Prediction Market Taxes: Complete Guide for US Traders (2026)
April 12, 2026 · PolyMath Team · 12 min read
Disclaimer
This article is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional for advice specific to your situation.
Prediction markets are a new enough category that many traders don't think about taxes until tax season — and then scramble. This guide covers what US traders need to know about reporting Polymarket and Kalshi income in 2026.
The Short Answer
Yes, prediction market winnings are taxable in the United States.
The IRS treats gambling and speculative trading winnings as income. Whether your profits from Polymarket or Kalshi qualify as gambling income, ordinary income, or capital gains depends on the platform structure — but in all cases, they're taxable.
Kalshi: The Clearest Case
Kalshi is a CFTC-regulated futures exchange — the first of its kind in the US for event contracts. This gives it the clearest regulatory treatment of any prediction market.
Tax classification: likely Section 1256 contracts
• 60% of gains taxed as long-term capital gains
• 40% of gains taxed as short-term capital gains
• This blended rate is typically lower than ordinary income tax rates
• Mark-to-market accounting: You report gains/losses at year-end on open positions, not just closed ones
Form 1099
Kalshi is required to issue a 1099 for US taxpayers. Check your Kalshi account under Settings → Tax Documents before filing.
The 7% fee
Kalshi's profit fee reduces your taxable gain — the fee comes out before you receive proceeds, so your taxable amount is already net of fees.
Important caveat
Section 1256 treatment for prediction market contracts is not definitively settled law. The IRS hasn't issued specific guidance on Kalshi. A tax professional familiar with derivatives/futures is worth consulting if you have significant gains.
Polymarket: More Complicated
Polymarket uses USDC (a crypto stablecoin) and operates via smart contracts on the Polygon blockchain. This creates additional tax complexity.
Tax classification options (currently unsettled):
Option 1 — Gambling income
If Polymarket is treated like a sportsbook, winnings would be ordinary income. Losses are deductible only as itemized deductions (subject to limits), not dollar-for-dollar against winnings.
Option 2 — Capital gains
If contracts are treated as property (since USDC is a crypto asset), gains/losses may be capital gains. Short-term rates apply (ordinary income rates) for contracts held under a year.
Option 3 — Ordinary income from speculation
The catch-all bucket — taxable as ordinary income.
The USDC complication
Converting USDC to/from USD, or using USDC to buy market contracts, may itself trigger taxable events depending on your USDC cost basis. Crypto tax rules apply to the USDC layer. Additionally, Polymarket doesn't issue US tax documents — you're responsible for self-reporting from your on-chain transaction history.
How to Track Your Activity
The IRS expects you to report all income. The burden of proof falls on you.
For Kalshi:
1. Download your transaction history from Settings → Export
2. Kalshi issues a 1099-B for US taxpayers (check your account each January)
3. Report on Schedule D or Form 6781 (Section 1256 contracts)
For Polymarket:
1. Export your transaction history from your Polymarket account
2. Use a crypto tax tool (Koinly, CoinTracker, TaxBit) to import Polygon wallet transactions
3. Your Polygon wallet address is your complete on-chain record
4. Report on Schedule D
General record-keeping best practices
• Track every deposit, withdrawal, and trade
• Note your cost basis on every entry (what you paid per share)
• Record the date of each transaction
• Keep records for at least 7 years (IRS standard)
Deducting Losses
Kalshi (Section 1256)
Losses can be carried back 3 years or forward indefinitely against Section 1256 gains. You can also deduct losses against ordinary income (up to $3,000/year for individuals, with the rest carried forward).
Polymarket / gambling losses
If treated as gambling, losses are deductible only to the extent of winnings, and only if you itemize deductions. You cannot net losses against other income.
Estimated Quarterly Taxes
If you're profitable, you may owe estimated quarterly taxes to avoid underpayment penalties. The IRS requires quarterly estimated payments if you expect to owe $1,000+ in taxes for the year.
Q1
April 15
Q2
June 15
Q3
September 15
Q4
January 15 (following year)
The Professional Trader Question
If prediction market trading is your primary occupation, you may qualify as a professional trader, which changes your tax treatment significantly:
Trading losses become fully deductible as business expenses
You can deduct trading-related expenses (tools, subscriptions, data feeds)
But you're also subject to self-employment tax on net profits
The threshold for “professional trader” status involves regularity, continuity, and trading as a primary income source. This is a meaningful category for full-time traders but requires careful documentation and usually a CPA consultation.
State Taxes
Most states follow federal treatment for income. A few notes:
Nevada
No state income tax
Florida
No state income tax
California
High income tax rates (up to 13.3%) — no special treatment for capital gains
Platform Summary
| Platform | Tax Classification | 1099 Issued | Best Action |
|---|---|---|---|
| Kalshi | Likely Section 1256 futures | Yes (1099-B) | Review 1099, use Form 6781 |
| Polymarket | Unclear (gambling or capital gains) | No | Export tx history, use crypto tax tool |
What to Do Right Now
Export all transaction histories from Kalshi and Polymarket immediately
Download your crypto wallet history from Polygonscan if you use Polymarket
Calculate your approximate net P&L for the current and prior tax years
Consult a CPA familiar with crypto/derivatives if your gains are meaningful
Use PolyMath's Portfolio Tracker going forward to log all positions and calculate P&L automatically
The tax complexity is manageable if you track as you go. It becomes a significant headache if you reconstruct retroactively.
Track Your P&L Automatically
PolyMath's Portfolio Tracker logs every position and calculates your P&L in real time — so your records are always ready when tax time comes.
Want to go deeper on the trading side? Read our guide on Polymarket trading strategy or learn about how to win on Kalshi including the 7% fee math.
Last updated: April 2026. Tax law changes frequently — verify current rules with the IRS website or a qualified tax professional.
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