Capital Losses

A capital loss occurs when you close a prediction market position for less than you paid. This happens when you buy YES and the market resolves NO, or when you sell shares at a lower price than you purchased them.

Example

You buy 150 YES shares at $0.70 each (cost: $105). The market resolves NO, and your shares are worth $0. Your capital loss is:

How losses save you money

Capital losses are valuable because they reduce your tax bill in three ways:

1. Offset capital gains: Losses cancel out gains dollar-for-dollar. If you had $5,000 in gains and $3,000 in losses, you only pay tax on $2,000.
2. Deduct against other income: If your losses exceed your gains, you can deduct up to $3,000 per year against wages, salary, and other income.
3. Carry forward: Any losses beyond the $3,000 annual limit carry forward to future tax years indefinitely.

The $3,000 limit

The IRS caps the amount of net capital losses you can deduct against ordinary income at $3,000 per year ($1,500 if married filing separately). Excess losses carry forward. If you lost $15,000 trading prediction markets, you'd deduct $3,000 in year one and carry the remaining $12,000 to future years.

Important for prediction market traders

If you had a losing year, the capital gains method is often the best choice because it maximizes your loss deductions. The gambling income method, by contrast, can only use losses to offset winnings — not other income — and only if you itemize.