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Gaming Edge’s TL;DR
- The IRS has not said how taxes on money made on prediction markets should be registered.
- The uncertainty adds to the dilemma about whether prediction markets are commodities or gambling.
Prediction market winnings are taxable, but the IRS still has not said exactly how they should be treated.
According to a Moneywise report, tax professionals have pointed to three possible approaches:
- Gambling income treatment
- Capital gains treatment
- Section 1256 treatment
Each can produce a different tax result, especially for players who both win and lose across multiple contracts.
That uncertainty comes as prediction markets remain tied up in broader legal and regulatory disputes. A federal judge in Manhattan on July 8 denied Kalshi’s request to block New York from enforcing gambling laws against its sports contracts, and Kalshi has appealed to the Second Circuit.
A federal appeals court reached the opposite conclusion for New Jersey in April.
Why the tax treatment matters
If prediction market profits are treated as gambling income, losses can generally be deducted only against winnings, and only if a taxpayer itemizes. A provision in President Donald Trump’s One Big Beautiful Bill Act would let gamblers deduct only 90 cents of every dollar lost, which became effective Jan. 1.
If the activity is treated more like stock trading, gains and losses would follow capital gains rules, including the ability to use up to $3,000 in excess losses each year to offset ordinary income.
A third possibility is Section 1256 treatment, which would split gains 60% long-term and 40% short-term even for short holding periods.
Former IRS special agent Ryan Schutz told Moneywise:
“I think it’s extremely confusing for the users of prediction markets.”
What users should do now
Tax forms may not settle the issue. Kalshi and Polymarket provide users a Form 1099 in some form, while Robinhood provides an Event Contracts Annual Statement that it says is not a substitute tax-reporting form.
For now, the clearest takeaway is recordkeeping. Traders are advised to keep detailed records for each contract, including entry prices, settlement amounts, dates, and losses, and to consult a tax professional.
The biggest open questions are whether the IRS will issue formal guidance before the 2026 filing season and whether courts will further clarify how prediction market contracts should be classified.
Based on reporting by Godwin Oluponmile for Moneywise.
