• Oct 14, 2026

Prediction Market Taxes: A Complete Guide for Traders (2026)

TL;DR: Prediction market profits may be taxable in the United States, even if a platform does not issue a tax form. The correct tax treatment depends on the type of contract, how it is traded and settled, and the applicable federal tax rules. Some transactions may qualify for capital-gains treatment, certain qualifying contracts may fall under Section 1256, and other arrangements may raise gambling-income or ordinary-income questions. Traders using cryptocurrency must also evaluate any separate taxable disposals of digital assets. In 2026, the new limitation on wagering-loss deductions makes accurate tax classification particularly important.

Prediction markets have become increasingly popular among traders looking to speculate on elections, sports, economic indicators, financial markets, and other real-world events. Platforms such as Polymarket and Kalshi allow participants to buy and sell contracts whose value depends on the outcome of a specific event.

However, making a profit from a prediction market is not just a trading matter. It can also create tax-reporting obligations.

Unlike a conventional stock trade, a prediction market transaction may involve an event contract, a financial derivative, a cryptocurrency-funded position, or a product with characteristics that raise questions about gambling-related tax rules. These distinctions can affect how gains and losses are calculated, which tax forms are required, and whether losses can be deducted.

This guide explains how prediction market taxes work under U.S. federal tax rules, what traders should know about Polymarket and Kalshi, how cryptocurrency transactions may affect their tax returns, and what changes to consider for the 2026 tax year.

This article discusses U.S. federal taxation. State tax rules and the treatment of individual contracts may differ. The appropriate classification should be determined from the specific contract terms and applicable law.

1. What Are Prediction Market Taxes?

Prediction market taxes refer to the potential tax liabilities arising from profits, settlements, sales, or other taxable events involving contracts tied to future outcomes.

For example, a trader might purchase a contract predicting whether:

·       A particular candidate will win an election.

·       The Federal Reserve will change interest rates.

·       A sports team will win a championship.

·       A cryptocurrency will reach a specified price.

·       An economic indicator will exceed a particular threshold.

The contract may be purchased for a relatively small amount and later sold for a higher price, sold at a loss, or settled according to the event's outcome.

Example: How a prediction market profit works

Suppose a trader buys a contract for $50. If the predicted outcome occurs, the contract pays $100.

The trader has made a $50 economic profit before transaction costs.

However, the $50 profit does not automatically qualify as a capital gain, gambling income, or Section 1256 gain. The applicable tax treatment depends on the legal and tax characteristics of the contract.

This classification matters because different rules may apply to income reporting, capital-loss deductions, and the treatment of positions held at year-end.

2. How Are Prediction Markets Taxed in the United States?

There is no single tax rule that can safely be applied to every prediction market product. The analysis should start with the specific contract and the transaction that generated the profit or loss.

These are possible classifications, not a list of options a trader can freely choose between. A contract's actual characteristics and the applicable law determine the appropriate treatment.

The IRS provides guidance on capital gains and losses, digital assets, and Section 1256 contracts. These sources are useful starting points, but they do not, by themselves, resolve the classification of every prediction market product.

3. Capital Gains and Losses From Prediction Markets

If a prediction market contract is treated as a capital asset, a trader may need to calculate a capital gain or loss when the contract is sold, exchanged, or settled.

Capital gain or loss = Amount realized − Adjusted basis

The amount realized and adjusted basis must be determined under the rules applicable to the particular transaction. Eligible transaction costs may affect the calculation.

Example: Selling a contract at a profit

Suppose a trader purchases a contract for $40 and later sells it for $70.

·       Purchase cost: $40

·       Sale proceeds: $70

·       Profit before applicable costs: $30

If the contract qualifies for capital-asset treatment, the $30 may be a capital gain.

The holding period can also matter. Under the general capital-gains rules, gains on capital assets held for one year or less are generally short-term, while gains on capital assets held for more than one year may qualify as long-term.

However, traders should not automatically apply these holding-period rules to every event contract. A contract may be subject to different tax rules, including special rules for qualifying derivatives or wagering transactions.

How are prediction market losses deducted?

If the contract qualifies for capital treatment, capital-loss rules may apply.

For individuals, net capital losses generally offset capital gains. If deductible capital losses exceed capital gains, individuals can generally deduct up to $3,000 of the excess against ordinary income each year, or $1,500 for married individuals filing separately. Eligible unused capital losses may generally be carried forward, subject to the applicable rules.

These limits do not automatically apply to losses classified as gambling losses or losses from other types of contracts.

4. Do Prediction Market Contracts Qualify for Section 1256?

Section 1256 of the Internal Revenue Code provides special tax treatment for certain specified financial contracts.

For qualifying contracts, the rules generally provide:

·       60% long-term treatment: 60% of the recognized gain or loss is treated as long-term.

·       40% short-term treatment: The remaining 40% is treated as short-term.

·       Mark-to-market accounting: Qualifying contracts held at the end of the tax year are generally treated as sold at fair market value on the last business day of the year.

These rules can apply regardless of how long the qualifying contract was held. Form 6781 is used to report applicable Section 1256 gains and losses. See the IRS Form 6781 guidance: https://www.irs.gov/forms-pubs/about-form-6781.

Example: Section 1256 tax calculation

Suppose a trader realizes a $1,000 gain from a contract that has been confirmed to qualify under Section 1256.

The actual tax liability depends on the trader's income, applicable tax rates, and other circumstances.

Important: Trading on a CFTC-regulated platform does not automatically make every contract a Section 1256 contract. Eligibility must be established under the applicable statutory requirements.

Traders should therefore avoid assuming that all Kalshi, ForecastEx, or other event contracts receive 60/40 treatment without examining the specific product.

5. Are Prediction Market Winnings Taxed as Gambling Income?

Some prediction market products may raise questions about whether their tax treatment falls under the federal wagering rules. The answer depends on the legal nature of the transaction and the applicable tax law.

This distinction has become especially important following the 2025 tax legislation that changed the treatment of wagering losses beginning in 2026.

Example: Winnings and losses

Suppose a trader has the following results from transactions classified as wagering:

The trader has broken even economically. However, if the 2026 wagering-loss limitation applies, the full $10,000 of losses may not be deductible.

As explained in the next section, the new rules generally limit the deduction to 90% of wagering losses, and the deductible amount cannot exceed wagering gains.

This is why traders should not assume that their overall net trading profit or loss automatically equals the taxable amount.

6. How Does the One Big Beautiful Bill Act Affect Prediction Market Taxes in 2026?

The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduced a change that may significantly affect traders whose prediction market transactions are classified as wagering.

Beginning with the 2026 tax year, wagering losses are generally deductible only up to the lesser of:

·       90% of eligible wagering losses; or

·       The taxpayer's wagering gains for the year.

The IRS has discussed the change in its 2026 Internal Revenue Bulletin: https://www.irs.gov/irb/2026-19_IRB. Whether a particular prediction market transaction is subject to this rule depends on its tax classification.

Example: How the 90% wagering-loss limitation works

Suppose a trader earns $10,000 in winnings and incurs $10,000 in eligible wagering losses during 2026.

Although the trader broke even financially, $1,000 may remain in taxable income under this simplified example, assuming the trader qualifies to claim the deduction and has no other relevant adjustments.

Wagering losses are generally claimed as itemized deductions on Schedule A, subject to the applicable restrictions. Taxpayers who take the standard deduction generally cannot separately deduct wagering losses.

The higher standard deduction amounts introduced for 2026 do not eliminate these restrictions.

Why this matters: Two traders with identical economic results may have different tax outcomes if their contracts receive different tax classifications. Capital losses, Section 1256 losses, and wagering losses are governed by different rules.

7. How Cryptocurrency Affects Polymarket Taxes

Crypto-based prediction markets introduce an additional layer of tax complexity.

A trader may have to evaluate both the event-contract transaction and the cryptocurrency transactions used to fund, trade, or settle the position.

The IRS generally treats digital assets, including stablecoins, as property for federal income tax purposes. Consequently, using cryptocurrency to acquire property or another asset can create a separate taxable disposition, depending on the transaction.

See the IRS's digital asset tax guidance: https://www.irs.gov/filing/digital-assets.

Example: Buying a prediction market contract with USDC

Suppose a trader purchases USDC for $500 and later uses it to acquire a prediction market contract when the USDC has a fair market value of $600.

·       Original USDC cost basis: $500

·       Fair market value when used: $600

·       Potential gain on the USDC disposition: $100

If the transaction constitutes a taxable disposition and the USDC has an adjusted basis of $500, the trader may have a separate $100 gain to report.

The prediction market contract then needs to be analyzed independently to determine the appropriate treatment of any subsequent sale or settlement.

This example assumes the values stated are accurate and excludes fees and other adjustments.

What crypto transactions should traders review?

·       Cryptocurrency acquired to fund trading accounts.

·       Cryptocurrency exchanged or used to acquire contracts.

·       Proceeds received from selling or settling positions.

·       Stablecoin transactions, including USDC disposals.

·       Network fees and trading fees.

·       Transfers between wallets and accounts, distinguishing genuine self-transfers from taxable transactions.

Not every blockchain transfer is taxable. Moving assets between wallets owned by the same taxpayer is generally different from selling, exchanging, or spending those assets.

It is also important not to assume that the event-contract profit and the cryptocurrency gain or loss are the same amount.

8. Which Tax Forms Do Prediction Market Traders Need?

The correct forms depend on how the transactions are classified. A platform's tax statement may provide useful information, but it does not necessarily determine the taxpayer's final reporting obligations.

For more details, refer to IRS guidance on Form 6781, digital asset reporting, and taxable income.

These forms are not interchangeable. A trader should determine the appropriate classification before deciding where to report the activity.

9. How to Report Kalshi Taxes

Kalshi offers event contracts covering subjects such as economics, financial markets, politics, and sports. The reporting approach for a Kalshi trader should be based on the particular contracts traded and the applicable tax rules.

Step 1: Download your transaction history

Obtain the available annual statements, tax documents, and transaction exports from Kalshi. Retain details of contract purchases, sales, settlements, fees, and any positions that remain open at year-end.

Step 2: Review the contract classification

Do not automatically treat all Kalshi profits as capital gains or Section 1256 gains merely because the platform operates within a regulated event-contract framework. Determine whether the specific contract qualifies for the proposed tax treatment under the applicable law.

Step 3: Calculate gains and losses

Reconcile your transaction records to determine the purchase cost, proceeds, eligible transaction costs, and realized results. If positions remain open at year-end, review whether any special mark-to-market rules apply.

Step 4: Prepare the appropriate tax forms

Use Form 8949 and Schedule D when capital-asset reporting applies. Use Form 6781 for qualifying Section 1256 contracts. Report wagering income and eligible losses under the relevant rules if the transactions are classified as wagering.

Step 5: Review the 2026 wagering-loss rules

For transactions treated as wagering, evaluate the new 90% loss-deduction limitation and the applicable itemization requirements.

10. How to Report Polymarket Taxes

Polymarket traders may face additional recordkeeping challenges because cryptocurrency transactions and decentralized trading activity can involve on-chain and platform-level records.

The international Polymarket product and Polymarket US should not automatically be treated as identical for tax analysis. Product terms, contract structures, transaction records, and access arrangements may differ.

The Commodity Futures Trading Commission's designated contract market records identify Polymarket US as a designated contract market. However, regulatory status alone does not establish the tax classification of every contract.

Step 1: Export your transaction records

Collect your available Polymarket trading history, including contract purchases and sales, settlement proceeds, trading fees, wallet addresses, relevant transaction hashes, deposits, and withdrawals.

Step 2: Reconcile the cryptocurrency activity

Compare platform records with the relevant blockchain activity. Identify transfers, trades, contract purchases, and settlements. Avoid treating every wallet movement as a new taxable transaction; determine whether it represents a self-transfer, a funding movement, or a disposal.

Step 3: Calculate contract-level results

Calculate the result of each relevant contract under the appropriate tax method. If the records contain partial sales, multiple purchases, or unsettled positions, retain enough detail to support the calculations.

Step 4: Review USDC transactions separately

Determine whether using, selling, or exchanging USDC created a taxable disposition. Review the adjusted cost basis and fair market value at the time of each relevant transaction.

Step 5: Report the results under the applicable rules

Prepare the necessary tax calculations and forms once the contract classification and cryptocurrency consequences have been assessed.

11. What If the Prediction Market Platform Does Not Provide a Tax Form?

A missing Form 1099-B or other tax statement does not automatically mean that a transaction is tax-free or that no reporting is required.

The IRS generally requires taxpayers to report taxable transactions even when they do not receive an information return. Its digital asset guidance explains recordkeeping and reporting obligations associated with taxable digital asset transactions.

Traders should maintain their own records containing:

·       Platform and contract names.

·       Dates and quantities of purchases, sales, and settlements.

·       Purchase costs and settlement proceeds.

·       Fees and other relevant transaction costs.

·       Cryptocurrency cost basis and fair market value at the time of disposal.

·       Wallet addresses and transaction hashes, where applicable.

·       Year-end open positions and any relevant valuation information.

For cryptocurrency-based trading, the records should also allow the trader to trace funding transactions and distinguish cryptocurrency gains or losses from contract-level results.

Keeping a clear audit trail makes it easier to explain the calculations if the IRS requests supporting documentation.

12. Prediction Market Platforms Available in the United States

Prediction market products are offered through dedicated exchanges, brokerages, cryptocurrency platforms, and other services. Their availability, eligibility requirements, and regulatory status may vary by product and jurisdiction.

Kalshi

Offers event contracts across categories such as politics, economics, sports, and financial markets. Tax reporting should be assessed at the contract level.

Polymarket

Offers prediction markets on real-world events. Cryptocurrency-funded activity may require additional reconciliation and digital asset tax analysis.

ForecastEx

Provides event contracts through its exchange structure. Traders should review the applicable contract and account documentation.

Robinhood

Has offered event-contract access through exchange partnerships. Availability and reporting details depend on the product and applicable terms.

Interactive Brokers

Provides access to various financial products, including event contracts through relevant exchange arrangements.

Other services, including Crypto.com, NinjaTrader, Webull, PredictIt, and the Iowa Electronic Markets, may be relevant to specific users or product categories. Their offerings and operating conditions can change.

Before trading, verify the current product availability, applicable state restrictions, eligibility requirements, and official platform documentation.

Remember: A platform's name or regulatory status does not, by itself, determine the tax treatment of your transactions.

13. What Records Should Prediction Market Traders Keep?

Accurate records are particularly important when a trader uses multiple platforms, trades frequently, or funds positions with cryptocurrency.

·       Download complete transaction histories from every platform.

·       Record purchases, sales, settlements, and contract identifiers.

·       Track trading fees and other eligible transaction costs.

·       Reconcile deposits, withdrawals, and wallet transfers.

·       Calculate cryptocurrency cost basis and disposal values.

·       Identify positions that remained open at year-end.

·       Determine the applicable tax classification for each contract type.

·       Retain tax statements, transaction exports, and supporting evidence.

A consistent recordkeeping process can help traders identify missing data, prevent duplicate transactions, and support the figures reported on their tax returns.

14. Frequently Asked Questions About Prediction Market Taxes

Are prediction market winnings taxable in the U.S.?

They may be. The tax treatment depends on the contract and applicable federal tax rules. Traders should not assume that winnings are tax-free simply because a platform does not issue a tax form.

Do I have to pay taxes on Polymarket profits?

Polymarket profits may create U.S. federal tax obligations. Traders should assess the treatment of their event contracts separately from any taxable cryptocurrency disposals associated with funding or trading them.

Are Kalshi profits considered capital gains?

Not automatically. The appropriate classification depends on the particular contract and applicable law. Trading through a regulated platform does not, by itself, establish capital-gains treatment.

Do prediction market contracts qualify for Section 1256?

Some contracts may warrant a Section 1256 analysis, but eligibility must be established under the statutory requirements. Traders should not assume that all contracts on a particular platform qualify.

Can I deduct prediction market losses?

Potentially, but the rules differ by classification. Capital losses are subject to capital-loss limitations, Section 1256 losses have their own rules, and wagering losses are subject to wagering-specific restrictions, including the 90% deduction limitation beginning in 2026.

Do I need to report prediction market transactions if I did not receive Form 1099?

A missing information return does not automatically remove a reporting obligation. Taxable transactions generally still need to be reported under the applicable rules.

Is using USDC on Polymarket a taxable event?

Using USDC may constitute a taxable disposition of a digital asset. The outcome depends on the transaction and the asset's adjusted basis and value at the time. The event-contract result must also be analyzed separately.

Which tax forms should I use for prediction market trading?

Depending on the classification, relevant forms may include Form 8949, Schedule D, Form 6781, Form 1040, Schedule 1, and Schedule A. The correct forms depend on the nature of the transactions and the applicable rules.

Do prediction market taxes differ by state?

Yes, state tax treatment and regulatory restrictions may differ. This guide focuses on U.S. federal taxation, so traders should also check the rules applicable to their state of residence.

15. How Bitcounts Can Help With Crypto Tax Reconciliation

Prediction market tax reporting can become complicated when a trader uses several platforms, funds positions with USDC, or has incomplete transaction records.

At Bitcounts, we help crypto investors and traders organize complex digital asset activity, reconcile transaction histories, investigate missing cost basis, and prepare accurate records for tax reporting.

Our services can be particularly useful when you need help with:

·       Reconciling cryptocurrency wallets and exchange accounts.

·       Reviewing USDC and other stablecoin transactions.

·       Identifying missing or inconsistent transaction data.

·       Reconstructing cost basis and calculating digital asset gains and losses.

·       Preparing organized transaction records for your tax professional.

If you trade prediction markets alongside other cryptocurrency assets, reviewing the full transaction history can help identify issues that a platform-level statement may not capture.

Explore our Crypto Tax services at https://bitcounts.org/ or contact Bitcounts to discuss your reconciliation requirements.

Final Thoughts

Prediction market taxes involve more than calculating the difference between the amount paid for a contract and the amount received at settlement.

Traders need to consider the legal and tax classification of their contracts, the treatment of losses, any applicable Section 1256 rules, and separate cryptocurrency transactions. The 2026 limitation on wagering-loss deductions makes this analysis especially important for transactions that fall within the wagering rules.

The most reliable approach is to maintain complete transaction records, evaluate the tax treatment of each relevant transaction, and seek professional advice where the classification is uncertain.

Disclaimer: This article is for general educational purposes only and does not constitute tax, legal, or financial advice. U.S. federal and state tax rules may change, and the treatment of prediction market contracts depends on the facts and applicable law. Consult a qualified tax professional regarding your specific circumstances.