Prediction market taxes: what the IRS has and hasn't said
Gains from prediction markets are taxable. How they are taxed is not settled. As of November 2026, tax professionals report that the IRS has issued no guidance specific to event contracts, so traders and preparers are choosing between gambling, capital gain and Section 1256 treatment, with real money riding on the choice.
This page is general information, not tax advice. Your situation depends on facts we don't know, so work with a tax professional before you file.
What is settled
Income from these contracts is reportable. All the professional sources we reviewed agree on that point, whatever the classification.
If the activity is treated as gambling, the IRS rules are clear. Its Topic 419 says "gambling winnings are fully taxable," that you report them on Form 1040 via Schedule 1, and that you can deduct losses "only if you itemize your deductions on Schedule A." Deductible losses "can't be more than the amount of gambling income you reported." The IRS also expects you to keep a diary or similar record of winnings and losses.
What is unsettled
Withum, a national accounting firm, wrote in August 2026 that the IRS "has not issued guidance specifically addressing these contracts." Baker Tilly's James Creech told Financial Planning in December 2025 he did not understand "why the IRS has been silent on this." Three main treatments are in play:
| Treatment | How gains are taxed | How losses work | The main doubt |
|---|---|---|---|
| Gambling (wagering) | Ordinary income | Itemizers only; capped at winnings; 90% of losses from 2026 | Platforms say these are regulated financial contracts |
| Capital asset | Short- or long-term capital gain | Net capital loss up to $3,000 a year against other income, rest carried forward | Contracts on non-property events may not qualify |
| Section 1256 | 60% long-term, 40% short-term, marked to market at year end | Capital loss | Event contracts are prepaid and lack variation margin, so they may not be "regulated futures contracts" |
Withum's view, as one firm's analysis: sports, election and similar contracts "seem to meet the plain meaning of a wagering transaction," and regulated status should not decide the question. It sees a stronger capital-gain argument for contracts tied to property such as commodities or currencies. It also notes Kalshi's perpetual futures look more like notional principal contracts, which are excluded from Section 1256.
The 90% rule changes the stakes
Under the One Big Beautiful Bill Act, starting with 2026, only 90% of wagering losses are deductible, and still only up to wagering gains. Withum's example: $100,000 of gains and $100,000 of losses leaves $10,000 of taxable income. Creech warned this "could come as surprise to a lot of people who win and lose small amounts frequently."
Worked example: same year, three answers
Say your 2026 trading shows $5,000 of winning positions and $4,000 of losing positions, a $1,000 net profit. This is a simplified illustration. How "winnings" are measured for event contracts is itself unsettled.
| Treatment | Amount that is taxable |
|---|---|
| Gambling, you itemize | $5,000 income minus 90% × $4,000 = $1,400 |
| Gambling, standard deduction | $5,000 income, no loss deduction |
| Capital gain (short-term) | $1,000 at ordinary rates |
| Section 1256 | $1,000, split $600 long-term and $400 short-term |
The same $1,000 profit produces anything from $1,000 to $5,000 of taxable income.
What forms platforms issue
Kalshi. Kalshi's help center lists four forms for users who meet IRS thresholds: 1099-INT for "interest payments from Kalshi," 1099-MISC for "credit/rewards from Kalshi," 1099-B for "transaction proceeds from broker transactions (crypto transfers)," and 1099-DA for digital asset reporting from ZeroHash. That list does not describe a form for ordinary event-contract profits. Some third-party guides say Kalshi issues a 1099-B for trading proceeds. Check your own tax documents rather than either source. Kalshi says it computes profit and loss on a first-in, first-out (FIFO) basis and that it "cannot give members advice on their taxes."
Polymarket.com. Several tax sources describe it as an offshore platform that does not issue US tax forms. No form does not mean no tax.
Robinhood. Pease Bell CPAs reports Robinhood provides an "Event Contracts Annual Statement" that is not filed with the IRS.
Polymarket US. We did not find a primary source describing its tax forms.
Creech's practical advice to preparers was to follow the 1099 until the IRS speaks.
Habits that help whatever the answer
- Export your full trade history each year, including fees. The platform's annual P&L may not match the treatment you use.
- Keep records good enough to support gambling treatment (date, market, amount, result), since that is the most demanding standard.
- Track fees separately. They affect your gain under every treatment.
- Pick a position with your preparer and apply it consistently.
New to these markets? Start with how prediction markets work, and see the Kalshi fees guide for the costs you will want in your records. Prediction market positions can lose their full value.
FAQ
Do I have to pay taxes on Kalshi winnings?
Yes. Tax professionals agree prediction market income is taxable and reportable. What is unsettled is whether it is gambling income, capital gain or Section 1256 income.
Has the IRS issued guidance on prediction market taxes?
As of November 2026, accounting firms including Withum report no IRS guidance specific to event contracts. Treatment is based on analogies to existing rules.
Are Kalshi contracts Section 1256 contracts?
That is disputed. Withum argues they likely are not regulated futures contracts because they are prepaid and have no variation margin, though the argument is stronger for contracts tied to property like commodities.
What tax forms does Kalshi send?
Kalshi's help center lists 1099-INT (interest), 1099-MISC (credits and rewards), 1099-B (crypto transfers) and 1099-DA (digital assets via ZeroHash) for users who meet IRS thresholds. Check your account for what you actually received.
Can I deduct prediction market losses?
It depends on the treatment. As gambling, losses are deductible only if you itemize, only up to winnings, and only at 90% starting in 2026. As capital losses, up to $3,000 of net loss a year can offset other income.