Prediction markets have grown from a niche corner of the internet into a mainstream financial product. Platforms like Kalshi and Polymarket now handle billions of dollars in monthly volume. What has not kept pace is tax guidance. The IRS has not issued specific rules on how prediction market contracts should be taxed, which leaves traders navigating this question at filing time.

This article does not assert a single correct tax outcome. This article explains what traders face at tax time, why there is no standard tax form to rely on, and what the right analytical starting point may look like.

Your Profits Are Taxable. The Question is How.

Prediction market profits are taxable income under existing U.S. tax law. The unsettled question is which tax framework applies, because different characterizations produce meaningfully different results in terms of tax rates, recognition timing, loss treatment, and reporting requirements.

There are four treatments practitioners consider when analyzing prediction market contracts. Not all of them apply equally to every contract or every platform. The correct starting point is to evaluate each in sequence, beginning with whether a statutory regime displaces the default rules.

Whether gambling treatment applies is a question answered contract by contract. The analysis must consider the economic substance of the underlying event.

Sports-outcome contracts are most frequently analyzed under a wagering framework given the nature of the underlying event. Contracts tied to macro-economic data or financial indicators present a different analytical consideration because the underlying event looks more like what financial derivatives were designed to track. Political and other event contracts generally fall between the two, and the analysis remains unsettled across all categories.

Even for contracts tied to sports outcomes, where the wagering analogy is most frequently raised, classification is not automatic. Whether a specific contract constitutes a wager or a financial instrument under federal tax law remains an open question. The analysis should consider both the economic substance and structure of the specific contract.

A sports-outcome contract that trades on a regulated exchange, can be exited before resolution, involves no house, and settles through a clearinghouse carries structural and economic features that distinguish it from conventional wagering but whether those distinctions are sufficient under federal tax law remains an open question.

Where gambling treatment applies, gains are reportable as income and losses are deductible only to the extent of winnings for the year, only for taxpayers who itemize, and only on a per-session basis. If wagering treatment does not apply, the next question is whether Section 1256 imposes a specialized regime.

Section 1256 applies 60 percent of gains and losses treated as long-term, 40 percent as short-term, regardless of how long positions were held and require year-end mark-to-market reporting. The tax rate differences explain why traders and some practitioners ask about it. The harder question is whether prediction market contracts qualify.

A contract only falls under Section 1256 if it satisfies two requirements. First, it must trade on a qualified board or exchange, which includes CFTC-regulated Designated Contract Markets. Second, the contract must fall within one of the specific statutory categories which include regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, or dealer securities futures contracts.

These categories were designed for price-based financial instruments. Prediction market contracts are different in a fundamental way since they settle on binary factual outcomes. Because these definitions were not written with event-based contracts in mind, qualification is not presumed, it requires affirmative justification based on the specific contract's structure. If Section 1256 does not apply, the analysis falls to the default characterization rules which consider capital gains or ordinary income.

Capital gains treatment applies where the contract is treated as a capital asset, which considers the contract as a property right that the trader acquired, held, and disposed of. Gains and losses net against each other across the year. Where capital treatment does not clearly apply, the tax treatment is ordinary income.

Ordinary income treatment views the contract as producing income from a contingent financial arrangement rather than as a wager, a specialized derivative, or a capital asset. Under this treatment, what the trader receives at settlement is ordinary income.

The right framework depends on the specific platform, the structure of the contracts, and the trader's broader tax situation. The applicable tax treatment is determined by the facts, not selected for a preferred tax outcome. In the absence of IRS guidance, the standards that matter are whether the position taken is reasonable, consistently applied, and supported by documentation that could withstand examination.

Tax Reporting Without 1099s

Prediction market activity currently lacks standardized tax reporting. What that means in practice varies by platform, but even reporting-friendly platforms leave traders with significant documentation and accounting work to do before filing.

Kalshi may issue limited 1099 forms for certain income but does not currently provide comprehensive 1099 reporting covering individual contract acquisitions, dispositions, and cost basis. Traders need to download their full transaction history in CSV format, map each contract from opening to closing, and calculate position-level gains and losses independently.

Polymarket does not issue standardized U.S. tax forms. Traders must reconstruct activity from on-chain transaction records, wallet data, or blockchain explorers. Beyond the documentation burden, Polymarket introduces a second layer of complexity because contracts settle in USDC.

The absence of third-party reporting does not reduce the obligation to report. The burden of reconstructing transaction history, establishing cost basis, and applying a consistent tax treatment falls on the taxpayer.

When To Get Help With Prediction Market Taxes

The core challenge with prediction market taxation is that no single statutory category was designed for these contracts and reasonable practitioners applying existing tax law can reach different conclusions. The classification decision drives the rate, the loss treatment, and the reporting mechanics.

Traders with significant volume, activity across multiple platforms, Polymarket positions requiring on-chain reconstruction, or any situation where the tax characterization question is material should consider working with a prediction market CPA that can provide a documented tax opinion on the applicable framework, reconstruct the full trade history at the contract level, and prepare tax reporting that supports the position taken.

About Summ

Summ simplifies crypto tax reporting across 3,500+ wallets, exchanges, and blockchains. It generates precise, accountant-endorsed reports for a wide range of crypto activity, including DeFi and on-chain transactions, helping users stay fully compliant.

Meet the author

Patrick Camuso, CPA, is the Managing Director of CamusoCPA, the only Forbes Best-In-State Top CPA firm built crypto-native since 2016. Patrick Camuso, CPA is a nationally recognized leader in cryptocurrency accounting and taxation. After beginning his career advising hedge funds, private equity firms, and investment managers at Deloitte, he became an early adopter of cryptocurrency and went on to found Camuso CPA in 2016, one of the first U.S. firms built exclusively for crypto investors and Web3 businesses, now widely recognized as a category-defining leader in the field.

Today, Patrick is the only CPA honored as a Forbes Best-In-State Top CPA for cryptocurrency, a distinction awarded to fewer than 1% of CPAs nationwide. He is a national speaker at premier blockchain conferences, a continuing professional education (CPE) instructor training CPAs worldwide, a podcast host, and an author. His insights have been featured in Forbes, Financial Times, Accounting Today, Bloomberg Tax, and other leading industry outlets.

Patrick is also recognized for developing industry-leading methodologies that ensure data integrity, regulatory compliance, and IRS-defensible strategies for digital asset investors and Web3 businesses.

Camuso CPA delivers audit-ready accuracy and full-service support by uniting crypto accounting, tax preparation, planning, resolution, and advisory with a proprietary reconciliation process that ensures data integrity, eliminates software errors, and provides investors and founders with the financial clarity to protect and grow their portfolios. Learn more about Patrick & Camuso CPA

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