Gambling Income

The gambling income method treats prediction market profits the same way the IRS treats casino winnings, poker tournament prizes, and sports betting payouts. It's one of four possible tax treatments for prediction market income.

How it works

1. Report your gross winnings (total from all winning positions, not net profit) as "other income" on Schedule 1
2. Deduct losses on Schedule A, but only up to the amount of your winnings
3. You must itemize deductions to claim any losses — if you take the standard deduction, losses are not deductible at all

Example

You had $8,000 in winning positions and $5,000 in losing positions (net profit: $3,000).

• Gambling method: Report $8,000 income, deduct $5,000 if itemizing → $3,000 taxable
• If not itemizing: Report $8,000 income, no loss deduction → $8,000 taxable

For non-itemizers, this method can result in a much higher tax bill than capital gains or ordinary income methods.

OBBBA 2025 loss cap

The One Big Beautiful Bill Act (OBBBA) proposed in 2025 would cap gambling loss deductions at 90% of winnings. If enacted, using the example above, you could only deduct $7,200 (90% of $8,000) instead of the full $5,000 in losses.

When this method makes sense

Rarely. The gambling method is usually the worst option for prediction market traders because of the gross winnings reporting and itemization requirement. However, it may be required if the IRS specifically classifies prediction market contracts as wagers rather than financial instruments.