Prediction Market Tax Guide 2026

Every dollar of profit from prediction market trading is taxable as a capital gain. This is across all platforms that support prediction markets, including Kalshi, Polymarket, and Robinhood. Under IRC Section 61, this income is taxable whether the trading platform sends out a 1099 or not.

If you owe taxes, it’s up to you, as the taxpayer, to ensure that tax reporting is submitted. That said, it’s not just about what tax is owed but also the classification of any income. For example, in 2025, Designated Contract Markets saw the number of listed contracts certified rise to 1,600, a substantial increase from just 131 in 2021.

The main issue is the classification of self-reporting, rather than the amount owed, which the IRS continues to monitor due to increased volume. The primary difference is between ordinary income and gambling treatment reporting obligations. In a non-equity contract or ordinary framework, all gains and losses are still netted, but losses aren’t rolled over.

As of 2026, there is no specific IRS guidance or tax law on event prediction market contracts, including a Revenue Ruling, Private Letter Ruling, or FAQ, regarding capital asset treatment and classification. It means that tax professionals must apply comparable rules for tax purposes, covering futures contracts, gambling income for professional gambler status, and general property. This can lead to different conclusions about how legitimate practitioners report trading activities on tax forms.

This impacts taxpayers who follow the rules; for example, those who apply Section 1256 to CFTC-regulated Kalshi contracts should not face penalties. This is so long as the positions were well documented and one that can be defended at the time taken, even if the IRS changes its guidance. It doesn’t extend to positions without a plausible basis, for example, assuming your capital treatment is untaxable because you didn’t receive a 1099.

If you treat Kalshi one way and Polymarket another, you need a real structural reason for the difference, not just as a tax-saving choice.

The largest 2026 development was introduced under the “One Big Beautiful Bill Act,” which affects gambling taxable income.

• Gambling Income: Starting in the 2026 tax year, taxpayers whose trade or business status is classified as gambling income can deduct losses only up to 90%. What this means for a trader is that the maximum they can benefit from in deductions is a maximum of 90%, even if they ran at a loss or broke even. Say they won $100,000 and also made $100,000 in losses; the max they can claim is $90,000, meaning $10,000 in taxable income must be paid, even without profits.
• Classification Matters: An important distinction for traders in choosing classification hinges on financial benefits rather than technicalities. If the activity, whether prediction markets or sports betting, is instead classified as a financial contract or treated under capital gains, the same trader who broke even will have a zero tax bill. This tax-character classification debate is why many tax professionals continue to push back against automatic classification of CFTC-regulated prediction market platforms.
• Choosing Classification: For traders who may have a large volume of wins and prediction market losses in a tax year. They should determine which applies to their circumstances before presuming it automatically receives the default gambling treatment, and highlight how prediction markets differ from sports betting. This can save thousands of dollars, particularly for traders who may otherwise be neutral economically for the year.

Polymarket’s unique approach includes settling positions in USDC, a stablecoin pegged to the dollar rather than in US dollars. This is unlike Kalshi and Robinhood traders who receive gains in US dollars. It means that traders on Polymarket, which runs on the Polygon blockchain, have to track their digital assets separately. Understanding how blockchain records transactions is crucial to accurate reporting.

If USDC is purchased directly from a centralised exchange at $1.00 and bridged to Polygon, the cost is $1.00. If USDC is obtained in another way, such as swapping ETH or other assets on decentralised exchanges, include a cost basis set at the USDC value on the date of the swap. This swap is still subject to income tax analysis, regardless of any subsequent trading inside Polymarket.

Each time USDC is purchased on “Yes” or “No” shares, or when you sell a position or receive resolution payouts, it creates a tax trigger across two layers. The first is the actual gain or loss, as well as any gains or losses on the crypto purchased. When you create taxable income, the IRS requires traders to provide both the on-chain Polygon records and the account dashboard-resolved markets on Polygon. Both are needed to create taxable income; neither alone offers a complete record.

To prevent audit risk related to federal income tax reporting, it’s vital to maintain the following records.

• Trading data: Some traders use multiple platforms, and each trade must be recorded. For every position, record when you entered, when it closed, what you paid, what you received, and the final profit or loss.
• Platform exports: Don’t wait till the end of the tax year, as reporting formats can change. Instead, download your full transaction history either monthly or quarterly. If using Polymarket, download the history of all platform exports from its interface, as well as the connected wallet address on PolygonScan for USDC; download a crypto tax guide if necessary, and retain the conditional token transaction records.
• Fee costs: Trading fees also reduce taxable gains by increasing costs. This applies to all three platforms and is one that many traders miss during their reconciliations.
• Retention period: The IRS can audit returns for up to three years, or up to six years if income has been underreported. Keep all records for seven years as a buffer for audits beyond the maximum window.
• Keep platforms separate: If using all three platforms- Kalshi, Robinhood, and Polymarket keep these records separated in files or tabs. Each may receive different classification treatment, which can complicate reconciling with any partial 1099 documentation that may exist.

The following forms are the ones to use for both gains and prediction market losses when filing your taxes:

• Section 1256 treatment: All gains and losses must be reported on Form 6781. It includes the option for the 60/40 split to be applied automatically once entered on the form, which then flows through to Schedule D.
• Capital gains treatment: Any short-term gains from contracts held for less than one year are reported on Form 8949 and Schedule D. This is alongside any other investment activity, which is taxed at ordinary income rates.
• Gambling income treatment: Any net profits are reported as “Other Income” on Schedule 1, Line 8z, which is typically labelled specifically as “Kalshi prediction market earnings” or “Polymarket contract gains.” The 90% loss cap applies only under the new rules for tax years 2026+.
• Combination rule: When traders use multiple platforms in the same tax year, gains and losses are generally combined by classification rather than filed as separate categories. However, it’s important that activity on each platform in classification choices remains consistent and is independently verifiable.
• Disclosure option: When the tax position is ambiguous, you may file a disclosure form to explain your treatment. This is usually best handled by a tax advisor from a reputable CPA firm due to high documentation standards.

During large betting events like the 2026 FIFA World Cup, many foreign investors may choose to invest in US prediction markets, which operate under different tax rules. These international investors generally visit for short periods, which means they don’t necessarily qualify as tax residents. The qualification test is based on the amount of time spent across three-year periods and day counts, not just on being in the country.

One ambiguous area concerns participation by visitors from abroad in prediction market activities, which are treated as gambling and may be subject to US taxes under that classification, whereas they would not be if treated as a financial contract. This area of taxation is still in the development phase and is therefore best addressed with professional advice regarding their residency status.

Traders tend to make one of five mistakes when completing tax returns on their prediction market trades:

• Assuming no 1099 means no tax owed: Your reporting obligation remains independent of whether the platform issues a form. Polymarket doesn’t issue any, which doesn’t reduce reporting requirements.
• Using inconsistent classification across platforms without justification: You can’t simply choose the tax treatment you prefer on one platform and a different one on another for no reason, just to benefit from lower taxes.
• Ignoring the embedded USDC cost basis on Polymarket: Not tracking the crypto cost basis of USDC used in Polymarket gains leaves out a taxable layer independent of prediction market activity itself.
• Relying entirely on Robinhood’s Event Contracts Annual Statement as a tax form: The statement should be used as supporting information, not as the only document for filing, without professional guidance.
• Not accounting for the 90% loss cap when estimating tax liability: A trader who thinks a break-even play means no tax bill may still owe tax due to the new 2026 gambling loss cap.

Ultimately, prediction market gains remain subject to taxes, regardless of the platform used or the form of receipt, although classification uncertainty remains in 2026. The question for traders, beyond identifying prediction market strategies, is not whether tax is owed but which classification applies to their trading. Due to the new 90% gambling loss limits, with no self-reporting from Polymarket and minimal from Kalshi and Robinhood, this can cause reporting issues.

Those who use Polymarket also have to face the crypto cost tracking. Due to the intricate nature and finances at stake, and lack of IRS guidance, professional tax advisor guidance is not an option but a must for high trading volumes.