Capital Gains

Capital gains are the profits you make when you sell or settle an asset for more than you paid for it. In prediction markets, a capital gain occurs when your contract pays out more than your cost basis.

Example

You buy 100 YES shares at $0.35 each (cost: $35). The market resolves YES, and you receive $1.00 per share ($100). Your capital gain is:

Short-term vs. long-term

Short-term capital gains apply to positions held for one year or less. They're taxed at your ordinary income tax rate (10%–37% depending on your bracket).

Long-term capital gains apply to positions held for more than one year. They're taxed at preferential rates: 0%, 15%, or 20% depending on your income.

Since most prediction market contracts settle within days or weeks, nearly all gains are short-term.

Capital gains as a tax method

Treating prediction market profits as capital gains is one of four possible tax methods. Under this approach, each closed position is reported individually on Form 8949 with results summarized on Schedule D. This method allows losses to offset gains and provides up to $3,000 in annual loss deductions against other income.

Who should consider this method

The capital gains method works well for traders with a mix of wins and losses, since losses directly offset gains. It's considered a "moderate" risk level — more defensible than Section 1256 but potentially less favorable than ordinary income for net losers.