How Are Prediction Markets Taxed? The IRS Still Hasn’t Provided Guidance

Prediction markets like Kalshi and Polymarket have exploded in popularity this year, with traders wagering on everything from election outcomes to which team lifts the World Cup trophy. But as more than half of 2026 has come and gone, the Internal Revenue Service still hasn’t issued any formal guidance on how winnings and losses from these contracts should be taxed, leaving traders and tax professionals to navigate a genuinely uncertain landscape.

“I think it’s extremely confusing for the users of prediction markets because they’re getting a lot of conflicting guidance,” Ryan Schutz, a former IRS special agent and founder of First There Tax, told CNBC. Without a formal ruling, tax preparers have been forced to analogize prediction market contracts to existing categories that were never designed with this product in mind.

Three Competing Ways to Report Winnings

Tax experts have identified three main frameworks that could apply to prediction market income: gambling income, capital gains, or treatment as a Section 1256 contract. Each comes with meaningfully different tax outcomes, and which one applies can depend on the specific contract, the platform, and even how a trader’s activity is characterized on audit.

Under gambling treatment, winnings are reported as ordinary income, and losses are only deductible up to the amount of winnings — and only for taxpayers who itemize. That calculation just got tougher, too. President Trump’s “One Big Beautiful Bill Act” included a provision capping gambling loss deductions at 90%, starting with the 2026 tax year. Under the old rules, a trader who won $100 and lost $100 would owe nothing. Under the new framework, that same trader could only deduct $90 of the loss, leaving $10 of taxable income despite breaking even economically.

Capital gains treatment offers a different set of trade-offs. Taxpayers whose losses exceed their gains can use up to $3,000 in realized losses per year to offset ordinary income, with the ability to carry additional losses forward — a more favorable structure than the gambling deduction cap, though most prediction market positions are held briefly enough to be taxed as short-term gains at ordinary income rates anyway.

Why Section 1256 Is the Prize Worth Fighting For

The most favorable — and most contested — path is Section 1256 contract treatment, which applies a 60/40 split regardless of how long a position is held: 60% of net gains taxed at the lower long-term capital gains rate, and 40% at the higher short-term rate. Long-term capital gains rates top out at 20%, while short-term gains and ordinary income can be taxed as high as 37%, making the 1256 split significantly cheaper for high-volume traders.

Kalshi’s status as a Commodity Futures Trading Commission-regulated Designated Contract Market has fueled arguments that its contracts could qualify for this treatment, similar to regulated futures. But that’s far from settled. The CFTC has also classified many of these contracts as binary options that function as swaps — a characterization that could trigger a statutory exclusion Congress built specifically to keep swap-like contracts out of the 60/40 regime. Polymarket, as an offshore platform that doesn’t issue U.S. tax forms, doesn’t qualify under any reading of Section 1256, and many practitioners doubt Kalshi’s contracts clear the bar either.

Without a definitive answer from the IRS, tax professionals are left interpreting fragmented, sometimes contradictory signals — a problem that’s only grown more urgent as prediction markets have moved from a niche curiosity into a mainstream way to speculate on sports outcomes, politics, and world events.

What Traders Should Do in the Meantime

Every tax expert consulted on the issue agrees on at least one point: income from prediction markets is taxable and reportable no matter how it ends up being classified, even for traders who never receive a 1099 from the platform they used. That makes recordkeeping essential in the absence of clear rules — tracking every contract, entry and exit price, and platform statement, since the eventual classification could apply retroactively to positions already on the books.

For traders who also frequent traditional sportsbooks, the same 90% cap on wagering loss deductions under the new law is worth watching closely, since it changes the math on itemizing altogether. Bettors comparing platforms and looking for value can check the latest DraftKings promo code offers as part of that broader planning. Until the IRS weighs in with formal guidance, prediction market traders are effectively filing in the dark, relying on the judgment calls of accountants rather than a clear rulebook — a gap that’s likely to draw more scrutiny as trading volumes climb heading into next year’s filing season.