Prediction Market Taxes: What You Owe (US Guide)

Yes, prediction market profits are taxable in the US. Kalshi sends you a 1099. Polymarket does not, but the IRS still expects you to report.

The split between these two platforms is not just about tax forms. It reflects a genuine difference in legal classification, tax treatment, and record-keeping burden. Understanding which rules apply to which platform changes how you plan, and potentially how much you owe.

How Kalshi Profits Are Taxed

Kalshi is a US-regulated exchange operating under CFTC oversight. Because of that regulatory structure, its contracts qualify as Section 1256 contracts under the Internal Revenue Code. This matters significantly for how your profits get taxed.

Section 1256 contracts receive what is called 60/40 treatment. Sixty percent of your net gain is taxed at the long-term capital gains rate (0%, 15%, or 20% depending on your income), and 40% is taxed at your ordinary income rate (up to 37%). This applies regardless of how long you held the position. You do not need to hold for a year to get the long-term rate on the 60% portion.

Kalshi issues 1099-B forms, the same form brokers use for stock trades. You report the net gain or loss on Form 6781 (Gains and Losses from Section 1256 Contracts), not on Schedule D directly. TurboTax and most professional tax software handle this automatically once you import your 1099-B.

Worked example:

You made $5,000 net profit on Kalshi over the year.

Under Section 1256 treatment:

• 60% of $5,000 = $3,000, taxed at 15% long-term capital gains rate = $450
• 40% of $5,000 = $2,000, taxed at 32% ordinary income rate = $640
• Total tax: $1,090 (21.8% effective rate on the $5,000)

If Kalshi profits were treated as all short-term (as most online platforms are):

• $5,000 x 32% = $1,600 (32% effective rate)

The Section 1256 treatment saves $510 in this example. At higher income brackets, the savings are larger because the gap between ordinary income rates and long-term capital gains rates widens.

Section 1256 also allows carryback of net losses. If you had a losing year on Kalshi, you can carry the loss back three years or forward indefinitely, which is more flexible than standard capital loss treatment.

One caveat: the Section 1256 treatment for prediction market contracts has not been tested extensively in court. Kalshi's exchange structure is novel. The 1099-B reporting and CFTC registration are strong indicators, but if you have large positions, confirm current IRS guidance or ask a CPA.

How Polymarket Profits Are Taxed

Polymarket operates as a decentralized prediction market on the Polygon blockchain. There is no US corporate entity issuing tax forms. You will not receive a 1099. That does not mean the income is untaxed.

Polymarket trades involve USDC and on-chain outcome tokens. The IRS treats crypto assets as property. Each trade, each resolution, and each USDC conversion is a potentially taxable event. The burden of tracking every transaction is entirely on you.

Here is how the tax math works on a basic trade:

You buy 100 outcome shares at $0.60 each ($60 total). The event resolves in your favor. Each share pays out $1.00. Your taxable gain is $0.40 per share, or $40 total.

If you sold those shares before resolution at $0.85 each, the gain is $0.25 per share, or $25 total. Same math, different trigger.

Both scenarios produce a capital gain. The rate depends on holding period. If you held the shares for more than one year before selling or resolution, it is long-term (0%, 15%, or 20%). Under one year, it is short-term, taxed at ordinary income rates.

In practice, most Polymarket positions resolve within weeks or months, so nearly all gains are short-term.

The tricky part is cost basis. If you buy shares in multiple batches at different prices, you need to track each lot separately. Most people use FIFO (first-in, first-out) by default, but you can specify specific lots if you track them properly from the start.

There is no official Polymarket tax export tool. You pull your transaction history from Polygonscan using your wallet address, then calculate gains manually or import it into a crypto tax tool. This is tedious, but the transactions are all on-chain and verifiable, so the data is there.

Tax Comparison Table

The classification difference between Kalshi and Polymarket is not just an administrative detail. It determines which deduction rules apply, which forms you file, and whether losses carry forward.

Gambling losses, the category that covers crypto casinos and traditional sports betting, can only be deducted up to the amount of gambling winnings in the same year. Excess losses disappear. Capital losses, which apply to Polymarket, can carry forward indefinitely and offset $3,000 of ordinary income per year even if you have no capital gains to absorb them. Section 1256 losses on Kalshi can carry back three years, which is even more flexible.

If you had a losing year, the platform you used matters more than the dollar amount of the loss.

The Crypto Gambling Tax Overlap

The crypto gambling tax article explains the double-tax problem in detail. Here is the short version as it applies to prediction markets.

When you win crypto from gambling, you owe income tax at the moment of winning, based on the fair market value of the crypto you received. Then, when you sell that crypto, you face a separate capital gains calculation. If the price dropped between winning and selling, you effectively paid income tax on money you no longer have.

Polymarket's USDC structure mostly sidesteps this. USDC is pegged to the dollar. A $40 gain in USDC is a $40 gain in dollars (under normal conditions). There is no meaningful price movement between winning and selling. The double-tax problem nearly disappears.

The edge case is a USDC depeg. In March 2023, USDC briefly dropped to $0.87 during the Silicon Valley Bank collapse. If you won USDC during the depeg and then held until it re-pegged, you would have gambling or capital gains income on the recovery. This is unusual, but the tax exposure exists.

For anyone also playing crypto casinos, the picture is messier. You win BTC, BTC moves 15% before you sell, you owe income tax on the original value regardless. The comparison between prediction markets and crypto casinos covers the practical differences in detail, but the tax exposure is one of the clearest reasons to understand the distinction before depositing.

One piece of good news for losing Polymarket traders: capital losses are real losses that carry forward. The can you make money on prediction markets article documents that the majority of traders lose money over time. If you are among them, those losses have tax value. Track them. They offset future capital gains dollar for dollar.

The same is not true for gambling losses from crypto casinos or sports betting. Those are use-it-or-lose-it deductions, limited to winnings in the same year, requiring itemization, and now capped at 90% of winnings under rules that took effect for the 2025 tax year.

What to Track

For Kalshi:

Save your 1099-B. Kalshi emails it in January for the prior tax year. It will show your total net gain or loss across all contracts. Report it on Form 6781. If you use tax software, there should be a specific input for Section 1256 contracts. Do not file it as a regular stock trade on Schedule D.

Also save any year-end account statements. If there is ever a discrepancy between your records and Kalshi's, having both gives you something to work with.

For Polymarket:

Use a dedicated wallet that you only use for Polymarket. If your Polygon wallet also holds NFTs, DeFi positions, and regular USDC transfers, the transaction history becomes a tangled mess that is difficult to sort later.

Export your transaction history from Polygonscan (polygonscan.com). Enter your wallet address, click "ERC-20 Token Txns," and export as CSV. This gives you every USDC and outcome token transaction with timestamps.

From there, two tools handle the calculation well. CoinLedger imports Polygon transactions directly and produces a Form 8949-ready gain/loss report. Koinly does the same and is slightly better at handling DeFi edge cases. Both charge annual fees (roughly $50 to $200 depending on transaction volume). For anyone with more than a few dozen trades, manual calculation is not worth it.

Do not wait until tax season. Export monthly. Prices and contract details on old positions can be harder to verify months later, and Polygonscan data can sometimes be incomplete for older or unusual token types.

For crypto casinos:

Some platforms provide transaction history exports that simplify tax tracking considerably. Stake, one of the larger crypto casinos, allows users to download betting history in a structured format. This does not replace a tax tool, but it gives you a starting point for calculating gambling income and losses.

For offshore casinos that provide no export, your only option is pulling transaction data from the blockchain directly, the same process as Polymarket.

General rules regardless of platform:

Record the USD value of every transaction at the time it occurs, not at year-end. For USDC, this is trivial ($1 = $1). For BTC or ETH, use a price feed like CoinGecko or CoinMarketCap and snapshot the price at the time of the transaction. Many crypto tax tools do this automatically once you import the raw transaction data.

Keep records for at least three years after filing. For large or complex returns, seven years is safer. The IRS has three years to audit standard returns and six years if there is a significant understatement of income.

FAQ

Does Polymarket report to the IRS?

No. Polymarket has no US corporate entity and issues no tax forms. All reporting is on you.

What if I made under $600 on a prediction market? Do I still owe taxes?

Yes. The $600 threshold refers to when a platform is required to issue a W-2G form for gambling income. That applies to sports betting, not prediction markets. For Kalshi, all trades are reported on a 1099-B regardless of size. For Polymarket, the IRS expects you to report all capital gains regardless of the amount. There is no de minimis exception for crypto capital gains.

Can I deduct prediction market losses?

On Kalshi, yes. Section 1256 losses are capital losses with carryback and carryforward options. On Polymarket, yes. Capital losses carry forward indefinitely. These are both more favorable than gambling losses from casinos or sports betting, which are limited to winnings in the same year and require itemization.

Are stablecoin prediction market gains really taxable?

Yes. USDC is still a crypto asset in the eyes of the IRS. Gains from trading USDC-denominated contracts are taxable events. The stable price means the double-tax problem is minimal, but the underlying gain is still real and reportable.

What if I am outside the US?

This article covers US federal tax rules. Most other major jurisdictions either treat prediction market gains as capital gains (UK, Australia, Canada) or as gambling winnings that may or may not be taxable. In the UK and Australia, casual gambling winnings are generally not taxed. Verify the rules in your specific country.

Should I use a tax professional for this?

If your total gains or losses across prediction markets and crypto gambling exceed a few thousand dollars, yes. A CPA familiar with both crypto and gambling taxation is worth the cost. The intersection of Section 1256 rules, crypto property treatment, and gambling income classification is narrow enough that most general CPAs will need to research it. Ask specifically whether they have filed returns with Section 1256 crypto contract income before hiring.

Last updated: March 2026. Tax laws change frequently. This is not tax advice. Consult a qualified tax professional for your specific situation.