Tax Guide for Prediction Market Winnings in the US
Winnings from prediction markets like Kalshi and Polymarket are taxable income in the United States, and the IRS treats them differently depending on which platform you use, how much you win, and whether the activity is a hobby or a business. CFTC-regulated event contracts on Kalshi are typically reported as ordinary income on a Form 1099-MISC or 1099-B, while winnings from offshore or crypto-based platforms like Polymarket must be self-reported, usually as “other income” on Schedule 1. This guide walks you through exactly how to report, what records to keep, and the common mistakes that trigger IRS attention.
How the IRS Classifies Prediction Market Income
The IRS does not have a single, dedicated category for prediction market winnings. Instead, the classification depends on the platform’s legal status and the structure of the contract. Kalshi, the only federally regulated prediction market exchange in the US, treats its event contracts as Section 1256 contracts in some cases and as ordinary income contracts in others. Section 1256 contracts receive a favorable 60/40 split, meaning 60% of gains are taxed at the long-term capital gains rate and 40% at the short-term rate, regardless of holding period.
Polymarket, which operates under offshore licensing and settles in USDC, does not issue US tax forms. US residents who trade on Polymarket are responsible for self-reporting their net gains as ordinary income or, in some cases, as capital gains if they can establish that the contracts function as property. Most tax professionals recommend the conservative route of ordinary income reporting until further IRS guidance emerges.
What Tax Forms You Will Receive
If you trade on Kalshi and your net winnings exceed $600 in a calendar year, you should expect one of two forms:
- Form 1099-B — Used when Kalshi treats your activity as broker-dealer transactions. This form reports proceeds, cost basis, and gain or loss per contract.
- Form 1099-MISC — Used for miscellaneous winnings not classified as broker transactions. Reported in Box 3 (other income).
Polymarket users receive no US tax documentation. You are expected to maintain your own transaction logs showing deposits, trades, settlement amounts, and withdrawals. Export your trade history monthly and keep screenshots of your account balance at year-end.
Reporting Your Winnings
How you report depends on which form you receive and your overall trading pattern. The table below outlines the most common scenarios:
| Scenario | Form | Where to Report | Rate |
|---|---|---|---|
| Kalshi hobbyist, 1099-MISC | Schedule 1, Line 8 | Other income | Ordinary |
| Kalshi active trader, 1099-B | Form 8949 + Schedule D | Capital gains | 60/40 split (if 1256) |
| Polymarket occasional user | Schedule 1, Line 8 | Other income | Ordinary |
| Polymarket as business | Schedule C | Business income | Ordinary + SE tax |
If your trading rises to the level of a trade or business, meaning you trade frequently, substantially, and with the intent to profit, you may qualify for trader tax status (TTS). TTS allows you to deduct trading expenses on Schedule C, including software, data subscriptions, and a portion of your home office. However, TTS is rarely granted to prediction market traders, and the IRS applies strict criteria.
Can You Deduct Losses?
Losses are deductible, but only against gains in most cases. Hobbyists cannot deduct losses in excess of winnings, and the Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions through 2026, which means casual gamblers often lose the ability to offset. Traders who report under Section 1256 can net gains and losses within the contract category, and up to $3,000 of excess capital losses can offset ordinary income per year under standard capital loss rules.
Example: If you win $12,000 on Kalshi but lose $8,000 on Polymarket, you cannot simply net to $4,000 unless both platforms are treated the same way for tax purposes. Mixing platforms often requires professional guidance.
State Taxes and Residency Considerations
Federal tax is only part of the picture. State treatment varies widely:
- No state income tax — Florida, Texas, Nevada, Tennessee, Washington, Wyoming, South Dakota, and Alaska impose no state tax on prediction market winnings.
- Full state tax — California, New York, New Jersey, and Oregon tax prediction market income at ordinary state rates, which can exceed 13%.
- Restricted states — Some states block Kalshi or Polymarket access entirely, and residents who trade via VPN face additional compliance risk.
If you move states mid-year, prorate your winnings based on residency periods. Keep documentation of when trades were executed to support any state audit.
Record-Keeping Checklist
Maintain the following records for at least seven years:
- Monthly transaction exports from each platform
- Year-end account statements and balance screenshots
- Deposit and withdrawal records from your bank or crypto wallet
- Copies of all 1099 forms received
- Notes on any disputed settlements or voided contracts
Good records are the single biggest factor in surviving an IRS inquiry. Software like CoinTracker, TokenTax, and Koinly now supports Polymarket exports, and Kalshi provides a downloadable annual summary from its account dashboard.
Where to Trade and Get Clean Tax Documentation
For US-based traders who want straightforward tax reporting, Kalshi remains the gold standard. It is CFTC-regulated and issues the correct 1099 forms automatically. Open a Kalshi account here to access clean tax documentation and the broadest range of US-legal event contracts.
For traders focused on crypto-native markets with higher liquidity on international events, Polymarket is the leading option. Just remember that you are responsible for your own reporting, and the IRS still expects every dollar to be disclosed.
For a complete side-by-side comparison and the latest rankings, visit our best prediction markets guide.
This article is for general informational purposes and does not constitute legal or tax advice. Consult a qualified tax professional for guidance specific to your situation.