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Filing prediction markets as gambling isn’t accurate, and it isn’t cheap.

Capital treatment taxes your net for the year. Wagering treatment taxes your gross winnings and then limits what you can deduct. That single difference is why you can break even and still owe tax. Price your year under all three treatments below.

Compare all three

$

Your winning turnover plus your losing turnover for the year, not the net.

$

It decides everything on the gambling side: wagering losses are a Schedule A deduction.

Gambling (§165(d))

Up to

-$3,700

in tax on this activity

  • 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

$0

no tax, no benefit

  • Contracts almost always settle inside a year, so a gain is short-term and taxed at your ordinary rate.

§1256 (60/40)

$0

no tax, no benefit

  • 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.

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, and Realize does not pick a route for you. See the assumptions. Not tax advice.

How we calculate

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, which is the larger of the two problems for most filers.
Wagering losses do not carry forward
Losses beyond your winnings are simply gone. 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. It is the honest way to skip the question rather than guess at an answer. 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 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 (§1212(c)), which can turn it into a refund now instead of a deduction spread 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.
It is a strong but unsettled position
The IRS has issued no guidance on prediction-market contracts. The argument against wagering treatment is that these trade on CFTC-designated contract markets, which is why they operate in states where sports betting is illegal. But §1256 in particular is the aggressive end of the spectrum, and the IRS could challenge it even for years already filed. Realize computes each route and never picks one for you. The final call is yours and your CPA’s.
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. It is not tax advice.

Gambling or trading, answered

Are prediction markets taxed as gambling?
There is no IRS guidance on event contracts, so nothing here is settled. The argument against gambling treatment is that 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. Most practitioners treat these as capital rather than wagering. The choice is yours and your CPA’s.
Why does the calculator ask how much I traded, not just my profit or loss?
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.
Can I really owe tax on a break-even year?
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. Worse, that 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.
What happens to my losses if I file as gambling?
Wagering losses beyond your winnings do not carry forward. That amount is permanently lost. 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).
What is the difference between Section 1256 and standard capital treatment?
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, which lowers the rate. Whether event contracts qualify for Section 1256 is genuinely unsettled and it is the aggressive end of the spectrum.

Important

Realize is a data tool, not a tax advisor, and gives no tax, legal, or financial advice. The figures on this page are illustrative and depend on your full return, prior-year filings, and IRS processing. Verify every figure and consult a tax professional before filing. State rules vary. See our full tax disclaimer.