Prediction Market Taxes: What You Need to Know in 2026

Prediction market winnings are taxable in the United States. This is true regardless of which platform you use, whether or not you receive a 1099 form, and regardless of the amount. Failing to report prediction market income is tax evasion — and the IRS has been increasingly focused on digital financial products.

This guide explains the current state of prediction market tax treatment. It is educational, not tax advice. Consult a qualified tax professional for advice specific to your situation.

Are prediction market profits ordinary income or capital gains?

This depends on how the contracts are classified. There are two main scenarios:

Section 1256 contracts (CFTC-regulated platforms)

Event contracts traded on CFTC-registered Designated Contract Markets — like Kalshi — may qualify as Section 1256 contracts under the Internal Revenue Code. Section 1256 treatment has two significant benefits:

• 60/40 rule: 60% of gains are taxed as long-term capital gains regardless of how long you held the contract; 40% are taxed as short-term capital gains.
• Mark-to-market accounting: positions are treated as if sold on December 31st each year, which can simplify record-keeping.

The long-term capital gains rate (0%, 15%, or 20% depending on income) is typically lower than the ordinary income rate. The 60/40 split means that even trades held for one day get partial long-term treatment — a meaningful tax advantage.

Important caveat: whether a specific event contract qualifies as a Section 1256 contract is not always clear-cut. The IRS has not issued definitive guidance on prediction market contracts specifically. Some tax professionals argue they qualify; others disagree. This is an area where a tax professional's judgment matters.

Ordinary income (non-CFTC platforms)

Winnings on non-CFTC-regulated platforms — sweepstakes models like Underdog, sports-specific exchanges operating under state law, and some crypto platforms — are more likely to be treated as ordinary income, similar to gambling winnings.

Gambling winnings are reported on Schedule 1 (Form 1040). You can deduct gambling losses up to the amount of your winnings, but only if you itemize deductions — not if you take the standard deduction. This means many casual traders cannot deduct any losses.

What records should you keep?

Whether or not you receive a 1099, you are responsible for reporting your gains. Keep:

• Transaction history from the platform: date, contract name, buy price, sell price or resolution price
• Net profit or loss per trade
• Total deposits and withdrawals for the year
• Any 1099 forms issued by the platform
• Wallet transaction records if using a crypto-based platform

Most CFTC-regulated platforms provide annual account statements you can download. Download these at year-end before they cycle off the platform or become harder to access.

Do platforms issue 1099s?

Kalshi and other regulated platforms issue 1099-B forms (proceeds from brokerage transactions) to users above certain thresholds. The exact threshold and form type varies by platform and is subject to IRS guidance changes.

Receiving a 1099 does not mean the platform has calculated your taxes correctly — it just reports gross proceeds. You are still responsible for calculating your actual gains and losses.

Not receiving a 1099 does not mean you don't owe taxes. The reporting threshold for 1099 forms is not the same as the threshold for taxable income — all profits are taxable regardless of whether a form is issued.

Crypto platforms and additional complexity

Trading on Polymarket using USDC adds a layer of tax complexity. The IRS treats cryptocurrency as property. This means:

• Converting USD to USDC to fund your Polymarket account may be a taxable event if your USDC was acquired at a different price than its current value.
• Each trade on Polymarket may involve cryptocurrency disposals — each of which is potentially a taxable event.
• Converting USDC back to USD at withdrawal is another potential taxable event.

In practice, USDC is a stablecoin designed to maintain a $1.00 peg, so gains from USD/USDC conversion are usually negligible. But technical taxable events can still create reporting obligations and complications if the IRS ever audits your crypto activity.

Using crypto tax software (Koinly, CoinTracker, TaxBit) can help track on-chain transactions and generate tax reports for Polymarket activity.

State taxes

If you live in a state with income tax, prediction market profits are generally taxable at the state level as well. State tax treatment follows the federal classification in most states. There is no state that specifically exempts prediction market winnings.

What if I had net losses?

If your prediction market trading resulted in a net loss for the year, the treatment depends on the contract classification. Under Section 1256, net losses can be carried back up to 3 years or carried forward, which can generate refunds on previously paid taxes in some cases.

For ordinary income treatment, losses can only offset other gambling winnings — not other income — and only if you itemize. This makes ordinary-income-classified losses substantially less valuable as a tax asset.

The practical takeaway

Keep records of every trade from the start. Set aside a portion of your winnings to cover taxes — 20–30% is a reasonable placeholder depending on your income bracket and state. File accurately.

If your trading volume is significant, consult a CPA or tax attorney who is familiar with derivatives and ideally with prediction markets specifically. The classification questions are genuinely unsettled, and getting the wrong answer costs money.

This guide reflects the state of understanding as of 2026. Tax law changes, IRS guidance evolves, and the specific facts of your situation matter. Nothing here is tax advice.