Short answer: Prediction market winnings are taxable income in the United States. How you report them depends on the platform. Payouts from CFTC-regulated event contract exchanges like Kalshi are typically reported on Form 1099-B as short-term capital gains or ordinary gains, while winnings from offshore crypto venues like Polymarket are generally treated as self-reported gambling or miscellaneous income. Either way, the IRS expects you to track every contract, report your net results, and pay the appropriate rate on the gains.
This guide walks through the current tax treatment, the forms you can expect, how to document trades, and the practical steps that keep active traders out of trouble with the IRS. It is educational information rather than personal tax advice; speak with a CPA for anything complex.
How the IRS Classifies Prediction Market Winnings
The tax treatment of a prediction market trade turns on one question: is the venue a regulated derivatives exchange, an offshore crypto platform, or something closer to a gambling operator? Each bucket has different reporting mechanics.
| Platform Type | Example | IRS Treatment | Primary Form |
|---|---|---|---|
| CFTC-regulated DCM | Kalshi, ForecastEx | Capital gains on event contracts | 1099-B |
| Offshore crypto market | Polymarket | Self-reported income or gambling | Schedule 1 or Schedule C |
| Non-profit research exchange | Iowa Electronic Markets | Miscellaneous income | Schedule 1 |
| State-licensed sportsbook | DraftKings, FanDuel | Gambling winnings | W-2G at thresholds |
Kalshi event contracts are legally classified as swaps under the Commodity Exchange Act, which is why most traders see them flow through a 1099-B at year-end. Polymarket does not issue US tax forms, which puts the reporting burden entirely on the trader.
What Forms to Expect from Each Platform
Here is what active traders typically receive and when:
- Kalshi (1099-B): Delivered by late January through mid-February. Reports proceeds, cost basis, and realized gains per contract series. Imports cleanly into most tax software.
- Polymarket: No US tax documents. Traders must reconstruct activity from on-chain history and the platform’s trade export. Keep screenshots of every deposit, trade, and withdrawal.
- PredictIt: Issues a 1099-MISC if winnings exceed the $600 threshold. Trader fees reduce the reportable amount.
- ForecastEx: 1099-B similar in structure to Kalshi, filed through the clearing broker.
Even when a platform does not issue a form, the income is still reportable. The IRS has been clear in recent guidance that unreported crypto-denominated prediction market activity is a priority audit area.
Capital Gains vs. Ordinary Income vs. Gambling
The distinction matters because the three categories are taxed differently and allow very different deductions.
Capital gains treatment applies to Kalshi contracts closed within the same tax year. Because event contracts typically settle in days or weeks, nearly all gains are short-term and taxed at your ordinary income rate, from 10 percent up to 37 percent in 2026. The upside is that capital losses offset capital gains dollar-for-dollar and can offset up to $3,000 of ordinary income per year, with the remainder carried forward.
Ordinary income treatment applies when a platform issues a 1099-MISC or when you self-report Polymarket activity on Schedule 1. The rate is identical to short-term capital gains, but losses do not offset other income unless you qualify as a trader in securities, which is a high bar.
Gambling treatment applies to winnings from state-licensed sportsbooks and, under some interpretations, offshore prediction markets. Gambling losses are deductible only up to the amount of gambling winnings, and only if you itemize. This is the least favorable category for most prediction market participants.
Record-Keeping: What to Track All Year
Tax season is survivable if you keep a running ledger throughout the year. At minimum, every trade should have:
- Date and time of entry and exit
- Market name or ticker (for example, PRES-2028-DEM)
- Position size and the price paid per contract
- Settlement price and realized profit or loss
- Platform and account identifier
- Fees paid, which reduce taxable gains
For Polymarket traders, a block explorer export plus the platform’s CSV download usually covers everything. For Kalshi traders, the exchange’s monthly statements already match the format tax software expects. A spreadsheet updated weekly beats a frantic March reconstruction every time.
Deductions and Trader Tax Status
Most hobbyist prediction market traders cannot deduct expenses beyond what shows up on their 1099. Serious traders who meet the substantial, regular, and continuous activity test under IRS Topic 429 may elect trader tax status (TTS), which unlocks a Schedule C for deducting data feeds, platform fees, home office expenses, and research subscriptions. TTS is powerful, but it is also one of the most audited elections in the tax code, so document everything.
Even without TTS, these items are commonly deductible against relevant income:
- Platform trading fees (netted into 1099-B basis)
- Gas fees on Polymarket (reduces cost basis on each position)
- Wire and bank fees tied to funding deposits
- State-specific gambling loss deductions where applicable
State Tax Considerations
Federal rules are only half the picture. States that allow prediction market trading often treat the income as a regular capital or wagering gain, but a few impose extra rules. California stacks a 1 percent mental health surcharge on top of its progressive brackets for high earners. New York treats offshore crypto market activity as ordinary income with no gambling loss offset. Texas and Florida, with no state income tax, remain the most trader-friendly jurisdictions. Check your state’s department of revenue guidance each spring, as several states updated their stance on event contracts after the 2025 CFTC rulings.
Common Mistakes That Trigger IRS Attention
Three errors show up again and again in prediction market audits:
- Reporting net rather than gross. The IRS wants to see gross winnings on Schedule 1 and losses as a separate itemized deduction, not a single net number.
- Ignoring Polymarket because no form arrived. Chain analytics make these payouts increasingly visible. Report them.
- Double-counting fees. If fees are already netted into your 1099-B basis, do not deduct them again on Schedule C.
Clean records and consistent treatment year over year are the fastest route to a quiet filing.
Where to Trade and Keep Clean Records
If you prioritize simple tax reporting, a CFTC-regulated venue is the easier path. Kalshi issues a consolidated 1099-B that imports directly into TurboTax, H&R Block, and most professional tax platforms. Polymarket offers deeper, more exotic markets but puts the reporting work on you.
Compare both platforms side-by-side on our rankings page: Best Prediction Markets of 2026.
Ready to open an account?
- Trade regulated US event contracts on Kalshi and get a clean 1099-B at year-end.
- Access global, crypto-settled markets through Polymarket for depth and selection.
This article is educational information and does not constitute tax or legal advice. Consult a qualified CPA or tax attorney for guidance on your specific situation.