Taxes on Prediction Market Winnings: What US Traders Need to Know

Here's the uncomfortable truth about prediction market taxes in 2026: everyone agrees you owe them, and nobody official has said exactly how. This guide explains the options, the rules that changed in 2026, and the records you'll need — so your tax preparer can make the call.

This is general information for US taxpayers, not tax advice. Rules may change; please consult a CPA or enrolled agent, ideally one who knows derivatives or crypto.

Yes, it's taxable

Profits from trading event contracts on Kalshi, Polymarket, Robinhood or anywhere else are income. Not receiving a complete tax form doesn't change that — reporting income is your responsibility, not the platform's.^[1]

The four competing treatments

As of October 2026, we haven't found IRS guidance written specifically for event contracts.^[1] Tax professionals argue for one of four approaches.^[2] These aren't a menu you pick from freely: the right treatment depends on what the contract legally is and on your own circumstances, and some approaches are much harder to defend than others.

Each has a big impact. A trader with $20,000 of winnings and $18,000 of losses might owe tax on $2,000 under capital treatment — or considerably more under gambling treatment if they don't itemise or hit the 90% cap.

Worked example: $10,000 of net profit, 37% bracket

Before the 3.8% net investment income tax and state tax, which may apply. The gap is why the classification question matters — and why an aggressive choice needs professional backing.

The 90% gambling loss cap

The 2025 federal tax law (often called the "One Big Beautiful Bill") changed the deduction for wagering losses from 100% of losses (up to winnings) to 90%, starting with the 2026 tax year.^[4] Win $10,000 and lose $10,000, and you could still owe tax on $1,000.

If your prediction market activity is treated as gambling, this cap may apply. If it's treated as capital or Section 1256 trading, it doesn't — which is one reason the classification question matters so much in 2026. Bills to restore the 100% deduction had been proposed but not passed at the time of writing.

What about Polymarket's crypto site?

Trades on Polymarket's original international site happened on-chain with USDC. Many advisers treat those as digital-asset transactions, reported on Form 8949, with every trade potentially a taxable event.^[3] The regulated Polymarket US app works in dollars, like Kalshi. (US residents shouldn't be using the international site anyway — see how to use Polymarket from the US.)

Forms you might receive

Platforms send different documents, and reports disagree on how complete they are:

The federal threshold for Form 1099-MISC rose from $600 to $2,000 for payments made in 2026. No form doesn't mean no tax, and no platform gives trade-level cost basis the way a stock broker's 1099-B does — so download your full trade history.

How to work out your profit

For each closed trade: (sell or settlement price − buy price) × contracts − fees.

Losing trades are recorded the same way, as negative numbers. A simple spreadsheet per platform, updated weekly, is enough for most traders.

Record-keeping checklist

1. Export every trade (date, market, side, quantity, price, fees) from each platform, every year.
2. Track deposits and withdrawals separately from profits.
3. Keep fee records — they reduce your gain under most treatments.
4. Note bonuses and promotional credits, which may be taxable when received.
5. Keep state rules in mind — most states tax this income too.
6. Choose a treatment with a professional and apply it consistently.

Estimate your tax

To see how much the four treatments differ on your own numbers, use the prediction market tax calculator.

State taxes

Most states with an income tax follow the federal figure. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming don't tax ordinary income. Some states may not follow federal Section 1256 treatment, and states fighting sports contracts could argue those profits are gambling winnings.

When to get professional help

• Net profits of more than a few thousand dollars in a year.
• You're considering capital-gains or Section 1256 treatment.
• Large losses you want to deduct.
• Any trading on crypto-funded platforms.
• Hundreds of trades a year (trader tax status may come up).

Look for a CPA or enrolled agent with derivatives or crypto experience.

The bottom line

Prediction market profits are taxable, the classification is unsettled, and 2026's 90% cap on gambling losses raises the stakes. Keep meticulous records and get professional advice before filing. And remember the cheapest tax bill is the one on money you didn't lose: keep stakes modest and costs low with our fees guide.