Prediction Market Taxes, Explained (Kalshi, Polymarket, and the IRS)

Profits from prediction markets are taxable income, and that is roughly where the certainty ends. Kalshi — the largest US-regulated venue — does not currently send a form that reports your trading profit: as of August 2026, its help documentation lists forms covering interest, promotional credits, and crypto transfers, none of which adds up your event-contract gains. And the IRS has never said what an event contract actually is for tax purposes: a Section 1256 contract with favorable 60/40 treatment, a plain capital asset, ordinary income, or a gambling wager. Each answer produces a different tax bill, and the gap between them widened in January 2026, when a new federal law capped gambling-loss deductions at 90% of losses.

This guide maps the landscape for anyone trading a prediction market: what forms the platforms actually issue, which questions are genuinely open, and where the traps sit. One thing up front, and it is not boilerplate: this is general education, not tax advice. Reasonable professionals disagree on the open questions below, and if real money moves through your account, the cost of a CPA who has seen event contracts before is small next to the cost of guessing wrong.

What tax forms does Kalshi actually send?

As of August 2026, Kalshi’s help center lists four form types, each issued only if you cross the relevant IRS threshold:

• 1099-INT — interest paid on your cash balance
• 1099-MISC — promotional credits and rewards, such as referral bonuses
• 1099-B — proceeds from broker transactions tied to crypto transfers
• 1099-DA — digital-asset transaction reporting, issued through Kalshi’s crypto partner ZeroHash

Notice what is missing: a form that totals your event-contract trading profit. In Kalshi’s early years, net winnings above $600 were reported on Form 1099-MISC, and the practice has shifted over time — so check the documents section of your own account each January rather than assuming. But the current documentation is clear that Kalshi computes profit and loss using first-in-first-out accounting, updates P&L statements monthly, and — in its own words — “cannot give members advice on their taxes.”

No 1099 doesn’t mean no tax — it means the math is your job.

The math itself is simple. Buy 1,000 YES contracts at 40¢ and you’ve spent $400. If the event resolves YES, you collect $1,000, for a $600 profit. That $600 is taxable income whether or not any form ever arrives; the $600 and $2,000 figures you see attached to 1099s are the platform’s reporting thresholds, not your reporting threshold, which is zero. If you trade event contracts through a brokerage app that routes orders to Kalshi’s exchange, your tax documents come from that broker instead — check its tax center, not Kalshi’s.

How does the IRS classify event-contract income?

It doesn’t — yet. There is no revenue ruling, no notice, and no case law that says how a binary event contract is characterized for federal income tax. That leaves four candidate frames, and they produce very different outcomes:

Characterization	Where it’s reported	How gains are taxed	How losses work
Section 1256 contract	Form 6781	60% long-term / 40% short-term, marked to market	Net against gains; $3,000/yr against ordinary income; carryback election
Capital asset (non-1256)	Form 8949 / Schedule D	Short- or long-term by holding period	Offset capital gains; $3,000/yr against ordinary income
Other income	Schedule 1	Ordinary rates	No clean deduction path
Gambling	Schedule 1 (wins) / Schedule A (losses)	Ordinary rates on winnings	Itemizers only, capped at winnings — and only 90% of losses from 2026

The Section 1256 argument

Section 1256 is the prize. Qualifying contracts get 60/40 treatment: 60% of net gains taxed as long-term capital gain and 40% as short-term, regardless of holding period, reported on Form 6781. For a trader in the 32% bracket with a $10,000 net gain, ordinary treatment costs about $3,200; 60/40 costs about $2,180 ($6,000 at the 15% long-term rate plus $4,000 at 32%). Losses net against 1256 gains and can even be carried back three years by election.

The case for it: Kalshi is a CFTC-designated contract market, which squarely satisfies the statute’s “qualified board or exchange” requirement, and positions are cash-settled on a regulated venue. The case against it: Section 1256 enumerates five specific contract types — regulated futures contracts, foreign currency contracts, nonequity options, and two dealer categories — and event contracts are named nowhere. Worse, the statute expressly excludes swaps and “similar agreements,” and the Commodity Exchange Act’s swap definition explicitly reaches contracts that pay out on the occurrence or nonoccurrence of an event. Tax professionals who claim 60/40 treatment for event contracts generally regard it as an aggressive position and often attach Form 8275, the disclosure statement that can protect against understatement penalties if the IRS later disagrees. The IRS hasn’t said. That sentence is doing a lot of work in this article, and it is the honest one.

The gambling argument

An event contract is economically a stake on an uncertain outcome, and Kalshi’s fastest-growing markets are sports — the most wager-shaped product in the lineup. If event contracts are wagering transactions, winnings are ordinary income and losses fall under Section 165(d): deductible only if you itemize, only up to your winnings, and — see below — only 90% of them starting in 2026. Note that platforms don’t issue Form W-2G for event contracts the way a casino does for a slot jackpot, and the tax code never cleanly defines “wagering transaction.” It is even possible that a sports contract and a CPI contract could end up characterized differently. Nobody knows, because no authority has ruled.

Capital asset, or just “other income”

The middle paths: a contract is property, so gains on contracts sold or settled could simply be capital gains on Schedule D — mostly short-term, given typical holding periods. Or the income is plain “other income” on Schedule 1, which is what Kalshi’s old practice of reporting net winnings on 1099-MISC implied. Other income is the simplest frame for winners and the murkiest for losers, since there is no obvious mechanism for deducting a net losing year at all.

Why do losses suddenly matter more in 2026?

Because of Section 70114 of the One Big Beautiful Bill Act (Public Law 119-21). For tax years beginning after December 31, 2025, the deduction for wagering losses is capped at 90% of losses, still limited to the amount of winnings. The arithmetic is brutal for high-volume, thin-margin traders — exactly the profile of an active prediction-market participant, if the gambling characterization applies.

Run a break-even year: $40,000 in gross winnings, $40,000 in losses. Under the old rule you deducted the full $40,000 and owed nothing. Under the 2026 rule you deduct $36,000, leaving $4,000 of taxable income on zero economic profit — roughly $960 of tax at a 24% rate, on money you never made. Take the standard deduction instead of itemizing and it’s worse: your losses produce no deduction at all. Bills to restore the full deduction, including the FAIR BET Act, were introduced in 2025, but a January 2026 attempt to advance the fix was blocked in the House, and as of August 2026 none has passed. Whether this regime touches event contracts at all depends entirely on the unresolved characterization question above — which is why that question is no longer academic.

What about Polymarket?

Polymarket’s tax picture splits into two eras. The offshore era — the crypto-native platform that US users accessed before and, unofficially, after Polymarket’s 2022 US exit — issued no US tax forms at all. That changed nothing about the obligation: profits were taxable when earned, and the recordkeeping burden sat entirely on the trader.

Crypto adds a second layer of taxable events on top of the trading itself. The IRS treats digital assets as property (the position it has held since Notice 2014-21), so disposing of a token is a taxable event. Deposit 1 ETH you bought at $2,000 when it’s worth $3,400, and the conversion into Polymarket’s collateral realizes a $1,400 capital gain before you’ve traded a single contract. Polymarket now runs on PUSD, its own dollar-pegged stablecoin, and auto-converts deposits from USDC and more than a dozen other tokens — each conversion a disposition, even if the gain on a stablecoin is usually near zero. Every US filer also answers the digital-asset question on Form 1040 under penalty of perjury. Meanwhile, the broker-reporting regime is arriving: custodial digital-asset brokers must report gross proceeds on Form 1099-DA for transactions from 2025 onward, with basis reporting phasing in for 2026 — though Congress nullified the rule that would have swept in DeFi platforms, so offshore-era on-chain trades generate no forms.

The regulated era began on November 24, 2025, when the CFTC issued an Amended Order of Designation to QCX LLC, doing business as Polymarket US — the exchange Polymarket acquired in 2025 — permitting intermediated access for US customers through regulated brokers. That puts Polymarket US in the same regulatory posture as Kalshi: a designated contract market, with the same unresolved characterization questions, and with tax-reporting practices still settling as of August 2026. If you trade there through an intermediary, expect your tax documents to come from that broker, and verify what it actually issues.

What records should you keep?

Whatever characterization you and your CPA land on, the raw material is the same. Keep:

• Full trade exports for every calendar year — fills, prices, fees, and settlements, not just the annual summary. Export before closing an account; history behind a dead login is history you don’t have.
• Monthly statements. Kalshi’s P&L statements update on the first of each month; download them as they post.
• Deposit and withdrawal records, matched against bank or wallet activity.
• Crypto cost basis for any token that touched a prediction market: acquisition date, price paid, and the timestamp and value of every conversion.
• A note of the position you took — which characterization, and why — plus Form 8275 if you claim Section 1256 treatment, so the file explains itself if questioned years later.

Quick answers

Do I owe taxes on Kalshi profits if I never got a 1099? Yes. The 1099 thresholds govern what the platform must report, not what you must report. All trading profit is taxable from the first dollar.

Are Kalshi contracts Section 1256 contracts? Nobody can say for certain — the IRS has issued no guidance. The exchange qualifies as a qualified board or exchange, but event contracts aren’t among the statute’s enumerated types and the swap exclusion cuts against them. Professionals who take the position often disclose it on Form 8275.

Can I deduct prediction-market losses? It depends entirely on characterization. As capital losses they offset gains plus $3,000 of ordinary income per year; as gambling losses they require itemizing, cap at winnings, and shrink to 90% starting in tax year 2026; as “other income” losses, there may be no deduction path at all.

Does Polymarket report my activity to the IRS? The offshore platform issued no US tax forms, and the repeal of the DeFi broker rule means on-chain activity there stays unreported by anyone but you. Polymarket US operates through regulated intermediaries, whose reporting practices were still settling as of August 2026 — check with your broker.

Is using crypto on Polymarket itself taxable? Yes, potentially before any contract settles. The IRS treats digital assets as property, so converting ETH, BTC, or even one stablecoin into Polymarket’s PUSD collateral is a disposition that can realize gain or loss.

Do I actually need a CPA for this? If more than trivial money moved through your account, yes — and that is the point of this article, which is general information, not tax, legal, or accounting advice. The characterization of event contracts is genuinely unsettled, the 2026 loss rules raise the stakes, and your facts are yours alone. Bring your trade exports to a professional and decide the open questions together.