Prediction market gains are taxable. This is the single most important fact that new traders overlook. Whether you made $50 or $50,000, the IRS expects you to report your prediction market profits. The good news is that CFTC-regulated platforms receive favorable tax treatment compared to many other investment types. This guide breaks down exactly how your gains are classified, what forms you will receive, and how to stay compliant without overpaying.
Disclaimer: This guide provides general educational information about prediction market taxation. It is not tax advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional for advice specific to your situation.
Are Prediction Markets Taxable?
Yes. There is no ambiguity here. The IRS considers prediction market gains to be taxable income. This applies whether you:
- Hold a contract to resolution and collect a payout
- Sell a contract before resolution at a profit
- Receive proceeds from any prediction market trade on any platform
The taxable event occurs when you realize a gain — either by selling a contract or when it resolves. Unrealized gains (contracts you still hold that have increased in value but have not been sold or resolved) are not taxed until you close the position, with one important exception for Section 1256 contracts discussed below.
How Gains Are Classified
The tax classification of your prediction market gains depends on the regulatory status of the platform you trade on. This distinction matters significantly because it determines your tax rate.
CFTC-Regulated Platforms (Kalshi, Robinhood Sports)
Contracts traded on CFTC-regulated exchanges are classified as Section 1256 contracts under the Internal Revenue Code. This is the same classification used for regulated futures contracts and certain options. Section 1256 treatment provides two major advantages:
The 60/40 rule. Regardless of how long you held the contract, your gains are automatically split 60% long-term capital gains and 40% short-term capital gains. For a trader in the 32% ordinary income bracket, this blended rate can save substantial money compared to having everything taxed as short-term gains.
| Tax Bracket | Short-Term Rate | 60/40 Blended Rate | Savings |
|---|---|---|---|
| 22% | 22% | 18.8% | 3.2% |
| 24% | 24% | 20.2% | 3.8% |
| 32% | 32% | 25.4% | 6.6% |
| 35% | 35% | 27.4% | 7.6% |
| 37% | 37% | 28.6% | 8.4% |
Mark-to-market at year end. Section 1256 contracts are marked to market on December 31. This means any unrealized gains or losses on open positions are treated as if you sold and immediately repurchased them at fair market value on the last day of the year. You pay taxes on those unrealized gains even if you have not closed the position.
Loss carryback. Section 1256 net losses can be carried back up to three years to offset Section 1256 gains from those prior years. This is a unique benefit not available for regular capital losses.
Crypto-Based Platforms (Polymarket)
Polymarket operates on the Polygon blockchain using USDC. The IRS has not issued specific guidance on prediction markets conducted through crypto, but the prevailing interpretation among tax professionals is:
Gains are short-term capital gains or ordinary income. Without CFTC regulation, Polymarket contracts do not qualify for Section 1256 treatment. Gains are taxed at your ordinary income rate if held less than one year, which covers the vast majority of prediction market trades.
Crypto-to-crypto transactions may be taxable. Converting ETH to USDC to fund your Polymarket account could itself be a taxable event if the ETH appreciated since you acquired it. Similarly, withdrawing USDC and converting to USD triggers a tax event on any USDC appreciation.
Record-keeping burden is higher. Polymarket does not issue 1099 forms. You are responsible for tracking every transaction, including deposits, trades, and withdrawals, along with the USD value at the time of each transaction.
Tax Treatment by Platform
Here is a platform-by-platform breakdown of what to expect:
Kalshi
- Classification: Section 1256 contracts (60/40 treatment)
- Tax forms: Issues 1099-B annually if your proceeds exceed the IRS reporting threshold
- Cost basis reporting: Yes, Kalshi reports cost basis to the IRS
- Fees: Transaction fees are deductible as investment expenses
Robinhood Sports
- Classification: Section 1256 contracts (powered by Kalshi's CFTC-regulated exchange)
- Tax forms: 1099-B included in your consolidated Robinhood tax statement
- Cost basis reporting: Yes, Robinhood reports cost basis
- Integration: Gains appear alongside your stock and options activity on the same 1099
Polymarket
- Classification: Short-term capital gains (no Section 1256 treatment)
- Tax forms: None issued by the platform
- Cost basis reporting: You must track this yourself
- Additional complexity: USDC conversions may trigger separate taxable events
FanDuel Predicts / DraftKings Predictions
- Classification: Likely Section 1256 if contracts are cleared through CFTC-regulated infrastructure
- Tax forms: 1099 forms for qualifying gains
- Note: Confirm the regulatory structure, as it may vary by contract type
Record-Keeping Best Practices
Good records make tax season straightforward and protect you in an audit. Here is what to track:
For every trade, record:
- Date and time of purchase
- Platform name
- Contract description (the exact market question)
- Number of contracts
- Purchase price per contract
- Date and time of sale or resolution
- Sale/resolution price per contract
- Fees paid
- Net gain or loss
Use a spreadsheet or dedicated tool. A simple Google Sheet works for casual traders. If you trade actively across multiple platforms, consider crypto tax software like Koinly, CoinTracker, or TokenTax, which can import Polymarket transactions from your wallet.
Download transaction history regularly. Do not wait until tax season. Export your trade history from each platform monthly or quarterly. Platforms sometimes change their reporting formats, and having regular exports ensures you never lose data.
Keep records for at least seven years. The IRS can audit returns up to three years back (six years if they suspect underreporting). Seven years gives you a comfortable buffer.
Separate your prediction market activity by platform. This makes it easier to reconcile against 1099 forms and ensures you correctly apply Section 1256 treatment only to eligible trades.
Working With a Tax Professional
Prediction market taxation is a developing area of tax law. A qualified CPA or tax attorney can help you:
- Correctly classify gains from each platform
- Optimize your tax position using the 60/40 rule and loss carrybacks
- Handle multi-platform reporting, especially when mixing regulated and crypto platforms
- Navigate state tax implications, which vary significantly
- Respond to IRS inquiries about prediction market income
When choosing a professional, look for someone experienced with derivatives, Section 1256 contracts, or crypto taxation. A general tax preparer may not be familiar with the nuances of event contracts. The additional cost of a specialist typically pays for itself through correct classification and avoided penalties.