
How it works: If prediction market contracts qualify as Section 1256 contracts — a specific IRS category that includes certain regulated futures and options — gains and losses receive a 60/40 split. 60% is taxed as long-term capital gains (max 20%) and 40% as short-term capital gains (up to 37%), regardless of how long you held the contract. Losses can be carried back three years. Reported on Form 6781.
Why some advisors argue this applies: Prediction market contracts are traded on CFTC-regulated designated contract markets (DCMs). The CFTC has classified event contracts as "swaps" under the Commodity Exchange Act. Section 1256 applies to "regulated futures contracts" on designated contract markets. The argument is that if the CFTC says these are swaps on a DCM, they should qualify for Section 1256 treatment.
Why this is aggressive: The IRS has historically taken a narrow view of Section 1256 categories. In its February 2026 amicus brief, the CFTC argued that event contracts are swaps — but swaps are specifically excluded from Section 1256 treatment under certain conditions. Taking this position without explicit IRS blessing carries audit risk. Tax professionals who recommend it generally suggest filing Form 8275 (Disclosure Statement) to flag the position to the IRS.
The math: You profit $10,000. Under the 60/40 split: $6,000 is taxed at 15% long-term rate ($900) and $4,000 at 24% short-term rate ($960). Total tax: $1,860. Under ordinary income at 24%, you'd owe $2,400. The Section 1256 route saves $540 on a $10,000 profit.
Who this works best for: High-volume, high-profit traders where the rate differential is meaningful. Requires a tax professional comfortable with an aggressive position.
What Each Platform Reports to the IRS
This is critical. Each platform handles tax reporting differently, and the inconsistency creates confusion.
Kalshi
Kalshi issues 1099-MISC forms to users who exceed certain thresholds (generally $600+ in net earnings). Some users have also received 1099-B forms depending on how their trades were classified. Kalshi also issues 1099-INT for interest earned on idle cash balances (the ~4% APY feature). Tax reporting is more comprehensive than most platforms, but may not capture every detail needed for filing.
Polymarket (Global)
The global Polymarket platform (offshore, Panama entity) issues no tax forms of any kind. It does not collect sufficient identity information for US tax reporting. All calculation and reporting burden falls on the trader. Additionally, since Polymarket uses USDC on the Polygon blockchain, there may be separate taxable events when converting other crypto to USDC or when moving funds on/off the platform.
Polymarket US (via QCEX)
The US platform is still in beta. It's expected to issue 1099 forms once fully operational, but this hasn't been confirmed as of March 2026.
Robinhood
Robinhood currently does not issue specific tax forms for event contract trades. Since prediction market contracts are offered through Robinhood Derivatives (a separate entity from Robinhood Financial), the reporting may differ from stocks and crypto. Robinhood does issue standard tax documents for its investing products, but prediction market reporting is still developing.
OG (Crypto.com)
OG launched in February 2026 — too new for established tax reporting patterns. Users should maintain their own records and expect to self-report for the 2026 tax year.
The Bottom Line on Platform Reporting
Do not rely on any platform to track your tax obligations. The absence of a 1099 does not mean you don't owe taxes. The IRS expects you to report all taxable income regardless of whether a third party reports it. Keep your own detailed records.
What Records to Keep
Regardless of which tax treatment you choose, maintain the following for every trade:
For each position: Date opened, date closed or settled. Contract description (the specific market question). Number of contracts. Price paid per contract (your cost basis). Price sold or settlement amount. Fees paid. Net gain or loss on the position.
For deposits and withdrawals: Date and amount of every deposit. Date and amount of every withdrawal. Bank or payment method used.
For crypto-settled platforms (Polymarket global): Track any crypto-to-USDC conversions as separate taxable events. Record the USDC value at the time of each deposit and withdrawal. FBAR and FATCA reporting may apply if your offshore prediction market holdings exceed reporting thresholds ($10,000 for FBAR).
Most platforms provide some form of trade history or account statement. Download these regularly. But the platform export may not be filing-ready — you'll likely need to reconstruct the full trade-by-trade data yourself or with your tax preparer.
Prediction Market Taxes vs. Sports Betting Taxes
For traders coming from traditional sportsbooks, here's how prediction market taxation compares:
Sportsbook winnings are unambiguously gambling income. They're reported at ordinary income rates. Losses are deductible only if you itemize, capped at winnings. Starting 2026, the 90% loss cap under OBBBA applies. Sportsbooks issue W-2G forms for certain large payouts and withhold taxes in some cases.
Prediction market winnings occupy a gray zone. They could be gambling income (same rules as above), ordinary income (more favorable loss treatment), or Section 1256 financial derivatives (most favorable rate). No platform withholds taxes. Most issue 1099-MISC rather than W-2G. The classification is genuinely unsettled.
The key practical difference: if prediction market contracts are classified as financial instruments rather than wagers, losses are treated more favorably — you can net them against gains without the gambling loss deduction limitations. This is one reason the industry aggressively insists that prediction markets are financial markets, not gambling.
State Tax Considerations
State tax treatment adds another layer of complexity. Some states follow federal treatment, others have their own rules.
New Jersey allows 100% gambling loss netting on the NJ-1040, with no 90% cap — making it one of the more favorable states for prediction market traders regardless of classification.
States without income tax (Florida, Texas, Nevada, etc.) — no state-level prediction market tax applies, though the federal obligation remains.
States that classify prediction markets as gambling may apply their own gambling income tax rules, which vary widely.
Polymarket global users — states with specific crypto reporting requirements may create additional obligations for USDC-settled trades.
Check with a tax professional familiar with your state's specific rules.
What Happens When the IRS Finally Issues Guidance?
Tax professionals universally expect IRS guidance to come at some point — the industry is now processing billions in monthly volume and it's too big to ignore. When guidance arrives, several things could happen:
Best case: The IRS provides a clear framework and a safe harbor for prior-year returns, meaning traders who reported in good faith under any reasonable method won't face penalties.
Likely case: The IRS issues guidance going forward but doesn't fully address prior years, creating a period of uncertainty for already-filed returns.
Worst case: The IRS issues guidance that contradicts how you filed, and you need to amend prior returns. If you reported as ordinary income (Option 1) and the IRS says it should have been gambling income, the main difference is loss treatment — which could increase or decrease your tax bill depending on your specific situation.
This uncertainty is exactly why most tax professionals recommend the most conservative approach (ordinary income) — it minimizes the chance of owing additional tax if guidance lands differently than you expect.
A Note on Trump's Gambling Tax Proposal
President Trump has publicly discussed the possibility of eliminating federal taxes on gambling winnings. If enacted, this would be significant for prediction markets — but only if they're classified as gambling. If prediction markets are classified as financial instruments (ordinary income or Section 1256), the gambling tax elimination wouldn't apply. As of March 2026, this remains a discussion point rather than legislation.
The Practical Recommendation
For most prediction market traders filing 2025 returns right now, here's what tax professionals are generally advising:
Step 1: Gather all your trade data from every platform you used in 2025. Download account statements, trade histories, and any 1099 forms received.
Step 2: Calculate your net gain or loss across all prediction market activity for the year.
Step 3: For most people, report net profits as "Other Income" on Schedule 1, Line 8z. This is the safest approach with the lowest audit risk.
Step 4: If you had significant profits ($10,000+) and want to explore Section 1256 treatment for better rates, consult a CPA experienced with derivatives and prediction markets before filing. This is not a DIY decision.
Step 5: If you traded on Polymarket's global (crypto-based) platform, also account for any crypto conversion events and check whether FBAR/FATCA reporting applies.
Step 6: Keep copies of all records and calculations. If the IRS issues guidance later, you'll need these to verify or amend your return.
Frequently Asked Questions
Are prediction market winnings taxable?
Yes. Prediction market profits are taxable income under US law, regardless of which platform you used and regardless of whether you receive a tax form. The obligation to report exists even without a 1099.
How do I report prediction market earnings on my taxes?
Most tax professionals currently advise reporting net profits as "Other Income" on Schedule 1 (Form 1040), Line 8z. Use a description like "Prediction market earnings" or the specific platform name.
Will I receive a 1099 from my prediction market platform?
It depends on the platform. Kalshi issues 1099-MISC and sometimes 1099-B for qualifying accounts. Robinhood and Polymarket may not issue prediction-market-specific tax forms. The absence of a 1099 does not eliminate your reporting obligation.
Are prediction market earnings taxed as gambling or investment income?
The IRS hasn't said. Three approaches exist: ordinary income (safest), gambling income (unfavorable loss treatment), and Section 1256 financial derivatives (most favorable rates but aggressive). The classification depends on statutory interpretation and your tax advisor's assessment of the risk.
What's the 90% gambling loss cap in 2026?
Starting with tax year 2026 (filed in early 2027), the One Big Beautiful Bill Act limits gambling loss deductions to 90% of losses. This means break-even traders could owe tax on phantom income. This rule only matters if prediction market activity is classified as gambling.
Does Polymarket create additional crypto tax events?
Potentially. If you convert other crypto to USDC to fund your Polymarket account, that conversion is likely a taxable event. FBAR and FATCA reporting may apply if your offshore prediction market holdings exceed reporting thresholds. The global Polymarket platform issues no tax forms — you must self-report everything.
Can I deduct prediction market losses?
Yes, in some form — but the rules depend on classification. Under ordinary income treatment, losses offset gains. Under gambling treatment, losses are deductible only if you itemize and only up to winnings (with the 90% cap starting in 2026). Under Section 1256, losses can be carried back three years.
What records should I keep?
For every trade: date, contract description, number of contracts, cost basis, sale/settlement price, fees, and net gain/loss. For deposits and withdrawals: date, amount, and method. Download platform statements regularly — don't rely on the platform to maintain your records.
Should I wait to file until the IRS issues guidance?
No. The filing deadline is April 15, 2026 for 2025 returns. File on time using the best available approach. If IRS guidance later requires changes, you can amend your return. Filing late carries penalties regardless of tax law uncertainty.
Where can I learn more about how prediction markets work?
See our guide on how prediction markets work, our overview of prediction market legality in the US, and our rankings of the best prediction market apps to find the right platform for your needs.
