Prediction Markets Tax: 2026 Kalshi & Polymarket Guide

Are prediction market winnings taxable?

Yes. If you made money on a prediction market, that profit is taxable income.

This is true even when the platform never sends you a tax form. Kalshi and Polymarket do not issue a comprehensive 1099 for your event contract trades, and many traders take that to mean their winnings are tax-free. They aren't.

Remember, the reporting obligation is yours, not the platform's. The IRS expects you to report your income whether or not a form shows up in your inbox.

What's genuinely unsettled is not whether you owe tax. It's how your winnings get classified, and that classification changes how much you pay.

As of 2026, the IRS has not issued any formal ruling, guidance, or FAQ on prediction markets. That gap is why two traders with identical winnings can end up with very different tax bills.

How are prediction markets taxed in 2026?

Because the IRS hasn't issued specific guidance, tax professionals fall back on one of three existing frameworks. Each one treats your winnings differently.

The three treatments are gambling income, capital gains, and Section 1256 contracts. Here's how they compare.

Gambling income (ordinary rates)

The most conservative treatment is to report your prediction market winnings as gambling income.

Under this approach, your winnings are taxed at your ordinary income rate, which can be as high as 37% in 2026. You report the income on Schedule 1 of Form 1040.

Starting January 1, 2026, the One Big Beautiful Bill Act limits your gambling loss deduction to 90% of your losses, and only if you itemize. Before this change, you could deduct 100% of your losses against your winnings.

In other words, the 90% cap can leave you paying tax on money you didn't actually make. And if you don't itemize, you can't deduct your losses at all.

Capital gains treatment

Some advisors treat event contracts like capital assets, the same category as stocks and bonds.

This treatment has real advantages. You can net your gains and losses against each other, and if your losses exceed your gains, you can deduct up to $3,000 of net capital losses against your ordinary income each year. Any extra losses carry forward to future tax years.

You report capital gains and losses on Form 8949.

Compare that to the gambling treatment, where her losses would be capped and her gains taxed in full. Remember, capital losses come with tax benefits!

Section 1256 contracts (the 60/40 split)

The most tax-advantaged treatment, and the most contested, is Section 1256.

Section 1256 of the tax code covers certain contracts traded on CFTC-regulated exchanges. Kalshi is a CFTC-regulated designated contract market, so some traders and advisors argue its event contracts qualify.

If they do, your gains get the 60/40 split: 60% is taxed at the lower long-term capital gains rate and 40% at the short-term rate, no matter how long you held the contract. You report these on Form 6781.

It's important to note that the IRS has not confirmed that prediction market contracts qualify for Section 1256. Some tax experts, including analysts at KPMG, argue that a contract on a sports outcome is closer to a wager than a regulated futures contract. If you take this position and the IRS disagrees, you could owe back taxes and penalties. This is the treatment most worth discussing with a tax professional before you file.

Which treatment applies to your platform?

The right treatment depends heavily on where you traded. Here's how the major platforms compare.

Remember, no 1099 does not mean no tax. It means the recordkeeping is on you.

One note for Kalshi users: the cash interest Kalshi pays on your uninvested balance is ordinary income, similar to crypto interest, and is separate from your trading gains.

How Polymarket trades are taxed as crypto

Polymarket is different from every other platform on this list, and it's where most traders get tripped up.

Polymarket runs on-chain. You fund your account with USDC, a stablecoin, on the Polygon network. Every time you enter or exit a market, you're moving crypto.

That means a single Polymarket trade is two taxable events, not one:

1. The crypto disposal. Spending or swapping USDC is a disposal of a digital asset, which triggers capital gains tax based on your cost basis.
2. The contract outcome. Your profit or loss on the prediction itself is taxable under one of the three treatments above.

If you want the full picture, see our complete guide to how cryptocurrency is taxed.

Polymarket doesn't send you anything to help with this. There's no 1099 and no cost basis report, just a wallet address and a transaction history on the blockchain.

If you find yourself staring at a year of on-chain Polymarket activity, don't panic. Crypto tax software like CoinLedger can import your wallet history, reconstruct your cost basis, and calculate your gains automatically.

One more thing for Polymarket users. Because the platform is based offshore, large balances can trigger foreign account reporting requirements like the FBAR and FATCA. If your offshore holdings crossed $10,000 at any point in the year, this is worth a closer look.

Do you pay state taxes on prediction markets?

If you live in a state with an income tax, your prediction market profits are taxable at the state level too, on top of federal tax.

State treatment usually follows your federal classification. If you report your winnings as ordinary income, your state taxes them as ordinary income. States like California, New York, and New Jersey have some of the highest rates, so the state bill on a big win can be significant.

If you live in one of the states with no income tax, like Florida, Texas, or Wyoming, you'll generally only owe federal tax on your winnings.

How to report prediction market winnings

Reporting comes down to three steps: figure out your treatment, gather your records, and put the numbers on the right form.

The form depends on your treatment:

• Gambling income goes on Schedule 1 (Form 1040).
• Capital gains go on Form 8949 and Schedule D.
• Section 1256 gains go on Form 6781.

There's one mistake that draws IRS attention more than any other: reporting only your net winnings.

If you treat your contracts as capital assets, the IRS expects to see each disposal reported separately, with its proceeds and cost basis, not a single "net winnings" figure. Reporting one lump-sum number is a common audit trigger, because it doesn't match the gross activity the platform or the blockchain shows.

Remember, report your gross gains and losses, not just the bottom line.

What if you never received a 1099? You still have to report. Here's how to reconstruct your records:

1. Download your full history from each platform. Kalshi and Robinhood provide a profit-and-loss summary in your account.
2. Pull your on-chain history for Polymarket from your wallet using a block explorer, or import the wallet into crypto tax software.
3. Match each trade to its date, amount, and cost basis.

If your records have gaps, crypto tax software can fill most of them automatically from your wallet addresses and exchange connections.

Can the IRS track prediction market winnings?

Yes, more easily than most traders assume.

Kalshi and Robinhood are regulated US platforms that verify your identity through KYC checks. They report information to the IRS, and the trail leads straight back to you.

Polymarket feels anonymous because it's on-chain and skips KYC for many users. But every transaction is recorded permanently on the public blockchain, and the IRS works with analytics firms like Chainalysis to link wallet addresses to real people. For more on this, see our guide on whether the IRS can track cryptocurrency.

Remember, "on-chain" means permanently recorded, not invisible.

File your prediction market taxes with confidence

Prediction market taxes are messy in 2026 because the rules are still being written. Your recordkeeping doesn't have to be.

CoinLedger connects to your wallets and exchanges, imports your Kalshi, Robinhood, and Polymarket activity, and reconstructs the cost basis these platforms don't give you. For on-chain Polymarket traders especially, it turns a tangle of USDC transactions into a clean, IRS-ready report in minutes.

Get started with a free CoinLedger account today. More than 700,000 investors around the world trust the platform to handle their crypto and event contract taxes.