Prediction markets are platforms where you buy and sell contracts tied to real-world outcomes. Each contract pays $1 if the event happens, $0 if it doesn't. The price at any point reflects what the market thinks the odds are.
A Kalshi contract on "Will the Fed cut rates in March?" trading at $0.35 means the market gives it a 35% chance. If the Fed cuts, you get $1 per contract. If not, it expires at zero.
The mechanics look a lot like binary options. Kalshi and Polymarket argue - and the CFTC has agreed - that these are financial contracts, not gambling. That distinction is what drives most of the tax debate.
Are Prediction Markets Legal in the US?
Yes, at the federal level. Kalshi is a CFTC-regulated exchange. Polymarket received its Designated Contract Market status in 2025. Robinhood runs prediction markets through its existing brokerage infrastructure.
The complication is at the state level. Nevada and a handful of other states have argued that prediction market activity is gambling and falls under state gaming regulation. Depending on where you live, the outcome of those disputes could affect how your winnings are classified for state tax purposes.
Do Prediction Markets Issue Tax Forms?
It depends on the platform.
Kalshi issues a 1099-MISC for profits over $600.
Robinhood issues a consolidated 1099, though prediction market activity may not appear on the 1099-B section. Check your Robinhood tax documents and track any trades not captured there.
Polymarket operates on-chain and does not issue traditional tax forms. You are responsible for tracking your own transaction history from your wallet.
Whatever you receive, the IRS expects you to report all income. Not getting a 1099 isn't a reason not to file.
Can You Deduct Prediction Market Losses?
Yes, but the rules depend on how your income is classified.
Capital gains/losses: 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.
Section 1256: 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. Section 1256 losses can also be carried back three years to prior tax years, which isn't available for standard capital losses.
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.
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Frequently Asked Questions
Do I have to pay taxes on prediction market winnings if I don't cash out to my bank?
Yes. A taxable event occurs when a contract settles, not when you withdraw funds. Leaving your USDC balance on Polymarket doesn't defer the tax obligation.
What if my prediction market platform doesn't report to the IRS?
You're still required to report. The IRS has been expanding its focus on digital asset income
Is there a threshold below which I don't need to report?
No. The $600 threshold only determines when platforms are required to issue a 1099. All income is reportable regardless of amount.
Disclaimer: This guide is for general informational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and subject to change. Consult a qualified tax professional for advice specific to your situation.
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