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How you file prediction markets changes how much you keep.
Capital treatment taxes your net for the year. Wagering treatment taxes your gross winnings, then limits what you can deduct. Section 1256 splits a gain 60% long-term and 40% short-term regardless of holding period. Price your year the three common ways we see people file.
Did you make money?
Your winning turnover plus your losing turnover for the year, not the net.
Do you itemize?
It decides everything on the gambling side: wagering losses are a Schedule A deduction.
in tax on this activity
no tax, no benefit
no tax, no benefit
Figured for a single filer in the top federal bracket (37% ordinary, 20% long-term), so these are ceilings: a lower bracket means a smaller number in every column. A federal estimate, not a return. It ignores state tax, NIIT, and any other capital activity. See the assumptions.
Gambling (§165(d))
- Wagering losses are a Schedule A itemized deduction. Taking the standard deduction means none of these losses are deductible.
- This is tax on money you did not make.
Standard capital
- Contracts almost always settle inside a year, so a gain is short-term and taxed at your ordinary rate.
§1256 (60/40)
- 60% of the gain is taxed at the long-term rate and 40% at your ordinary rate, regardless of how long you held it.
- Whether event contracts qualify for §1256 is genuinely unsettled. This is the aggressive end of the spectrum.
What we assume, and where each number comes from
- What “how much did you trade” means here
- Your winning turnover plus your losing turnover for the year, not your net and not the total notional you cycled through. If you finished even having won $10,000 across your good days and lost $10,000 across your bad ones, that is $20,000. We split the figure you enter into gross winnings and gross losses, because those are the two numbers §165(d) actually operates on. It has to be at least as large as your net, since you cannot be down $20,000 having traded $5,000.
- Why gambling treatment can tax a break-even year
- Wagering winnings are gross income; wagering losses are a separate, limited deduction. They do not net first. For tax years beginning after 31 December 2025, §165(d) allows a deduction of 90% of your losses, and only to the extent of your winnings, so an even year leaves about 10% of your gross winnings taxable. And that deduction is an itemized deduction on Schedule A: take the standard deduction and it is worth nothing at all, and most filers take the standard deduction.
- Wagering losses do not carry forward
- Losses beyond your winnings go unused. There is no carryforward and no carryback. That is why the gambling column shows no benefit from a losing year, however large the loss. Under capital treatment the same loss offsets capital gains in full, then up to $3,000 a year against ordinary income (§1211(b)), with the remainder carried forward indefinitely (§1212(b)).
- Why every figure says “up to”
- We do not ask what you earn. Instead we price everything for a single filer in the top federal bracket, 37% on ordinary income and 20% on long-term gains, which are the highest of each. That makes every number on this page a ceiling: a lower bracket produces a smaller figure in every column, never a larger one. Connect your account and Realize uses your real bracket.
- Why we show “this year” as well as the maximum
- A capital loss is worth its size times your ordinary rate, but the $3,000 annual cap (IRC §1211(b)) means a large one arrives over several returns rather than all at once. The total and the timing are different facts, so we show both rather than quoting a ceiling on its own.
- §1256 and standard capital match on a loss
- They use the same annual cap and the same carryforward, so the totals are identical and we do not invent a difference. What §1256 adds is the ability to carry a net loss back up to three years against prior §1256 gains (IRC §1212(c)), which can offset earlier gains now instead of spreading a deduction over years. On a gain §1256 does separate: 60% is taxed at the long-term rate and 40% at your ordinary rate, whatever the holding period. Read the full §1256 60/40 guide.
- There is no IRS guidance on these contracts
- The IRS has issued no guidance on prediction-market contracts. They trade on CFTC-designated contract markets, and the IRS has not said whether they are wagers, capital assets or Section 1256 contracts. Section 1256 splits a gain 60% long-term and 40% short-term regardless of holding period. Realize computes each route and does not pick one; the filer decides which route the return uses. How Realize checks its numbers.
- Federal only, at a single marginal rate
- We apply one flat marginal rate to the amount this activity adds, rather than re-running the full bracket ladder. This estimate ignores state tax, the net investment income tax (NIIT), the interaction between itemizing and the standard deduction, and any other capital activity you have. Married and head-of-household filers hit the top bracket at different income levels, and married filing separately halves the $3,000 annual cap to $1,500.
Gambling or trading, answered
There is no IRS guidance on event contracts, so the question is open. Kalshi and Polymarket US are CFTC-designated contract markets, which is the same reason they operate in states where sports betting is illegal, and why the age requirement is 18 rather than 21; people who report the contracts as capital point to that. People who report them as wagering treat a contract on an outcome as a bet. Of the people we’ve seen file, standard capital, Section 1256 and gambling are the three most common ways, and the calculator prices the same year under each.
Because the two treatments measure different things. Capital treatment taxes your net for the year. Wagering treatment under §165(d) taxes your gross winnings and then allows a separate, limited deduction for your losses. That means your total traded changes the wagering answer even when your net does not, which is how a break-even year can still produce a tax bill.
Under wagering treatment, yes. For 2026 only 90% of wagering losses are deductible, and only to the extent of winnings, so breaking even leaves roughly 10% of your gross winnings taxable. On top of that, the deduction is an itemized deduction on Schedule A: if you take the standard deduction it is worth nothing at all, and your gross winnings are taxable in full. Under capital treatment a break-even year produces no tax.
Wagering losses beyond your winnings do not carry forward. That amount cannot be used in another year. Under capital treatment a net loss offsets capital gains in full, then up to $3,000 a year against ordinary income under §1211(b), and anything left carries forward indefinitely under §1212(b).
On a loss they produce the same total, because both use the same $3,000 annual cap and carryforward. Section 1256 additionally allows a net loss to be carried back up to three years against prior Section 1256 gains under §1212(c). On a gain Section 1256 splits it 60% long-term and 40% short-term regardless of holding period. Whether event contracts qualify is unsettled, so the calculator shows the year both ways.
Price your year three common ways.
Your estimate is free. Forms for tax year 2026 open for filing in 2027.