How to Pay Taxes on Prediction Market Winnings: 2026 Guide

Yes, prediction market winnings are taxable in the United States. Every dollar of profit you earn on Polymarket, Kalshi, Robinhood, or any other prediction market platform must be reported to the IRS, regardless of whether you receive a 1099 form. With prediction market volume exceeding $200 billion in the past 12 months and the IRS increasing its focus on digital asset income, getting your tax obligations right has never been more important.

This guide breaks down every aspect of prediction market taxation for the 2026 tax year: how your gains are classified, what forms to file, how to handle losses, and what changed under new federal law.

Important: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax law is complex, and prediction market taxation remains an area of significant ambiguity. Consult a qualified tax professional for guidance on your specific situation.

Are Prediction Market Winnings Taxable?

The short answer is unambiguous: yes. Under IRC Section 61, all income from whatever source derived is taxable unless specifically excluded. Prediction market gains are not excluded. This applies whether you trade on a CFTC-regulated exchange like Kalshi, a crypto-native platform like Polymarket, or a brokerage like Robinhood.

The IRS does not care whether a platform sends you a 1099. The reporting obligation rests entirely with the taxpayer. As of April 2026, the IRS has issued zero formal guidance specifically addressing prediction market contracts -- no Revenue Ruling, no Private Letter Ruling, no FAQ update. That silence does not mean your gains are tax-free. It means the classification is uncertain, which is a very different problem.

In 2025, DCMs (Designated Contract Markets) certified approximately 1,600 event contracts for listing and trading, up from 131 in 2021. With Kalshi processing $23.8 billion in trading volume and Robinhood generating $100 million in annualized prediction market revenue, the IRS has every reason to pay attention. So should you.

The Three Possible Tax Treatments

Because the IRS has not issued specific guidance, tax practitioners generally identify three defensible approaches to classifying prediction market income. Each carries different tax rates, different reporting forms, and different rules for losses. Your choice of classification has real financial consequences.

1. Section 1256 Contracts (60/40 Rule)

This is the most tax-efficient treatment. Under Section 1256 of the Internal Revenue Code, qualifying contracts are marked to market at year-end and taxed under a blended rate: 60% of gains are treated as long-term capital gains and 40% as short-term capital gains, regardless of how long you actually held the position.

For a trader in the 37% federal bracket, this matters enormously. Long-term capital gains are taxed at a maximum of 20% (plus the 3.8% Net Investment Income Tax), while short-term gains are taxed at ordinary income rates up to 37%. The blended effective rate under Section 1256 is significantly lower than ordinary income treatment.

Example: You earn $50,000 in net prediction market profits.

Treatment	Tax Rate Breakdown	Approximate Federal Tax
Section 1256 (60/40)	60% at 20% + 40% at 37%	$13,400
Ordinary income	100% at 37%	$18,500
Gambling income	100% at 37% (with loss limits)	$18,500+

That is a $5,100 difference on the same $50,000, before accounting for the 3.8% NIIT or state taxes.

The catch: Section 1256 applies only to specifically enumerated instruments -- regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts. Prediction market event contracts are not expressly named in the statute. Whether they qualify depends on statutory interpretation that has not been tested in court or confirmed by the IRS.

Furthermore, the Dodd-Frank Act added Section 1256(b)(2)(B), which excludes certain swap contracts from Section 1256 treatment. If the CFTC classifies event contracts as swaps for regulatory purposes, this exclusion could disqualify them from the favorable 60/40 split -- even on a CFTC-regulated exchange like Kalshi.

Bottom line: Section 1256 treatment is the strongest argument for CFTC-regulated platforms (Kalshi, Robinhood event contracts), but it remains legally untested. If you take this position, be prepared to defend it.

2. Ordinary Income (Schedule 1, Line 8z)

The most conservative approach. You report your net prediction market profit as "Other Income" on Schedule 1, Line 8z of your Form 1040. Gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your bracket.

This approach is unlikely to be challenged by the IRS because it results in more tax, not less. Many CPAs recommend this as the safest filing position given the current regulatory ambiguity.

Net losses under this treatment may be deductible against other income, but the rules are less clear than under Section 1256 or capital gains treatment.

3. Gambling Income

If prediction market contracts are classified as gambling, your winnings are reported as "Other Income" (or on Schedule 1) and taxed at ordinary income rates. But the critical difference is how losses are handled.

Gambling losses can only be deducted if you itemize (Schedule A), and they can only offset gambling winnings -- not other income. Starting in the 2026 tax year, the One Big Beautiful Bill Act (OBBBA) adds a further restriction: you can only deduct the lesser of 90% of your gambling losses or 90% of your gambling winnings for the year.

Example of the OBBBA impact: You win $100,000 and lose $100,000 on prediction markets in 2026. Under prior law, you would break even with no tax owed. Under the OBBBA:

Gambling winnings reported: $100,000
Maximum loss deduction: $90,000 (90% of $100,000)
Taxable "phantom income": $10,000
Federal tax owed (at 37% bracket): $3,700 on gains that do not actually exist

The Joint Committee on Taxation projects this provision will raise approximately $1.1 billion over 10 years across all gambling activity. For prediction market traders who treat their activity as gambling, this is a significant new cost.

Which Treatment Should You Use?

There is no single correct answer. The right classification depends on the platform you use, how you trade, and your risk tolerance for audit.

Factor	Section 1256	Ordinary Income	Gambling
Best for	CFTC-regulated platforms	Conservative filers	Casual bettors
Tax rate	Blended ~26.8% max	Up to 37%	Up to 37%
Loss treatment	Offset capital gains + $3,000; 3-year carryback	May offset other income	Only offsets gambling wins; 90% cap (OBBBA)
IRS challenge risk	Moderate-High	Low	Low-Moderate
Forms	Form 6781, Schedule D	Schedule 1, Line 8z	Schedule 1 + Schedule A
Requires itemizing?	No	No	Yes (for losses)

Kalshi vs. Polymarket: Tax Treatment Differences

The platform you trade on affects your tax situation in practical ways, even if the underlying legal classification remains the same.

Kalshi

Kalshi is a CFTC-registered Designated Contract Market. This regulatory status has several tax implications:

Strongest case for Section 1256 treatment. As a CFTC-regulated exchange trading standardized contracts, Kalshi contracts have the closest structural resemblance to regulated futures contracts enumerated in Section 1256.
Tax forms issued: Kalshi issues 1099-INT (for interest earned on cash balances, if $10+) and 1099-MISC (for referral bonuses, if $600+). However, Kalshi does not issue a comprehensive 1099-B for event contract trades.
Trade history available: Kalshi provides year-end trade history and P&L reports that you can use to calculate your gains and losses.
USD-denominated: All trades are in U.S. dollars, which simplifies record-keeping. No crypto conversion calculations are necessary.

Polymarket

Polymarket operates as a crypto-native prediction market built on the Polygon blockchain. The tax implications differ significantly:

Weaker case for Section 1256. Although Polymarket acquired a CFTC-licensed exchange (QCX) in late 2025, the international platform remains structurally different from a traditional DCM. Section 1256 treatment is harder to justify.
No tax forms issued. Polymarket does not issue any 1099 forms. The platform does not collect the tax information necessary to generate these forms for most users.
Crypto layer adds complexity. Trades are denominated in USDC. Depositing fiat to buy USDC, trading USDC for prediction market shares, and withdrawing USDC back to fiat may each create separate taxable events depending on your USDC cost basis.
Record reconstruction required. You must reconstruct your transaction history from Polymarket's portfolio history, on-chain records (via PolygonScan), or wallet data.

Robinhood

Robinhood offers CFTC-regulated event contracts (sourced from Kalshi's infrastructure). Robinhood states it will not provide 1099s specifically for event contract trades, though event contract activity may appear on your existing Robinhood 1099 alongside stocks, options, and crypto. Robinhood does provide an "Event Contracts Annual Statement," but labels it as not a substitute tax form.

Platform Comparison Table

Tax Factor	Kalshi	Polymarket	Robinhood
Regulatory status	CFTC DCM	CFTC no-action (via QCX)	CFTC-regulated (via Kalshi)
1099-B for trades	No	No	Unclear / partial
1099-INT	Yes (if $10+)	No	Yes (through Robinhood)
Trade history export	Yes (CSV)	Manual / on-chain	Yes (Annual Statement)
Currency	USD	USDC (crypto)	USD
Section 1256 argument	Strongest	Weakest	Strong
Crypto tax events	None	Possible (USDC conversions)	None

What Tax Forms to Expect (and Not Expect)

One of the biggest surprises for prediction market traders: most platforms do not send the tax forms you might expect.

Forms You May Receive

1099-INT: From Kalshi or Robinhood, reporting interest earned on uninvested cash balances. Issued if interest exceeds $10.
1099-MISC: From Kalshi, reporting referral bonuses or promotional credits exceeding $600.
1099-B (limited): Kalshi may issue a 1099-B for certain crypto transfer transactions, but this does not cover event contract trades.

Forms You Will Not Receive

No 1099-B for event contract trades from any major prediction market platform as of the 2025 tax year (filed in 2026).
No 1099 of any kind from Polymarket. The platform does not collect the information necessary to generate these forms.

What This Means for You

The absence of a 1099 does not eliminate your obligation to report. Under U.S. tax law, all income is reportable regardless of whether a third party reports it to the IRS. Failure to report prediction market income can result in:

Applicable income tax plus interest from the original due date
A 20% civil penalty for substantial understatement of income
A 75% fraud penalty in cases of willful non-compliance

With over 840,000 active Polymarket wallets as of February 2026 and growing IRS scrutiny of digital assets, the risk of non-reporting is real.

Step-by-Step: How to Report Prediction Market Gains

The exact forms depend on which tax classification you use. Here are the three paths.

Path A: Section 1256 Treatment (Form 6781 + Schedule D)

Calculate your net gain or loss. Total all prediction market profits and losses for the year. If you held open positions on December 31, mark them to market (treat them as if sold at fair market value on that date).
Complete Form 6781, Part I (Section 1256 Contracts Marked to Market). Enter your net gain or loss on Line 1.
Apply the 60/40 split. The form automatically splits your net gain: 60% flows to Schedule D, Line 15 (long-term) and 40% flows to Schedule D, Line 4 (short-term).
If you have a net loss, you may carry it back three years to offset prior Section 1256 gains (Form 6781, Part II) or carry it forward indefinitely.
File Schedule D with your Form 1040.

Path B: Ordinary Income Treatment (Schedule 1)

Calculate your net prediction market profit for the year (total winnings minus total losses).
Report on Schedule 1, Line 8z as "Other Income." In the description field, write something clear such as "Prediction market income -- Kalshi" or "Event contract net gains."
The net amount flows to Form 1040, Line 8 (Other Income).

Path C: Gambling Income Treatment (Schedule 1 + Schedule A)

Report total gambling winnings on Schedule 1, Line 8b (or Line 8z with description "Gambling winnings -- prediction markets").
If you itemize deductions, report gambling losses on Schedule A, Line 16 (Other Itemized Deductions). Remember: losses cannot exceed winnings, and starting in 2026, are capped at 90% under the OBBBA.
If you take the standard deduction, you cannot deduct any gambling losses. You owe tax on the full amount of winnings.

Record-Keeping Requirements

Regardless of which path you choose, you need documentation to support your return:

Date of each trade (entry and exit)
Contract description (market name, outcome)
Cost basis (what you paid for each contract)
Proceeds (what you received on sale or resolution)
Net gain or loss per trade
Platform name

Loss Deductions: What You Can and Cannot Deduct

How you classify your prediction market activity determines how losses are treated. The differences are substantial.

Under Section 1256 Treatment

Net losses can offset other capital gains dollar-for-dollar
Up to $3,000 of net capital losses can offset ordinary income per year
Excess losses carry forward indefinitely
A valuable three-year carryback election allows you to amend prior returns and offset Section 1256 gains from the previous three years
No 90% cap applies -- this is a critical advantage over gambling treatment

Under Ordinary Income Treatment

Net losses may be deductible against other income, though the exact treatment is debated among practitioners
The $3,000 capital loss limitation does not apply (these are not capital losses)
No carryback is available

Under Gambling Treatment (Post-OBBBA)

This is where the 2026 changes hit hardest:

Losses can only offset gambling winnings, not other income
You must itemize to deduct any losses (the standard deduction for 2026 is $15,000 for single filers and $30,000 for married filing jointly)
Starting in 2026, deductible losses are capped at 90% of gambling losses or 90% of gambling gains, whichever is less
No carryforward or carryback of unused gambling losses
Professional gamblers (who report on Schedule C) face the same 90% cap

Example comparing all three treatments:

You made $80,000 in winning trades and $60,000 in losing trades on Kalshi in 2026.

	Section 1256	Ordinary Income	Gambling
Gross gains	$80,000	$80,000	$80,000
Deductible losses	$60,000	$60,000	$54,000 (90% of $60K)
Taxable amount	$20,000	$20,000	$26,000
Effective tax rate (37% bracket)	~26.8% blended	37%	37%
Approximate federal tax	$5,360	$7,400	$9,620

The difference between Section 1256 and gambling treatment on the same $20,000 net profit: $4,260 in additional tax.

State Taxes: Key Differences

Federal taxes are only part of the picture. State tax treatment of prediction market gains varies significantly, and some states create particularly painful outcomes.

States With No Income Tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming impose no state income tax on prediction market gains. (New Hampshire and Washington tax certain investment income, but prediction market profits are generally not affected.)

States That Do Not Allow Gambling Loss Deductions

This is the biggest trap. If you treat prediction market gains as gambling income, several states do not permit you to deduct any gambling losses at all:

North Carolina: No gambling loss itemized deduction. You owe the 3.99% state tax rate (2026) on all gambling winnings, even if your net result is a loss.
Connecticut, Illinois, Indiana, Massachusetts, Michigan, Ohio, West Virginia, and Wisconsin either disallow or severely restrict gambling loss deductions at the state level.

States That Allow Full Netting

New Jersey allows full 100% netting of gambling wins and losses at the state level, making it one of the more favorable states for prediction market traders who use gambling treatment.

States Actively Fighting Prediction Markets

Several states have issued cease-and-desist letters to prediction market operators or attempted to regulate them as gambling: Nevada, Maryland, Connecticut, Tennessee, New Jersey, and Arizona. Hawaii has a pending prediction market ban (HB2198) that would classify platforms like Kalshi as illegal gambling by July 2026.

In April 2026, the Trump administration sued three states (Illinois, Connecticut, Arizona) over their attempts to regulate prediction markets under state gambling laws, asserting CFTC exclusive jurisdiction.

Practical takeaway: Your state of residence can turn a break-even year into a tax bill. If you live in a state that does not allow gambling loss deductions and you treat your prediction market activity as gambling, you owe state tax on gross winnings with no offset for losses.

2026 Tax Changes Affecting Prediction Market Traders

Two major developments affect prediction market taxation in 2026.

1. The OBBBA Gambling Loss Cap (Effective January 1, 2026)

The One Big Beautiful Bill Act, signed into law on July 4, 2025, limits gambling loss deductions to 90% of total losses (or 90% of total winnings, whichever is less). This applies to all tax years beginning after December 31, 2025.

The impact is most severe for high-volume traders who win and lose large amounts. A trader with $500,000 in wins and $500,000 in losses now owes tax on $50,000 of phantom income if they use gambling treatment.

There is active legislative effort to repeal this provision. Bills have been introduced in both the House and Senate to restore the full deduction, with bipartisan support, but neither has passed as of April 2026.

2. CFTC Rulemaking (March 2026)

On March 12, 2026, the CFTC issued an Advance Notice of Proposed Rulemaking (ANPRM) seeking public comment on prediction market regulation. The comment period closes April 30, 2026. While CFTC regulation is not the same as IRS guidance, the CFTC's formal classification of event contracts could influence how the IRS eventually treats them for tax purposes.

If the CFTC formally classifies prediction market contracts in a way that aligns with Section 1256 instruments, it would strengthen the argument for 60/40 treatment. If it classifies them as something else -- or if the Dodd-Frank swap exclusion applies -- it could foreclose that option.

Record-Keeping Best Practices

Given that most platforms do not issue comprehensive tax forms, your records are your defense in an audit. Here is what to maintain.

Essential Records

Trade log: Every trade with date, market name, contract description, buy/sell, quantity, price, and fees. Export from the platform whenever possible.
P&L summary: Net profit or loss by market and by platform, calculated using a consistent method (FIFO is standard).
Deposit and withdrawal records: Every fiat or crypto deposit into and withdrawal from each platform.
Platform statements: Download year-end statements from Kalshi, Robinhood, and any other platform. Polymarket users should export portfolio history and supplement with on-chain records from PolygonScan.
Screenshots of resolved markets: Resolution criteria can change or become unavailable after the market closes. Screenshot the resolution details for any significant trade.

For Polymarket Specifically

Export your portfolio history from the Polymarket interface
Check your wallet address on PolygonScan and export ERC-1155 token transactions (conditional tokens) and USDC transactions
Consider using crypto tax software (Koinly, CoinTracker, Blockpit) to normalize on-chain data, but review the output manually -- these tools frequently misclassify prediction market transactions because they were designed for token transfers, not event contracts
Track your USDC cost basis separately if you purchase USDC at varying prices

How Long to Keep Records

The IRS can audit returns up to three years after filing (six years if income is underreported by more than 25%). Keep prediction market records for at least seven years to be safe.

Frequently Asked Questions

Do I owe taxes if I did not receive a 1099?

Yes. Tax liability is based on income earned, not on forms received. The absence of a 1099 from Polymarket, Kalshi, or any other platform does not reduce your obligation to report gains.

What if I lost money overall -- do I still need to report?

It depends on your classification. Under Section 1256 or ordinary income treatment, net losses may be deductible and should be reported. Under gambling treatment, you should still report winnings and deduct losses (subject to limits) if you itemize. Failing to report a losing year means you cannot use those losses to offset future gains.

Can I use Section 1256 for Polymarket trades?

The argument is significantly weaker for Polymarket than for Kalshi. Polymarket is not a CFTC Designated Contract Market (its U.S. operations run through an acquired entity), and the crypto-native structure adds complexity. Most tax practitioners would not recommend Section 1256 for Polymarket trades unless the platform's regulatory status changes.

What about the crypto conversion -- is swapping USD for USDC taxable?

In principle, converting USD to USDC (a stablecoin pegged 1:1 to the dollar) should not generate a taxable event because there is no gain. However, if the price of USDC deviates from $1.00 at the time of conversion (which occasionally happens), a small gain or loss could result. Track your USDC cost basis to be safe.

I trade on multiple platforms. Do I combine everything?

Yes. Your tax return reports your total income from all sources. Combine gains and losses across all prediction market platforms, then report the total using whichever classification you choose. Be consistent -- do not use Section 1256 for Kalshi and gambling treatment for Polymarket in the same year without a defensible reason for the different treatment.

Should I hire a CPA?

If your prediction market activity involves more than a few thousand dollars, yes. The classification question alone -- Section 1256 vs. ordinary income vs. gambling -- can mean thousands of dollars in tax difference. Several CPA firms now specialize in prediction market taxation, and the cost of professional advice is almost always less than the cost of getting it wrong.

What if the IRS issues guidance after I file?

If the IRS issues guidance that conflicts with the position you took, you may need to amend your return. If you took a reasonable, good-faith position supported by the statutory language (such as Section 1256 for CFTC-regulated contracts), penalties are generally not imposed even if the IRS later disagrees. Document your reasoning at the time of filing.

Are prediction market winnings subject to self-employment tax?

Generally, no. Prediction market gains are not considered self-employment income for most traders. However, if you are a professional trader who reports on Schedule C, the analysis may differ. The OBBBA's 90% loss cap applies to professional gamblers as well.

Summary: Key Takeaways for 2026

All prediction market gains are taxable. No exceptions, no threshold, no 1099 required.
The IRS has not issued specific guidance. You must choose a defensible classification: Section 1256 (most favorable), ordinary income (safest), or gambling (worst for losses in 2026).
The OBBBA 90% loss cap is new for 2026. If you use gambling treatment, you can lose money and still owe tax.
Most platforms do not issue 1099-B forms for event contract trades. You are responsible for tracking and reporting your own gains and losses.
Your state matters. Some states do not allow gambling loss deductions at all, creating phantom taxable income even at the state level.
Keep detailed records. Download trade history, save platform statements, and consider crypto tax software for Polymarket. Retain records for at least seven years.
Consult a professional. The stakes are high and the rules are unclear. A CPA who understands prediction markets can save you far more than their fee.

Published April 8, 2026. Last updated April 8, 2026.

This guide is produced by Merlin, an AI-powered prediction market analysis platform. Merlin tracks real-time odds, whale trades, and mispriced probabilities across Polymarket and Kalshi.

Disclaimer: This article is for informational and educational purposes only. It does not constitute tax advice, legal advice, financial advice, or a recommendation to take any particular position on a tax return. Tax law is complex and subject to change. The tax treatment of prediction market contracts is unsettled, and reasonable professionals disagree on the correct classification. The information presented reflects publicly available guidance and practitioner analysis as of April 2026. You should consult a qualified tax professional, enrolled agent, or tax attorney before making any decisions about how to report prediction market income. The authors and publishers of this article assume no liability for any tax consequences resulting from actions taken based on this content.