If you cashed out of a Kalshi or Polymarket contract this year, the IRS wants to know about it. Prediction market winnings are taxable income in the United States, and the rules differ in subtle but important ways depending on which platform you traded on, how long you held the position, and whether you treated your activity as a hobby or a business. This guide walks through what every US prediction market trader needs to know before filing a 2026 return.
Disclaimer: This article is general information, not individualized tax advice. Prediction market taxation is a developing area, and your personal situation can change the answer. Consult a licensed CPA or tax attorney before filing, especially if your gains exceed a few thousand dollars.
The Core Rule: All Winnings Are Taxable
Under US tax law, income from virtually any source is taxable unless Congress has specifically excluded it. Prediction market winnings are not excluded. Whether you made $50 trading Fed rate contracts on Kalshi or $50,000 shorting an election market on Polymarket, that profit is reportable. The IRS has made clear through published guidance and enforcement actions that gambling winnings, trading gains, and miscellaneous income are all captured, and prediction markets fall into one of these buckets depending on the platform’s legal structure.
What differs is how you report the income, which forms you receive, what you can deduct, and the tax rate that applies. Those details can swing your effective tax bill by a factor of two or more.
Kalshi: Reported as Section 1256 or Ordinary Income
Kalshi is a CFTC-regulated derivatives exchange, which means its event contracts are treated as commodity-like instruments rather than gambling wagers. For most retail traders, this is a significant advantage. Kalshi typically issues a Form 1099-B at year end summarizing proceeds and cost basis for each contract that was closed, expired, or settled.
The key question is whether Kalshi contracts qualify for Section 1256 treatment, which applies to regulated futures contracts and offers the famous 60/40 split: 60% of gains are taxed at the long-term capital gains rate (currently 0%, 15%, or 20% depending on income) and 40% at ordinary rates, regardless of how long the position was held. Not every Kalshi contract has been formally designated as Section 1256, so some traders report winnings as ordinary short-term capital gains instead. Review your 1099-B carefully and ask Kalshi’s support team for clarification if the boxes checked on the form are ambiguous.
Polymarket: Treated as Property Transactions on a Crypto Rail
Polymarket settles in USDC, a dollar-pegged stablecoin, which puts it under the IRS’s cryptocurrency tax framework. Every trade is a disposition of property. You owe tax on the gain between what you paid for a share and what you received when you sold or when the contract resolved, measured in USD at the time of each transaction. Polymarket does not currently issue 1099-Bs to most US users, which means the reporting burden sits entirely on the trader.
Holding periods matter here. Positions held longer than one year qualify for long-term capital gains rates. Positions closed within a year are taxed as short-term gains at your ordinary income rate, which for most active traders means somewhere between 22% and 37% federal, plus state tax. Because most prediction market contracts resolve in weeks or months, short-term treatment is the common case.
Quick Comparison: Kalshi vs Polymarket Tax Treatment
| Feature | Kalshi | Polymarket |
|---|---|---|
| Regulatory status | CFTC-regulated DCM | Offshore, crypto-settled |
| Form issued | 1099-B (typical) | None, self-report |
| Tax character | Section 1256 or short-term capital gain | Property transaction (crypto rules) |
| Preferred rate available? | Yes, 60/40 split possible | Only on positions held >1 year |
| Loss deductibility | Yes, against capital gains | Yes, against capital gains (up to $3K ordinary) |
| Wash-sale rule applies? | No (Section 1256 exemption) | Currently no, but Congress is considering changes |
What Counts as a Taxable Event
You don’t owe tax every time your position moves on paper. The IRS taxes realized gains and losses, which means a taxable event only occurs when something changes hands. For prediction markets, the main triggers are:
- Selling a contract before expiration. The difference between your sale price and your purchase price is a realized gain or loss.
- Contract resolution. When a YES or NO contract pays out at $1 or $0, that settlement is a disposition.
- Converting USDC back to USD. On Polymarket, moving your winnings off the platform and into dollars is itself a crypto disposition if USDC has drifted even fractionally from $1.
- Transferring crypto to Polymarket. If you funded your account by swapping ETH or BTC into USDC, that swap was a taxable event in its own right.
Keep a detailed log of every trade with timestamps, dollar amounts, and contract identifiers. If the IRS or a state tax authority questions your return, the trader with clean records almost always wins the dispute.
Deductions, Losses, and the Hobby vs Business Question
Capital losses from prediction market trading offset capital gains dollar for dollar, and up to $3,000 of excess losses can offset ordinary income each year. Anything beyond that carries forward indefinitely. This is a meaningful shelter if you had a losing year.
If you trade prediction markets at a scale and consistency that resembles a business, you may be able to make a “trader in securities” election under Section 475(f), which would allow mark-to-market accounting and full ordinary loss treatment without the $3,000 cap. The bar is high: the IRS looks for substantial, continuous, and professional activity. A few dozen trades a year will not qualify. Several hundred trades a month, with trading as your primary source of income, might.
State Taxes, Estimated Payments, and Common Mistakes
Federal rules are only half the picture. California, New York, and New Jersey tax prediction market gains at ordinary income rates with no preferential long-term treatment. Washington, Texas, Florida, and other no-income-tax states leave winnings alone at the state level. If you move mid-year, you may owe partial-year returns in two states.
If your prediction market gains push you into a situation where you’ll owe more than $1,000 in federal tax that isn’t being withheld, the IRS expects quarterly estimated payments. Missing those triggers underpayment penalties, even if you pay the full balance by April. The three most common mistakes we see are failing to track cost basis on Polymarket, ignoring USDC conversion events, and assuming small winnings are below a reporting threshold. There is no de minimis exemption for gambling or trading gains.
Where to Trade
If you’re new to prediction markets and want to pick a platform with cleaner tax reporting, Kalshi is the easier starting point for most US traders thanks to its 1099-B issuance and potential Section 1256 treatment. If you want deeper liquidity on political and global markets and are comfortable managing crypto-based cost basis tracking, Polymarket remains the volume leader. For a side-by-side look at every major platform, see our rankings of the best prediction markets for US traders.
Taxes should never be an afterthought. Keep records as you trade, understand which bucket your platform falls into, and talk to a professional before you file. The alpha you captured in the markets is only yours to keep if you file correctly.