Prediction market winnings are taxable in the United States, and the IRS treats them differently depending on where you traded, how the platform is regulated, and whether you cashed out in dollars or crypto. This guide breaks down how federal taxes work for Kalshi, Polymarket, and other prediction market traders in 2026, what forms you should expect, and how to keep records that will survive an audit.
Nothing here is personalized tax advice. If your profits are material or your situation is complicated, work with a CPA who understands derivatives and digital assets.
How the IRS Classifies Prediction Market Income
The classification matters more than the dollar amount. It determines which form the income lands on, whether you can offset losses, and what your effective tax rate looks like.
- CFTC-regulated event contracts (Kalshi): Treated as derivatives. Gains and losses flow through Section 1256 or ordinary capital gains treatment depending on the specific contract. Kalshi issues a 1099-B for most retail accounts.
- Offshore or crypto-settled markets (Polymarket): Trades are typically treated as property transactions under the digital asset rules. Every buy, sell, and resolution can be a taxable event.
- State-licensed sports event contracts: May be taxed as gambling winnings, which land on Schedule 1 line 8b and cannot be netted against unrelated losses the way capital gains can.
The practical takeaway: a $5,000 profit on Kalshi and a $5,000 profit on Polymarket can produce very different tax bills.
Kalshi: What to Expect at Tax Time
Kalshi, as a CFTC-regulated designated contract market, reports to the IRS. US traders should expect a 1099-B each January covering the prior year. The form shows proceeds, cost basis, and realized gain or loss aggregated across your contracts.
Short-term capital gains rates (your ordinary income bracket) apply to contracts held less than a year, which is almost all event contracts. Losses can offset other capital gains and, if you have more losses than gains, up to $3,000 of ordinary income per year. The rest carries forward.
Traders who meet the IRS mark-to-market election criteria under Section 475 can treat gains and losses as ordinary, but that election has to be made in advance and is rarely the right move for part-time traders.
Polymarket and Crypto-Settled Markets
Polymarket runs on Polygon and settles in USDC. The IRS treats USDC as property, so each trade is a disposition of a digital asset. In practice, this means:
- Depositing USDC into Polymarket is not a taxable event by itself.
- Buying a “Yes” or “No” share is a disposition of USDC. You realize a tiny gain or loss based on the USDC cost basis.
- Selling a share, or holding to resolution, is a taxable disposition of the share, with the sale price (or resolved value) minus your basis as the gain or loss.
- Withdrawing USDC and converting to USD is another taxable event.
Polymarket does not issue 1099s to US customers. The responsibility for tracking basis, proceeds, and dates sits entirely on the trader. Tools like CoinTracker, Koinly, and TokenTax can import Polygon wallet activity and reconstruct a trade ledger, but you will almost always need to clean up resolved positions by hand.
Gambling Treatment vs. Capital Gains Treatment
Some sports-focused prediction markets and sweepstakes-model platforms report winnings as gambling income on Form W-2G rather than as capital gains. The difference is significant.
| Feature | Capital Gains (Kalshi, Polymarket) | Gambling Income (W-2G platforms) |
|---|---|---|
| Reported on | Schedule D / Form 8949 | Schedule 1, line 8b |
| Loss offset | Against other capital gains, plus $3K ordinary | Only against gambling winnings, itemized only |
| Carryforward of losses | Yes, indefinite | No |
| Standard deduction preserved? | Yes | Yes, but can’t deduct losses without itemizing |
If you trade across both treatment types, keep the ledgers separate. Mixing them is the single most common mistake traders make at tax time.
Records You Need to Keep
Regardless of platform, keep the following for at least seven years after you file:
- Monthly account statements and the annual tax summary from each platform.
- Deposit and withdrawal records, including wire confirmations and on-chain transaction hashes for crypto moves.
- A trade log with contract name, open date, close or resolution date, size, entry price, and exit price.
- Screenshots of your account balances on December 31 each year.
- Copies of 1099s and W-2Gs as they arrive, matched against your own records before you file.
If a platform shuts down or restricts your account, the IRS will still expect you to report accurately. Pull records regularly, do not wait until April.
State Taxes and Common Edge Cases
State taxation varies. States that follow federal capital gains treatment are straightforward. A handful of states, including New York and California, have their own treatment of gambling income that can create extra paperwork if you traded on multiple platform types. If you moved mid-year or trade from multiple residences, allocate income based on where you were when the gain was realized, not where the platform is based.
Three edge cases catch traders out most often:
- Wash sale rules. They do not currently apply to Kalshi event contracts or to Polymarket shares the way they apply to stocks, but Congress has floated extending them to digital assets. Watch for changes in 2026 legislation.
- Foreign reporting. If you held more than $10,000 in a non-US exchange or wallet at any point in the year, FBAR and Form 8938 obligations may apply.
- Hobby vs. trader classification. Most retail prediction market users are investors, not traders in a tax sense. Claiming trader status unlocks some deductions but requires substantial, continuous, and professional-level activity.
The Bottom Line
Prediction market winnings are taxable, but the exact treatment depends on the venue. Kalshi makes it easy with a 1099-B. Polymarket makes it hard by leaving the ledger entirely to you. Platforms that report as gambling eliminate your ability to carry losses forward. Trading across all three categories without a system almost guarantees an underpayment or an overpayment.
If prediction markets are a meaningful part of your financial life in 2026, build the tax workflow in January, not April. Pick a crypto tax tool, keep your Kalshi statements in a dedicated folder, and reconcile monthly.
Ready to start trading on fully regulated US markets? Open a Kalshi account here for CFTC-regulated contracts with proper tax reporting, or try Polymarket for the deepest global liquidity. Comparing platforms? See our full rankings of the best prediction markets in 2026.