How Are Prediction Markets Taxed? [2026 Guide]
Complete guide to prediction market taxes in the US — reporting requirements, capital gains treatment, and how to handle your tax obligations.
Last updated: 2026-03-05
The Short Answer
Prediction market profits are generally taxed as capital gains in the US — similar to stock trading, not gambling winnings. This is because CFTC-regulated prediction markets (like Kalshi) are classified as financial exchanges.
Important disclaimer: This is general information, not tax advice. Consult a tax professional for your specific situation.
How Prediction Markets Are Classified
The IRS treatment depends on the platform:
| Platform Type | Tax Treatment | Reporting Form |
|---|---|---|
| CFTC-regulated (Kalshi) | Capital gains/losses | 1099-B |
| Crypto-native (Polymarket) | Capital gains (crypto rules) | Self-reported or 1099 |
| Sportsbook hybrid (DraftKings, FanDuel) | May be gambling income | W-2G or 1099-MISC |
CFTC-Regulated Platforms (Kalshi)
Kalshi issues Form 1099-B for your trading activity, just like a stock brokerage. This means:
Short-Term Capital Gains
If you hold a contract for less than one year (most prediction market trades), profits are taxed at your ordinary income tax rate (10-37% depending on your bracket).
Long-Term Capital Gains
If you somehow hold a contract for over a year, profits are taxed at preferential long-term rates (0%, 15%, or 20%).
Capital Losses
You can deduct prediction market losses against gains, just like stock losses. This is a major advantage over gambling income, where losses can only offset gambling winnings.
Crypto Platforms (Polymarket)
Polymarket trading involves cryptocurrency (USDC), which adds complexity:
- Depositing USD → USDC: Generally not a taxable event (stablecoin)
- Trading contracts: Each buy/sell is a taxable event
- Withdrawing USDC → USD: Generally not taxable if USDC maintained its peg
Because Polymarket may not issue 1099s, you’re responsible for tracking and reporting your trades. Use crypto tax software (CoinTracker, Koinly, etc.) to generate reports.
Sportsbook Hybrids (DraftKings, FanDuel)
This is the gray area. DraftKings and FanDuel prediction features may be taxed as:
- Gambling income (if classified under state gaming rules)
- Capital gains (if classified as event contracts)
The platform’s 1099 classification will determine your treatment. If they issue a W-2G, it’s gambling income. If 1099-B, it’s capital gains.
Key Tax Rules
$600 Reporting Threshold
Platforms are required to report winnings over $600 to the IRS. Below that, you’re still legally required to report income, but you won’t receive a 1099.
Wash Sale Rules
The IRS wash sale rule (which prevents selling a stock at a loss and immediately rebuying it) may or may not apply to prediction market contracts. This is an unsettled area of tax law. Consult a tax professional.
State Taxes
Most states follow federal treatment, but some have specific rules for financial instruments or gambling income. Check your state’s tax code.
Record Keeping
Keep records of:
- Every trade (date, amount, contract, buy/sell price)
- Deposits and withdrawals
- Platform statements and 1099s
- Any fees paid
Most platforms provide downloadable trade history. Export this at year-end.
Tax-Smart Strategies
- Harvest losses — If you have losing positions, consider closing them before year-end to offset gains
- Track your cost basis — Know exactly what you paid for each contract
- Consider a tax professional — Prediction market taxation is new and evolving; professional advice is worth it
- Keep crypto transactions clean — If using Polymarket, use dedicated wallets to simplify tracking