Platforms like Kalshi, Polymarket, and Robinhood now process billions of dollars in contracts each month, covering everything from interest rate decisions to election outcomes to tomorrow's weather in Phoenix. With that kind of volume comes an unavoidable question: what do you owe the IRS on your winnings?

The short answer is: your profits are taxable. The longer answer is that the IRS hasn't issued definitive guidance on how prediction market income should be classified, which leaves traders in a genuine grey area. Depending on the platform you use and how your contracts are structured, your gains could be treated as ordinary income, capital gains, or Section 1256 contract income - each with meaningfully different tax outcomes.

How Are Prediction Markets Taxed in the US?

The IRS hasn't released specific rules for prediction markets. What we do know is this: your winnings are taxable income, regardless of whether or not you receive a tax form from the platform. There are currently three main positions:

1. Capital Gains Treatment

This position treats prediction market contracts as capital assets; similar to stocks or bonds. Under this approach, your gains and losses go on Form 8949 and Schedule D. You can offset capital losses against capital gains, if you have excess losses ‍then up to $3,000 in net capital losses can offset ordinary income per year, with unused losses carrying forward indefinitely.

Short-term gains (contracts held one year or less) are taxed at your ordinary income rate, between 10-37%.

‍Long-term gains (held more than one year) are taxed at preferential rates of 0%, 15%, or 20%.

In practice, most prediction market contracts resolve within days or weeks, so short-term treatment would apply in the majority of cases.

2. Section 1256 Contract Treatment

Section 1256 of the tax code applies to specific regulated financial instruments, including futures contracts traded on CFTC-regulated exchanges. Under this treatment, 60% of your gain or loss is treated as long-term capital gain/loss and 40% as short-term - regardless of how long you held the contract. This is known as the 60/40 rule.

The reason this matters for prediction markets: platforms like Kalshi operate as CFTC-regulated exchanges, which creates a legitimate argument for Section 1256 treatment. However, CFTC regulation alone doesn't automatically qualify a contract under Section 1256. Event-based contracts that settle on binary factual outcomes; did this happen or not? Sit in interpretive tension with the statute, which was designed for price-based instruments like commodity futures. Any trader taking a Section 1256 position should document their reasoning carefully and consult a tax professional.

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3. Ordinary Income (Gambling Treatment)

Some tax advisors treat prediction market winnings the same way as traditional gambling winnings; as ordinary income, reported on Schedule 1 (Form 1040) under "Other Income." Under this treatment, losses can only offset gains from the same category, and only if you itemize deductions on Schedule A.

Important 2026 update: Under the One Big Beautiful Bill Act, gambling loss deductions are now capped at 90% of gambling winnings. So if you had $10,000 in gains and $10,000 in losses, you'd still owe tax on $1,000 of income. This makes the gambling classification meaningfully worse for active traders than it was in prior years. Note that legislation to repeal the cap is already in motion so this provision may still change before it meaningfully impacts 2026 returns.

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Platform-by-Platform Breakdown

Kalshi is a CFTC-regulated exchange that settles contracts in US dollars. Its regulatory status makes the Section 1256 argument most defensible here. Many traders and tax advisors default to reporting Kalshi income as "Other Income" on Schedule 1, Line 8z, while others take the Section 1256 position.

Polymarket operates on blockchain infrastructure using USDC (a USD-pegged stablecoin) on the Polygon network. Polymarket received its CFTC Designated Contract Market designation in late 2025, meaning US users now access the platform through regulated intermediaries. Because trades settle in USDC rather than USD directly, there may be additional complexity: converting USDC back to dollars can itself be a taxable event if the stablecoin has fluctuated in value. Polymarket's on-chain structure means the platform is unlikely to issue standardized tax forms - you'll need to pull transaction records from your wallet or a blockchain explorer.

Your Polymarket and Kalshi activity now syncs directly into Summ for your tax reporting. Connect using your public wallet address or upload your data via CSV.

Robinhood Prediction Markets operate through Robinhood's existing brokerage infrastructure. Robinhood is reporting prediction market activity on consolidated 1099 forms, though the tax characterization - capital gains, gambling income, or Section 1256 - isn't settled. Some tax advisors are treating Robinhood prediction market trades as capital gains given the brokerage context. Robinhood itself has flagged that prediction market transactions may not be included in the 1099-B portion of the consolidated report, meaning you may need to track and report those separately.

Bottom line: All three platforms have taxable income. The classification is unsettled. Until the IRS issues explicit guidance, your best move is to pick a defensible position, apply it consistently, keep detailed records, and work with a tax professional familiar with digital assets and derivatives.

How Summ Can Help With Your Prediction Market Taxes

If you're trading on Polymarket or Kalshi, the complexity multiplies fast. Summ connects directly to crypto wallets and blockchain networks, automatically importing your transaction history, calculating your gains and losses, and generating data-backed tax reports. Log in or sign up to connect your accounts.

Summ supports:

• Wallet and exchange imports across 3,500+ sources
• Automatic categorization of gains, losses, and income events
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