Are Prediction Market Losses Tax Deductible? What You Can Claim

Gambling Treatment vs. Capital Treatment: No IRS Ruling

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 people file event contracts more than one way; the gambling-versus-capital question sets out what is cited on each side.

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 regulated as commodity derivatives, which is what people filing them as capital assets or Section 1256 contracts point to when they treat them as something other than wagers. That distinction separates a prediction market tax deduction from gambling income on Schedule 1, Line 8b.

Realize computes your position under each treatment, Section 1256 included, 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 common misreadings.

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

Capital treatment also changes 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. That is the structural difference from the gambling route, whose losses stop at the year's winnings.

What People Filing Kalshi and Polymarket Contracts Under Section 1256 Point To

Section 1256 covers regulated futures contracts and a short list of related instruments. Kalshi lists event contracts on a CFTC-registered Designated Contract Market, which people filing under Section 1256 read as meeting the exchange prong of the Section 1256 test. Polymarket US is run by QCX LLC, which the CFTC designated a contract market on July 9, 2025; the offshore polymarket.com is not that exchange. Robinhood routes event contracts through Kalshi's infrastructure, so the analysis follows Kalshi.

The swap exclusion in §1256(b)(2)(B) is the provision most often cited against it. Form 8275 is the IRS form for disclosing a position taken on a return.

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.

Rebuilding Cost Basis and Net Profit Without a 1099-B

As of October 25, 2026, none of Kalshi, Polymarket US or Robinhood has published that it issues a 1099-B for event contract trades. Kalshi's help center lists a 1099-INT, a 1099-MISC, a 1099-B for crypto transfers and a 1099-DA through ZeroHash, each only above an IRS threshold, and none is described as reporting event contract profit or loss. Kalshi's help article "How to add your Social Security Number" says it reports more than $10 of interest and more than $600 of incentive credits a year; the IRS line for the 1099-MISC is $2,000 for tax year 2026. Polymarket US, the CFTC-regulated exchange at polymarket.us, names no tax form in its documentation; its customer agreement mentions the 1099-B as a form delivered electronically. Robinhood says it provides no 1099 for event contract trades; its event contracts annual statement is, in its words, "not a substitute tax reporting 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 the Form 1099-DA instructions describe a form for sales of digital assets without naming 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. Plans and prices are on the pricing page.

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, in the order the statute sets. The order is fixed: gains first, then ordinary income, then time.

The $3,000 figure is the middle step, and it is often quoted as though it were the whole rule. It applies only to what is left after capital gains are offset.

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.

Gambling treatment has no equivalent step: wagering losses cannot offset 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 can cut the tax bill by about $720 a year. Because it lands at your ordinary income rate, the higher your bracket, the more each dollar of loss returns, and a large loss deducted this way spreads 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 can be used in full.

Three Years Back: The Section 1256 Loss Carryback

Section 1256 has a loss rule the other two routes do not. A net Section 1256 loss can be carried back three years under §1212(c), not only forward. Under Section 1256, the prior returns are amended and the loss applied against Section 1256 gains reported in those years, which may produce a refund. Where it applies, the carryback can produce a refund for a prior year rather than a deduction spread over later years.

Standard capital treatment carries a net loss forward only. Gambling treatment carries it neither back nor forward.

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
• Each prior year absorbs no more than its own net Section 1256 gain, and the rest moves to the next year

Realize builds Form 6781 and the transaction statement behind it, and Form 8949 for standard capital treatment, for the 2026 filing season. It does not produce Schedule D.

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

An amended return on Form 1040-X is how any refund usually arrives; Form 1045 is faster but must be filed within a year of the loss year ending. One Form 1045 covers every prior year touched; a Form 1040-X is one per year. Either way, attach an amended Form 6781 and Schedule D for each year. The 1040-X window is three years from the original filing date or two years from when you paid, whichever is later. The steps, form by form, are in how to amend a tax return for prediction market losses.

Each carryback year touched means its own amended return. Realize estimates §1212(c) carryback figures from your trades. The 1040-X itself is prepared by you or your preparer.

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 can come 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 What It May Be Worth, 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.

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. See our tax disclaimer.

Estimates shown are illustrative.

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 for whichever treatment you choose 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 against earlier Section 1256 gains. Under gambling treatment they offset only winnings, and only for those who itemize. Whether prediction-market event contracts qualify for Section 1256 is unsettled, and the IRS has issued no guidance on them.