Prediction Market Taxes: What You Need to Know
Everything you need to know about taxes on prediction market winnings. Covers Polymarket, Kalshi, and other platforms. IRS reporting, capital gains, and tax strategies.
⚠️ Tax Disclaimer
This guide provides general information about prediction market taxation. It is not tax advice. Tax laws are complex and vary by jurisdiction. Always consult a qualified tax professional for advice specific to your situation.
Quick Summary
Kalshi (US)
- • 1099-B forms provided
- • Section 1256 treatment (60/40)
- • Straightforward reporting
Polymarket (Crypto)
- • No tax forms provided
- • Track trades yourself
- • May need crypto tax software
Are Prediction Market Profits Taxable?
Yes. In the United States and most other countries, profits from prediction markets are taxable income. How they're taxed depends on:
- Which platform you use (regulated vs. crypto)
- Your country's tax laws
- How the activity is classified (trading vs. gambling)
- Your holding period and trading frequency
The good news: prediction markets on platforms like Kalshi are typically treated as capital gains, not gambling income, which can result in more favorable tax treatment.
Kalshi Tax Treatment
As a CFTC-regulated exchange, Kalshi provides clear tax documentation and favorable treatment for US taxpayers.
1099-B Forms
Kalshi issues 1099-B forms to all users with taxable activity. These forms include:
- Proceeds from all closed positions
- Cost basis for each trade
- Gains or losses per contract
- Date acquired and sold
Section 1256 Treatment
Kalshi event contracts may qualify for Section 1256 tax treatment, which offers significant advantages:
60/40 Tax Rule
Under Section 1256, gains are taxed as:
- • 60% at long-term capital gains rates (0%, 15%, or 20%)
- • 40% at short-term/ordinary income rates (up to 37%)
This applies regardless of how long you held the position.
Example Calculation
Let's say you made $10,000 in Kalshi profits and you're in the 32% tax bracket:
| Treatment | Calculation | Tax Owed |
|---|---|---|
| Ordinary Income (no 1256) | $10,000 × 32% | $3,200 |
| Section 1256 (60/40) | ($6,000 × 15%) + ($4,000 × 32%) | $2,180 |
In this example, Section 1256 treatment saves over $1,000 in taxes. The savings increase as your income grows.
Polymarket Tax Treatment
Polymarket operates differently since it's a crypto-based platform without US regulatory oversight.
No Tax Forms
Polymarket does not provide 1099 forms or any tax documentation. You're responsible for:
- Tracking all your trades
- Calculating gains and losses
- Reporting to tax authorities
How to Track Polymarket Trades
Several options for tracking your Polymarket activity:
- Manual tracking: Keep a spreadsheet of all trades with dates, amounts, and prices
- Crypto tax software: Tools like Koinly, CoinTracker, or TaxBit can import blockchain data
- Polymarket history: Download your transaction history from the platform
Tax Classification
How Polymarket profits are classified for tax purposes is less clear than Kalshi. Possible treatments:
- Capital gains: Most common treatment, similar to crypto trading
- Ordinary income: If IRS views it as gambling (less favorable)
- Mixed: USDC conversion may trigger separate crypto events
⚠️ Consult a Tax Professional
The tax treatment of offshore crypto prediction markets is an evolving area. If you have significant Polymarket activity, consult a tax professional familiar with crypto taxation.
How to Report Prediction Market Income
For Kalshi Users
- Download your 1099-B from Kalshi (available in January for prior year)
- Enter the information on Schedule D and Form 8949
- Report total gains/losses on your Form 1040
- If Section 1256 applies, use Form 6781
For Polymarket Users
- Export your transaction history from Polymarket
- Use crypto tax software or manually calculate gains/losses
- Report on Schedule D and Form 8949
- Include USDC conversions as crypto transactions if applicable
Key Forms
| Form | Purpose |
|---|---|
| Schedule D | Summary of capital gains and losses |
| Form 8949 | Detailed list of individual transactions |
| Form 6781 | Section 1256 contracts (60/40 treatment) |
| 1099-B | Provided by Kalshi (broker proceeds) |
Deducting Prediction Market Losses
If you have losing years, you can use losses to offset other income:
Capital Loss Deductions
- Losses first offset capital gains dollar-for-dollar
- Excess losses can offset up to $3,000 of ordinary income per year
- Remaining losses carry forward to future years indefinitely
Section 1256 Loss Carryback
One advantage of Section 1256 treatment: you can carry back losses up to 3 years to offset prior gains. This can result in a tax refund for previous years.
Tax Planning Tips
1. Keep Detailed Records
Track every trade with date, amount, price, and outcome. This is essential for accurate reporting and audit defense.
2. Use Tax Software
For Polymarket and crypto activities, crypto tax software can save hours of work and reduce errors.
3. Consider Timing
If you have control over when to realize gains or losses, consider the tax implications. Taking losses in high-income years can maximize deductions.
4. Set Aside Money for Taxes
If you're profitable, set aside 20-30% of gains for taxes. Don't spend it all and get caught short at tax time.
5. Consult a Professional
If you have significant trading activity, work with a CPA or tax attorney familiar with derivatives and crypto taxation.
International Considerations
Tax treatment varies significantly by country:
- UK: May fall under gambling (tax-free) or capital gains (taxable) depending on circumstances
- Canada: Generally treated as capital gains (50% taxable)
- Australia: Capital gains tax applies; may be CGT-exempt if gambling
- EU: Varies by country; check local tax authority guidance
Always consult local tax professionals for guidance specific to your jurisdiction.
Frequently Asked Questions
Do I have to pay taxes on prediction market winnings?
Yes, in most jurisdictions including the US, prediction market winnings are taxable. The specific tax treatment depends on the platform and your country's tax laws. In the US, these are generally treated as capital gains, not gambling income.
Does Kalshi provide tax forms?
Yes, Kalshi provides 1099-B forms for all users with taxable trading activity. These forms detail your trades, proceeds, and cost basis, making tax reporting straightforward.
Does Polymarket provide tax forms?
No, Polymarket does not provide tax forms. You're responsible for tracking your trades and reporting them yourself. Consider using crypto tax software to help with this.
How are Kalshi trades taxed?
Kalshi trades may qualify for Section 1256 treatment, meaning 60% of gains are taxed at long-term rates and 40% at short-term rates, regardless of holding period. This can result in lower effective tax rates.
Can I deduct prediction market losses?
Yes, you can generally deduct capital losses against capital gains. If losses exceed gains, you can deduct up to $3,000 against ordinary income per year, with excess losses carrying forward to future years.
Conclusion
Prediction market taxes don't have to be scary. The key takeaways:
- Kalshi users have it easy with 1099 forms and potential Section 1256 benefits
- Polymarket users need to track their own trades but can use crypto tax software
- Keep records of all activity regardless of platform
- Consult professionals for significant trading activity
Happy trading—and don't forget to pay your taxes!