Prediction market taxes are one of the fastest-growing questions in federal tax law, and the IRS still has not provided a clear answer. Trading volume on platforms like Kalshi and Polymarket has climbed sharply over the past year, yet no formal guidance exists for how these contracts should be reported. That gap leaves taxpayers, tax professionals, and platform operators applying a patchwork of existing rules that were never designed for this asset class.
This article explains how prediction markets are taxed under current federal law, how each major platform handles tax reporting, and what steps traders should take now to stay compliant while the regulatory landscape takes shape.
What Prediction Markets Are and How They Work
Prediction markets are exchange-traded platforms where participants buy and sell contracts tied to the outcome of real-world events. A contract might ask whether the Federal Reserve will raise interest rates at its next meeting, whether a particular candidate will win an election, or whether a hurricane will make landfall in a given state.
Binary contracts pay out a fixed amount, typically $1.00, if the predicted event occurs, and nothing if it does not. Prices reflect probability: a contract trading at $0.65 implies the market believes there is roughly a 65 percent chance the event will happen. Participants can buy or sell at any time before the contract settles, locking in gains or cutting losses as conditions change.
Many of these contracts trade on exchanges overseen by the Commodity Futures Trading Commission, which is the same federal agency that regulates futures and options markets. That regulatory connection is central to the tax debate, because the rules that govern futures carry distinct and often favorable federal tax consequences.
Unlike traditional sports betting or casino gambling, prediction markets operate on regulated exchanges and attract institutional investors, hedgers, and data analysts alongside retail traders. That distinction matters because the tax treatment of prediction market profits depends on whether the IRS classifies the activity as investing, futures trading, or gambling.
Three Tax Frameworks the IRS Could Apply to Prediction Market Income
How prediction markets are taxed hinges on classification. Three existing frameworks could apply, and each produces a materially different federal tax bill.
Section 1256 Contracts (Regulated Futures)
If prediction market contracts qualify as regulated futures under Section 1256 of the Internal Revenue Code, gains and losses receive favorable blended treatment: 60 percent long-term capital gains and 40 percent short-term, regardless of how long you held the position. Losses can also be carried back three years against prior Section 1256 gains. This classification generally produces the lowest tax burden for active traders.
Some contracts traded on CFTC-regulated exchanges like Kalshi may have a plausible argument for Section 1256 treatment, but the IRS has not confirmed this position. Taxpayers who claim it should be prepared to defend their rationale in the event of an audit.
Capital Gains (Investment Property)
If prediction market contracts are treated as capital assets bought and sold on an exchange, profits are taxed as short-term or long-term capital gains depending on the holding period. Because most prediction market positions settle within weeks or months, gains typically fall into the short-term category and are taxed at ordinary income rates, up to 37 percent for the highest earners under the current rate schedule the IRS publishes each year.
This is the most conservative position and the one most tax practitioners recommend absent specific IRS guidance.
Gambling Income
If the IRS treats prediction market activity as gambling, all winnings are taxable as ordinary income. Losses can only offset winnings, not other income, and only if the taxpayer itemizes deductions. Professional gamblers may deduct business expenses, but establishing professional gambler status is difficult and invites additional scrutiny.
The practical difference is significant. The same profit can carry a much higher effective tax cost under gambling classification than under Section 1256 treatment, driven by the taxpayer’s marginal rate and limits on deducting losses. That spread is why classification, not the trade itself, often determines the size of the final bill. Modeling these scenarios in advance is a core part of tax advisory services.
Current Federal Tax Treatment Without IRS Guidance
Without dedicated guidance from the IRS, taxpayers and their advisors must apply existing rules by analogy. Several principles are clear even without formal rules.
All prediction market profits are taxable. Regardless of classification, gains from prediction markets are includable in gross income. The absence of a Form 1099 from a platform does not eliminate the reporting obligation. Taxpayers who rely solely on 1099s to prepare their returns risk underreporting income.
Most positions are short-term. Because the majority of prediction market contracts settle within weeks or months, gains typically fall into short-term capital gains territory and are taxed at ordinary income rates.
The Section 1256 argument remains uncertain. While contracts on CFTC-regulated exchanges may have a stronger case, the IRS has made no public statement confirming or denying this treatment for prediction markets.
Gambling treatment is possible for casual traders. The IRS could view speculative, small-dollar prediction market activity, particularly on unregulated platforms, as gambling rather than investing. This interpretation would limit loss deductions and change reporting requirements. The agency’s own guidance on gambling income and losses shows how restrictive that treatment can be.
How Kalshi, Polymarket, and Robinhood Handle Tax Reporting
One of the most practical challenges for prediction market participants is inconsistent tax reporting across platforms. Each major platform handles Kalshi taxes, Polymarket taxes, and event contract reporting differently.
Kalshi issues Form 1099-B, treating transactions similarly to a traditional brokerage. This is the most familiar reporting format for taxpayers and tax preparers, and it provides cost basis and proceeds information for each transaction.
Polymarket does not issue Form 1099s. The platform operates outside U.S. jurisdiction and does not report to the IRS. Taxpayers are still legally responsible for reporting all gains, and the IRS has access to blockchain analytics tools that can identify unreported crypto-based trading activity.
Robinhood does not issue Form 1099s for event contracts. Instead, it provides an “Event Contracts Annual Statement,” which is not filed with the IRS. Taxpayers must use this statement to self-report income on their returns.
PredictIt issues Form 1099-MISC for net winnings above $600, treating payouts as miscellaneous income rather than brokerage proceeds.
The bottom line: all prediction market profits are taxable whether or not a platform sends a tax form. Maintaining your own detailed records is essential.
2026 Regulatory Developments Shaping Prediction Market Taxes
Several developments in 2026 are reshaping the prediction market landscape, even as the IRS itself has remained silent on tax classification.
CFTC Proposed Rule (June 2026)
On June 10, 2026, the Commodity Futures Trading Commission issued a notice of proposed rulemaking addressing the legality of certain event contracts traded on prediction markets. The proposal would treat contracts involving war, terrorism, and assassination as contrary to the public interest while permitting most sports-related event contracts. The proposed rule was published in the Federal Register on June 12, 2026, with public comments due by July 27, 2026. If finalized, this framework could influence how the IRS classifies certain contracts for tax purposes, particularly whether they qualify for Section 1256 treatment.
Platform Self-Regulation
In March 2026, both Kalshi and Polymarket announced new insider trading curbs, signaling a push toward institutional credibility. Greater self-regulation supports arguments for treating these platforms more like traditional exchanges, which could strengthen the case for capital gains or Section 1256 treatment rather than gambling.
State-Level Gambling Challenges
Several states, including Wisconsin, New York, and Illinois, are challenging prediction markets as a form of gambling and seeking state-level regulatory authority. If states succeed in classifying these contracts as gambling, it could bolster the IRS’s case for gambling treatment at the federal level, significantly limiting loss deductions for traders.
Rapid Market Growth
The steep rise in trading volume over the past year increases the likelihood that the IRS and Treasury will prioritize formal guidance. Higher dollar volumes mean more tax revenue at stake, which typically accelerates regulatory action.
Open Questions the IRS Still Needs to Answer
The lack of formal guidance leaves several critical questions unresolved for prediction market traders and their tax advisors:
- Whether prediction market contracts qualify as Section 1256 contracts eligible for 60/40 blended capital gains treatment
- Whether contracts on CFTC-regulated exchanges should be treated differently from those on unregulated platforms
- How to classify contracts that settle based on non-financial events such as weather, elections, or geopolitical outcomes
- Whether frequent prediction market traders can claim trader tax status under Section 475
- How wash sale rules apply to prediction market contracts, particularly when similar contracts trade on multiple platforms
- What reporting obligations platforms operating outside the United States owe to the IRS
- How state-level gambling classifications interact with federal tax treatment
Until the IRS addresses these questions, taxpayers must make judgment calls based on existing law and document their positions carefully.
What Prediction Market Traders Should Do Now
If you are actively trading on prediction markets, take these steps to protect yourself regardless of which tax framework ultimately applies.
Track every transaction. Maintain detailed records of purchases, sales, and settlements across all platforms, including those that do not issue tax forms. Record the date, contract description, purchase price, sale price, and any fees for every trade.
Report all gains. Do not assume that the absence of a 1099 means income is not taxable. The IRS treats unreported income as a compliance issue regardless of whether a platform files paperwork.
Work with a tax advisor. The classification of prediction market income involves judgment calls with real financial consequences. A qualified advisor can help you choose a defensible reporting position, document your rationale, and prepare for potential IRS scrutiny as formal guidance develops. Pease Bell’s accounting services cover the reporting and recordkeeping side of speculative trading activity.
Monitor regulatory developments. The CFTC proposed rule and state-level gambling challenges could shift the landscape quickly. Stay informed so you can adjust your approach as new rules take effect.
The prediction market tax landscape is evolving, and the IRS will eventually issue formal guidance. Taking a disciplined approach to recordkeeping and reporting now puts you in the strongest position when that guidance arrives.
Frequently Asked Questions
How are prediction markets taxed?
Prediction markets are taxed as income under federal law, but the specific classification is unresolved. Most tax practitioners treat gains as short-term capital gains taxed at ordinary income rates. Some contracts on CFTC-regulated exchanges may qualify for Section 1256 blended treatment (60% long-term, 40% short-term), though the IRS has not confirmed this.
Are prediction market losses tax deductible?
Prediction market losses are deductible, but the rules depend on classification. If treated as capital losses, they can offset capital gains and up to $3,000 of ordinary income per year. If classified as gambling losses, they can only offset gambling winnings, and only if you itemize deductions. Under Section 1256, losses can be carried back three years.
Is prediction market income considered gambling or capital gains?
The IRS has not made a definitive ruling. Contracts traded on regulated exchanges like Kalshi have a stronger argument for capital gains or Section 1256 treatment. Casual, speculative trading on unregulated platforms is more likely to be viewed as gambling. The classification directly affects your tax rate and your ability to deduct losses.
Does Kalshi send a 1099 for prediction market taxes?
Kalshi issues Form 1099-B, which reports proceeds and cost basis similarly to a stock brokerage. This makes tax reporting relatively straightforward. Polymarket and Robinhood do not issue standard 1099 forms, so traders on those platforms must self-report all income.
What is Section 1256 treatment for prediction market contracts?
Section 1256 provides a favorable tax rate for regulated futures contracts: 60 percent of gains are taxed as long-term capital gains and 40 percent as short-term, regardless of holding period. Some prediction market contracts on CFTC-regulated exchanges may qualify, but the IRS has not issued guidance confirming this treatment.
Has the IRS issued guidance on prediction market taxes?
No. As of June 2026, the IRS has not published any formal guidance, revenue ruling, or notice addressing the tax treatment of prediction market contracts. The CFTC published a proposed rule in June 2026 that could influence future IRS classification, but taxpayers must currently rely on existing tax frameworks and professional judgment.
