Are Prediction Market Losses Tax Deductible? What You Can Claim

Post a losing year on an event contract venue and someone will tell you the money is gone. That advice is wrong in a specific, fixable way. It applies the wagering rules to an instrument that most likely is not a wager.

Under capital treatment, a net loss is an asset. It offsets capital gains, cuts taxable income, and under Section 1256 reaches back into filed returns. Realize built the Tax Center around that gap, because the default answer costs traders real refunds. Loss treatment, not the rate, is where prediction market taxes actually get decided.

The difference is not small. Under capital treatment a $10,000 net loss offsets capital gains dollar for dollar, then reduces ordinary income by $3,000 a year under IRC §1211(b), about $720 back in the 24 percent bracket. Under gambling treatment the same $10,000 in a year with no winnings is worth nothing. Figures are illustrative.

Gambling Treatment vs. Your Tax Treatment: Why the IRS Hasn't Ruled

The IRS has issued no ruling, notice, or FAQ that classifies event contracts, so tax treatment follows from the instrument rather than from a form. That silence is why the gambling-versus-capital question matters more than any other decision on your return.

Gambling treatment caps wagering losses at wagering gains, requires you to itemize, and since 2026 allows only 90 percent of them. Zero gross winnings under that framework produces zero deduction. Capital treatment nets losses against gains first and does not care whether you itemize.

A casual gambler loses the deduction to the standard deduction; a professional gambler moves it to Schedule C and still meets the same loss limitation. Neither applies if the contract is not a wager.

Characterization is a conclusion drawn from facts, not a box you tick. Kalshi operates as a Designated Contract Market registered with the Commodity Futures Trading Commission. A DCM lists standardized contracts under federal oversight, and Kalshi's are commodity derivatives rather than sports wagers under the Internal Revenue Code. That distinction separates a prediction market tax deduction from gambling income on Schedule 1, Line 8z.

Realize computes your position under Section 1256 on that basis but does not assert that event contracts qualify: the IRS and the courts have not confirmed it, and could later disagree, including on filed years. Our filing strategy calculator puts all three treatments side by side in dollars, and our guide on what bettors get wrong about taxes walks through the misreadings that cost the most.

Capital Treatment: Why Deductible Losses Aren't Capped at Your Winnings

Capital treatment changes one thing that matters more than the rate: the ceiling. Wagering losses stop at gross winnings. Capital losses do not. A trader who lost $18,000 and won nothing still carries an $18,000 net capital loss into the netting rules, and that loss survives the year. Net capital losses are not forfeited for lack of a winning column.

Deductible losses under this framework offset short-term capital gains, then long-term capital gains, then up to $3,000 of ordinary income, then carry forward. Nothing is stranded. That single structural difference is why the characterization argument is worth having.

How Kalshi and Polymarket Contracts Reach Section 1256 Treatment

Section 1256 covers regulated futures contracts and a short list of related instruments. Kalshi lists event contracts on a CFTC-registered Designated Contract Market, the strongest structural argument available here. Polymarket's US venue runs through a CFTC-licensed exchange it acquired, and the economics are the same even though the argument is thinner. Robinhood routes event contracts through Kalshi's infrastructure, so the analysis follows Kalshi.

The Dodd-Frank swap exclusion is the live counterargument, and a trader taking the position can disclose it on Form 8275.

Qualifying contracts are marked to market at year end and taxed under the Section 1256 60/40 rule: 60 percent long-term, 40 percent short-term, regardless of holding period. On a losing year the 60/40 split still applies, and the mark to market on December 31 fixes the loss. That December 31 price is the figure venue exports cannot reconstruct after the fact, which is why year-end records have to be captured while the year is still open.

Realize is a software tool, not a CPA firm, a law firm, or a registered tax preparer.

Rebuilding Cost Basis and Net Profit Without a 1099-B

No prediction market venue issues a comprehensive 1099-B for event contract trades. Kalshi sends a 1099-INT for interest of $10 or more and a 1099-MISC for credits and rewards, a threshold that rose to $2,000 for 2026. Polymarket has issued no US tax forms. Robinhood provides an annual statement and states it is not a substitute tax form.

The reporting obligation is yours regardless of which tax forms arrive. Tax documents from a venue summarize trading activity; they do not determine characterization, and a 1099-DA covers digital assets rather than event contracts.

That leaves you rebuilding the file yourself. For every position you need:

1. Entry date, exit date, and the contract ticker
2. Cost basis, meaning what you actually paid per lot
3. Proceeds at settlement or sale
4. Fees, which reduce net profit
5. The December 31 mark on anything still open

Realize connects to Kalshi's and Polymarket US's official APIs in read mode, computes profit or loss contract by contract, and totals wins and losses net of fees for each tax year. Our guide on record-keeping for prediction market traders covers the manual version if you would rather build the trade history by hand.

The Three Paths a Net Capital Loss Can Take

A net capital loss does not pick one destination. It moves through an order set by statute, and Realize models all three paths, then applies whichever pays more. The order is fixed: gains first, then ordinary income, then time.

Most traders only ever hear about the middle step, which is why the $3,000 figure gets quoted as though it were the whole rule. It is the smallest of the three. Prediction market loss deductions get undersold because the loss deductions people describe are only ever step two.

Offset Capital Gains From Stocks and Other Trades

Losses from event contracts offset capital gains from anywhere else in your book. Sold a stock at a profit, closed a crypto position? The loss lands there first, dollar for dollar, with no cap.

Short-term capital losses hit short-term capital gains before long-term, and long-term works the reverse. Capital treatment requires a sale or exchange, or a Code provision that treats settlement as one, which is why how a position ends matters.

This is the path gambling treatment forecloses entirely. Wagering losses cannot touch a stock gain. If you finished the year up rather than down, our page for profitable traders covers the 60/40 repricing instead.

Deduct $3,000 Against Ordinary Income Each Year

Once the loss exhausts your capital gains, you offset ordinary income at $3,000 per year: wages, freelance income, interest. This is where you deduct prediction market losses against a paycheck. Married filing separately halves it to $1,500.

In the 24 percent tax bracket, this capital loss deduction cuts the tax bill by about $720 a year. Real money, slowly. Because it lands at your ordinary income rate, the higher your bracket, the more each dollar of loss returns, and traders who deduct losses this way should expect the benefit to stretch across several filings.

The limit is annual, not lifetime. A $30,000 excess loss releases $3,000 a year for a decade unless gains absorb it sooner.

Carry Losses Forward Indefinitely

Whatever survives both steps carries forward under Section 1212(b) with no expiration date. Section 1221 defines the capital asset, Section 1001 fixes the loss on disposition, Section 61 makes the income taxable at all.

The loss sits on your return and waits. Carried forward amounts keep their short-term or long-term character, and they apply against future capital gains before they touch ordinary income again. A brutal 2026 and a strong 2027? The carryforward gets used in full.

Three Years Back: The Loss Carryback Nobody Else Explains

Here is the provision that separates Section 1256 from every other framework. A net Section 1256 loss can be carried back three years under §1212(c), not only forward. You amend the prior returns. Apply the loss against Section 1256 gains reported in those years, and the IRS refunds the difference. A three-year carryback turns a losing year into a check rather than a slow drip against future income.

Ordinary income treatment offers no carryback. Gambling treatment offers neither carryback nor carryforward.

How the Net Section 1256 Contracts Loss Election Works on Form 6781

The mechanism is the net Section 1256 contracts loss election, made by checking Box D on Form 6781 and entering the amount on line 6. You elect it for the loss year, and the capital loss carryback runs to the earliest of the three prior years first, then forward through the remaining two. The loss can only offset Section 1256 gains in those years, and it keeps the 60/40 character on the way back.

Three constraints matter:

• The election cannot create or increase a net operating loss
• It only reaches years with reported Section 1256 gains
• It pays best after a strong prior year on the same venues

Realize is building Form 6781, Schedule D and Form 8949 output in time to file 2026 taxes.

Amending Prior Years With Form 1040-X to Claim a Refund

An amended return on Form 1040-X is how the refund usually arrives; Form 1045 is faster but must be filed within a year of the loss year ending. File one per prior year touched, attaching an amended Form 6781 and Schedule D. The 1040-X window is three years from the original filing date or two years from when you paid, whichever is later.

The paperwork is why most traders skip this. Three carryback years means three amended returns and a CPA billing $200 an hour on a question no software answers. Realize is building §1212(c) carryback and 1040-X prep for the 2026 filing season.

What Your Prediction Market Loss Is Worth in Real Dollars

A deductible loss is not an abstraction. What it returns depends on where it lands: dollar for dollar against capital gains, $3,000 a year against ordinary income, and against prior-year Section 1256 gains it comes back as a refund rather than a credit toward next April. Your bracket, your prior year gains, and your other capital gains all move the number.

State tax is out of scope here, and it moves fast. North Carolina had no state gambling loss deduction until Session Law 2026-41 created one in July 2026, retroactive to 2025. Prediction market winnings and losses can produce a different answer on your state return than your federal one, so check your state's current rule, not last year's.

From a Losing Year to a Federal Tax Refund, Traceable to the Trade

Realize computes your federal tax position from your losing trades and shows the work: every figure links back to the fill that produced it. Ordinary nonbusiness losses hit a wall at Section 67(h), another reason the capital and Section 1256 paths carry the argument.

That traceability is what a CPA needs on review, and the venue exports do not give it to you. The read-only connection cannot see your password, place trades, or move your money, and it is free forever for tracking. Characterization of event contracts remains unsettled, and we say so on every page that carries a dollar figure. See our tax disclaimer.

Estimates shown are illustrative. Confirm your position with a qualified tax professional.

How Realize helps

Realize connects to your accounts (read-only), pulls your full trade history, and organizes your gains and losses, including the year-end positions that mark-to-market would touch, into a clean, reconciled, year-by-year ledger. That gives you (or your CPA) the numbers needed to apply whatever treatment is correct and to fill out Form 6781 if it applies. Realize does the bookkeeping; the tax characterization is a decision you make with a professional.

For the bigger picture, see the Prediction Market Tax Center and our related guide on whether Kalshi winnings are taxable.

The bottom line

Under capital or Section 1256 treatment, prediction market losses are deductible and not capped at your winnings. They offset capital gains dollar for dollar, reduce ordinary income by $3,000 a year, carry forward indefinitely, and under Section 1256 can be carried back three years for a refund. That is why the characterization question matters more than the rate. Whether prediction-market event contracts qualify for Section 1256 is unsettled, so treat this as background, keep complete records, and confirm your own situation with a qualified tax professional (ideally a CPA) before filing.