The Complete Guide to Prediction Market Taxes in 2025

Yes. In the United States, profits from prediction markets are taxable income. This applies to every platform — Kalshi, Polymarket, Robinhood, DraftKings, FanDuel, and any others.

The IRS has not issued specific guidance on how prediction market profits should be classified. This creates uncertainty, but it does not mean they're tax-free. The IRS expects you to report all income, including income from sources without explicit rules.

Most tax professionals agree that prediction market profits fall into one of four categories: ordinary income, capital gains, Section 1256 contracts, or gambling income. The good news is that you get to choose which treatment to apply — and the difference can be significant.

The IRS has not released a Revenue Ruling, Notice, or other formal guidance specifically addressing prediction markets or event contracts. Here's what we do know:

• Kalshi is designated as a CFTC-regulated Designated Contract Market (DCM). This creates the strongest argument for Section 1256 treatment.
• Polymarket operates on-chain via Polygon using ERC-1155 conditional tokens. It is not CFTC-regulated, making capital gains the most commonly recommended approach.
• Robinhood offers event contracts within its brokerage app. The regulatory status of its prediction market contracts determines which tax treatments are most defensible.

Because there's no definitive guidance, multiple tax treatments are defensible. The key is to pick one method, apply it consistently, and be prepared to justify your choice if questioned.

Here's a summary of each method and when it applies:

Ordinary Income is the simplest: report your net P&L on Schedule 1, Line 8z. Your full marginal rate applies.

Capital Gains treats each position as a capital asset. You report every buy/sell or settlement on Form 8949. Short-term gains (held under 1 year) are taxed at ordinary rates. Long-term gains get preferential rates. You can also deduct up to $3,000 in net capital losses per year.

Section 1256 is the most tax-efficient for eligible contracts. 60% of gains are taxed at long-term rates and 40% at short-term rates, regardless of holding period. This is a significant advantage for short-term traders. However, it only applies to regulated futures and certain foreign currency contracts — which is why Kalshi's CFTC status matters.

Gambling Income requires reporting gross winnings (not net). Losses are only deductible if you itemize on Schedule A, and starting in 2026, the OBBBA caps gambling loss deductions at 90% of winnings.

Kalshi

Kalshi is a CFTC-designated contract market. Its event contracts are binary options traded on a regulated exchange. This regulatory status makes it the strongest candidate for Section 1256 treatment among prediction markets.

Import method: API connection or CSV export from your Kalshi account settings.

Recommended treatment: Section 1256 (moderate risk) or Capital Gains (conservative).

Polymarket

Polymarket uses a Central Limit Order Book (CLOB) paired with on-chain settlement on Polygon. Trades involve ERC-1155 conditional tokens through the CTF contract. Because Polymarket is not CFTC-regulated, Section 1256 treatment is harder to justify.

Import method: Wallet address (on-chain) or CSV upload.

Recommended treatment: Capital Gains (conservative) or Ordinary Income (conservative).

Robinhood

Robinhood's event contracts are available within its standard brokerage app. Your Robinhood 1099 may or may not separate event contract activity from stock trades.

Import method: CSV export from account settings.

Recommended treatment: Capital Gains (conservative) or Ordinary Income (conservative).

The savings depend on your income bracket and trading profile. Here's a realistic example for a trader in the 32% bracket with $10,000 in net prediction market profits (all short-term):

Section 1256 saves money because the 60/40 split means 60% of your gains are taxed at the long-term capital gains rate (max 20%) instead of your ordinary rate (up to 37%). For a trader in the 32% bracket, this blended rate is roughly 25.2% instead of 32%.

The savings increase with higher income brackets and larger profit amounts. A trader in the 37% bracket with $50,000 in profits could save over $3,500 with Section 1256 compared to ordinary income treatment.

Important: Section 1256 is only defensible for CFTC-regulated platforms like Kalshi. For Polymarket or Robinhood, capital gains is usually the best option because it allows loss deductions and position-level tracking.

Depending on your chosen method, you'll need one or more of these forms:

• Form 8949 — Sales and Other Dispositions of Capital Assets. Lists every position with date acquired, date sold, proceeds, cost basis, and gain/loss. Required for capital gains treatment.
• Schedule D — Capital Gains and Losses. Summarizes your Form 8949 totals and calculates net capital gain or loss. Filed with your 1040.
• Form 6781 — Gains and Losses from Section 1256 Contracts. Reports the 60/40 split. Only for CFTC-regulated contracts.
• Schedule 1 — Additional Income and Adjustments. Line 8z for ordinary income or gambling income reporting.
• Schedule A — Itemized Deductions. Required if using gambling treatment and claiming losses.

Our calculator generates pre-filled Form 8949, Schedule D, and Form 6781 PDFs based on your imported trades. We also generate a CPA summary letter explaining the methodology.

Cost basis is the amount you paid for your prediction market shares. When you sell or a market settles, your gain or loss is:

Gain/Loss = Proceeds − Cost Basis

We use FIFO (First In, First Out) to match shares. When you sell, the earliest purchased shares are matched first. This is the most common and IRS-accepted method.

Example: You buy 100 shares of "Yes" on a Kalshi market at $0.40 ($40 total). Later you buy 50 more at $0.60 ($30 total). The market settles Yes. Your 150 shares pay out $1.00 each ($150 total).

• First 100 shares: $100 − $40 = $60 gain
• Next 50 shares: $50 − $30 = $20 gain
• Total gain: $80

FIFO ensures consistent, auditable cost basis tracking across all your positions.

• Not reporting at all. Even if you didn't receive a 1099, your profits are taxable. Exchanges may report to the IRS independently.
• Mixing methods across platforms. Be consistent. If you use capital gains for Kalshi, use it for all platforms (though Section 1256 can apply only to eligible contracts).
• Forgetting to deduct losses. Prediction market losses are valuable. Under capital gains, you can deduct up to $3,000 in net losses per year against other income.
• Double-counting across platforms. If you trade the same market on multiple platforms, make sure you're not counting P&L twice.
• Ignoring holding periods. Short-term vs long-term matters for capital gains. Most prediction market trades are short-term, but some longer-dated markets may qualify for long-term rates.
• Filing gambling income without itemizing. Under gambling treatment, losses are only deductible if you itemize on Schedule A. If you take the standard deduction, you can't offset your winnings.

Don't wait until the last minute. Import your trades early, compare your tax methods, and decide on your approach before April. If you need more time, file Form 4868 for an automatic 6-month extension — but note that this extends the filing deadline, not the payment deadline.