How Are Prediction Markets Taxed? A Plain-English Guide

Prediction market taxation has one settled answer and one open question. Settled: every dollar of prediction market winnings you clear on Kalshi, Polymarket, or Robinhood is taxable income, form or no form. Each resolution is a taxable event. Open: how that income gets characterized, which decides your tax rate and what happens to your losses.

The IRS has issued no guidance on event contracts. No revenue ruling, no notice, no FAQ. In that silence, tax professionals choose among three treatments, and each one uses different tax forms, different rates, and different loss rules. On identical trades the spread between them is not small.

This guide walks all three, prices them, names which venues send 1099 forms, and says what records survive an audit. No jargon, no hype.

Are Prediction Markets Taxable? What the IRS Has and Hasn't Said

Yes. The IRS treats prediction market income as taxable whether your prediction market profits came to $80 or $80,000, and no reporting threshold exempts small gains. What the IRS has not done is say which rules apply.

That gap is the subject of this page. Kalshi calls its products event contracts, and prediction market contracts are what the Internal Revenue Code has never named. The CFTC regulates them as derivatives. Most traders experience them as bets. Those three descriptions pull toward three different places in the tax code, and until Treasury speaks, your filing position is a judgment call you have to be able to defend.

Taxes on Prediction Markets: Reporting Is Settled, Characterization Isn't

Separate the two questions and the confusion clears. Reporting is not optional. Taxable income is taxable income, and a missing 1099 changes nothing about your obligation. Characterization is where the real money sits, because it determines your rate, your tax forms, and whether a loss can offset anything at all.

Three candidate treatments are in play:

• Gambling. Gambling income is taxed at ordinary rates, gambling losses are an itemized deduction on Schedule A, and traders who do not itemize deduct nothing.
• Capital gains. The contract is a capital asset. Gains and losses land on Form 8949 and Schedule D, and a net capital loss offsets up to $3,000 of other income.
• Section 1256. Contracts get the 60/40 split, year-end mark-to-market, and a loss carryback that no other treatment offers.

The characterization question stays unsettled, and prediction market traders carry the consequence. We argue it in full in our guide on prediction markets taxed as gambling.

Why Event Contracts Still Have No IRS Guidance in 2026

Neither the IRS nor Treasury has published a position on event contracts. The regulatory record runs the other way: Kalshi operates as a CFTC-designated contract market, and the Commodity Futures Trading Commission supervises it as a futures exchange, not a sportsbook. That regulatory status is an argument, not a ruling.

Meanwhile the wrong answers circulate freely among prediction market platforms and their users. The most common one, that no form means nothing to report, is also the most expensive. We collected the rest in what bettors get wrong about taxes.

Prediction Market Tax Treatment: Gambling, Capital Gains, or Section 1256?

Every filing position starts here. The three treatments are not interchangeable labels on the same number; they produce genuinely different tax bills from identical trading. Each is laid out below with the forms it uses and the trap it carries. Read them in order. Gambling treatment is the worst 2026 outcome for most traders. Capital gains is the common practitioner default. Section 1256 is the favorable position, and the one carrying the most audit risk.

Gambling Treatment and the OBBBA 90% Wagering-Loss Limit

Under gambling treatment your winnings are ordinary income and your losses are deductible only as itemized deductions, capped at winnings. If you take the standard deduction, you deduct nothing. Then the One Big Beautiful Bill Act made it worse.

1. Starting in tax year 2026, OBBBA amends IRC Section 165(d) to cap the wagering loss deduction at 90% of losses.
2. Win $100,000 and lose $100,000 and you have broken even economically.
3. The 90% cap lets you deduct $90,000, leaving $10,000 of taxable income you never earned.

That is phantom income, and it is the single strongest reason to care about characterization. The mechanics are in our guide to the OBBBA 90% gambling-loss limit.

Capital Gains Treatment: Form 8949, Schedule D, and the $3,000 Offset

Treat the contract as a capital asset and the machinery is familiar. You bought at a price, you sold or the market resolved, and the difference is a gain or loss reported on Form 8949, then carried to Schedule D on your Form 1040. Nearly every event contract resolves inside a year, so nearly every payout is a short-term capital gain taxed at your ordinary income rate, reported on your tax return.

The loss side is the appeal. Losses offset gains dollar for dollar, and a net capital loss deducts up to $3,000 against other income each year under Section 1211(b), with the remainder carried forward indefinitely under Section 1212(b). Most tax software lands here. So do most CPAs, and it is defensible without a disclosure form.

Section 1256 Treatment: the 60/40 Rule, Mark-to-Market, and Form 6781

Section 1256 is the favorable case and the aggressive one. Contracts that qualify get a 60/40 split: 60% of the gain counts as a long-term capital gain and 40% as short-term, regardless of holding period. Open positions are marked to market on December 31 at fair market value, so unrealized gains count that year. Reporting runs through Form 6781, which flows to Schedule D.

The catch is qualification. Section 1256 lists specific instruments, mostly regulated futures contracts on a qualified board or exchange, and event contracts are not named. Practitioners taking this position commonly attach Form 8275 to disclose it. We treat it as the aggressive end of a range, and the IRS could disagree later, including for years already filed.

Our full breakdown of the Section 1256 60/40 rule shows the arithmetic bracket by bracket.

Prediction Market Tax Rate: What Each Treatment Actually Costs You

There is no single prediction market tax rate, and no single answer on prediction market taxes. Your rate is a function of your tax bracket and the treatment you file under, and the gap between the best and worst case on the same trades routinely runs several thousand dollars. Below is how the arithmetic works. Figures are illustrative, and this page is not tax advice.

Ordinary Income Rates vs. the 60/40 Blended Rate by Bracket

Ordinary income rates run 10% to 37%. Short-term capital gains use those same rates. The 60/40 blend moves 60% of the gain to long-term capital gains rates, which top out at 20%. Our worked example on a $10,000 gain for a top-bracket trader:

• Section 1256: 60% at 20% plus 40% at 37% comes to roughly $2,680.
• Ordinary income or gambling: the full $10,000 at 37%, roughly $3,700.
• Fully short-term capital: also roughly $3,700, since short-term rates are ordinary rates.

The wider the gap between your ordinary rate and the long-term rate, the more the split saves, which is why higher earners benefit most. Holding period does not enter into it. Section 1256 net gains and losses are also exempt from the wash sale rules of Section 1091, and this estimate ignores state taxes and the net investment income tax. If you finished the year up, the numbers are worked out for profitable traders.

How Losses Work: the $3,000 Offset, Carryforward, and the Section 1212(c) Carryback

A losing year is where the treatments diverge most. Under gambling rules a loss can vanish entirely. Under capital treatment it offsets gains, then $3,000 of ordinary income, then carries forward. Under Section 1256, IRC Section 1212(c) adds a third path: prediction market losses carried back three years against prior Section 1256 gains, with those returns amended for a refund. The carryback only offsets prior Section 1256 gains, and it cannot create or increase a net operating loss.

We model all three paths and apply whichever pays more. A loss in a year with no gains does not disappear, which is the belief that costs traders the most money. Our guide on prediction market losses walks the full treatment.

How Kalshi, Polymarket, and Robinhood Are Taxed Differently

The treatment argument is federal and venue-agnostic. The paperwork is not. Regulation, settlement currency, and reporting practice vary by platform, and that decides how much reconstruction work lands on you. Two positions, identical profit, wildly different filing labor.

CFTC Regulation, Settlement, and Which Venues Send 1099 Tax Forms

Kalshi runs as a CFTC-regulated DCM and settles in dollars, which is the cleanest case and the strongest Section 1256 argument. Kalshi does send tax forms, just not for your trading: a 1099-INT for interest on cash balances, a 1099-MISC for referral credits and rewards, and a limited 1099-B or 1099-DA tied to crypto transfers. None of them reports your event contract profit or loss.

Polymarket settles in USDC on Polygon, so every trade is also a crypto disposal. Do not expect a form there either. Form 1099-DA reporting began with transactions on or after January 1, 2025, but the final regulations reach custodial brokers only, and decentralized or non-custodial platforms sit outside them.

Estimate a Polymarket year before filing season: the Polymarket tax calculator runs without a sign-up. For the Kalshi-specific reporting picture, see are Kalshi winnings taxable.

Robinhood Derivatives, PredictIt, ForecastEx, and Newer Venues

Robinhood prediction market activity runs through Robinhood Derivatives, with contracts cleared on Kalshi's exchange. Robinhood has stated it will not provide 1099s for event contract trades. It sends an Event Contracts Annual Statement instead, which it labels "not a substitute tax reporting form," and nothing about event contracts reaches your consolidated 1099. PredictIt and ForecastEx have issued Form 1099-MISC. Crypto.com, FanDuel, and DraftKings each entered the category with their own reporting practice, and several have published none.

The rule of thumb holds across all of them: the venue's paperwork does not settle your event contract tax treatment. Your records do.

Prediction Market Tax Reporting: Which Tax Forms Arrive and What to Keep

Prediction market tax reporting is mostly a records problem wearing a rules problem's clothes. Prediction market traders file with numbers nobody hands them. Whichever treatment you choose, you file with numbers you assembled yourself, from a trade history you exported before the venue changed its format. Build the file during the year, not in April.

Cost Basis, Fills, and the December 31 Mark: Records That Survive an Audit

Your transaction history has to reconstruct every position. The IRS period of limitations runs three years in the ordinary case and six if you omit more than 25% of your gross income, so monthly exports and a three-year floor are the working minimum. A carryback reaches three years back, which sets the same bar.

1. Date, market, and contract description for every fill.
2. Cost basis, proceeds, fees, and net result per lot.
3. The December 31 fair market value of anything still open.

That last line is the one traders lose. Venue exports rebuild what closed. They do not tell you what an open contract was worth on the final trading day, and mark-to-market needs exactly that.

Realize pulls your full trade history, this year and the prior three, and reconciles it year by year including the open positions mark-to-market would touch. We tested six mainstream tax tools: TurboTax, H&R Block, FreeTaxUSA, TaxSlayer, CoinTracker, and Koinly. None of them recognizes a prediction market. More on method in how to track your prediction market trades.

Amending a Prior Year With Form 1040-X and Your CPA

A carryback runs through an amended return. You file Form 1040-X for each prior year the loss reaches, recompute that year's Section 1256 gain, and claim the refund. Three years back is the limit.

Talk to a CPA or another tax professional before you file an aggressive position, and give them the trade-level file rather than a summary.

Realize is a software tool, not a CPA firm or a registered tax preparer, and we will never e-file on your behalf.

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

Prediction market taxation has one settled answer (yes, it's taxable) and one open question (how). Three treatments are in play: gambling (the worst 2026 outcome for most traders), capital gains (the common practitioner default), and Section 1256 (favorable but aggressive). Each uses different forms, rates, and loss rules, and the gap between them routinely runs several thousand dollars on identical trades. 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.