How prediction market winnings are taxed in the US

Profits from prediction markets are taxable income in the United States, on every venue, at every size, whether or not a form arrives in January. What is not settled is which part of the tax code applies: gambling income, capital gains, or the special regime for exchange-traded contracts under Section 1256. The venue you use decides what gets reported, and the reporting decides how hard your April is.

Three boxes, one profit

The same $1,000 of net winnings can land in three places on a return.

Gambling income. Winnings are ordinary income, reported in full. Losses are deductible only if you itemize, only against winnings, and, for tax years beginning in 2026 under the 2025 tax law as of September 2026, only up to 90% of the losses. A trader who takes the standard deduction pays tax on gross wins and gets nothing for gross losses. This is the treatment state regulators would prefer, since it follows from calling the contracts bets.

Capital gains and losses. Each contract is a capital asset bought and sold. Gains and losses net against each other, a net loss offsets up to $3,000 of other income per year, and the rest carries forward. Almost every position is held under a year, so the gains are short-term and taxed at ordinary rates.

Section 1256. Regulated futures contracts and certain options on a qualified exchange get a blended rate, 60% long-term and 40% short-term regardless of holding period, are marked to market at year end, and losses can be carried back three years against earlier 1256 gains. Whether a binary event contract on a designated contract market qualifies is the unsettled question, and it is the one to raise with a professional rather than settle from a help page.

What Kalshi reports

Kalshi is a US exchange with US customers, so it issues tax forms. As of September 2026, it sends a Form 1099-MISC to users whose net profit for the year clears the reporting threshold, which the venue puts at $600, and it files the same form with the IRS. Below the threshold no form is sent; the income is still taxable.

Two details matter. The 1099-MISC reports a net figure, wins less losses, which is not the shape gambling treatment wants, since that treatment reports gross wins and deducts losses separately. And a 1099-MISC is a generic income form; it does not tell the IRS which of the three boxes the venue thinks applies. Kalshi's own tax page states its view and the caveat that the view is not advice. Fees paid, which the fee formula makes easy to compute per order, reduce the net profit the form shows, and how Kalshi works covers where to find the trade export that backs it up.

What Polymarket reports, and why it is a crypto question

On the global site nothing is denominated in dollars. Deposits are USDC, positions are tokens on Polygon, and a winning position is redeemed for USDC. From the IRS's point of view each of those steps is a digital-asset transaction: buying a position token with USDC is a disposal of USDC and an acquisition of a token, and redeeming the token at 100 is a disposal of the token with a gain equal to 100 less what you paid. The USDC legs usually produce no gain because USDC holds at a dollar, but they still exist, and so does the record of them, permanently, on a public chain.

Broker reporting for digital assets started with 2025 transactions. Custodial brokers file Form 1099-DA showing gross proceeds, with cost basis added from 2026 onward. Congress repealed the rule that would have extended this to non-custodial front ends in 2025, so whether the global Polymarket site ever files a 1099-DA for anyone is doubtful, and it does not serve US persons in any case. What a US resident who off-ramps through an exchange will see is a 1099-DA from the exchange for the sale of USDC, which shows proceeds and, at most, a few cents of gain. That form says nothing about the profit made on Polymarket. The two records have to be reconciled by hand, which is why withdrawing from Polymarket is also a bookkeeping event.

The Polymarket US app is a different venue: dollars in, dollars out, a licensed exchange with US customers, and reporting in the same shape as Kalshi's. The two Polymarkets differ in more than tax, and which one you used is the first question a preparer will ask.

The Section 1256 question

Section 1256 covers regulated futures contracts traded on a qualified board or exchange, plus listed options and a few other instruments. Kalshi's contracts trade on a qualified board. Whether a contract that pays $1 or $0 on a yes-or-no question is a regulated futures contract in the statute's sense has not been decided by the IRS in published guidance or by a court, as of September 2026. Some preparers report Kalshi results on Form 6781 under 1256; others treat them as ordinary; a few as gambling. The blended rate and the loss carryback make the answer worth money to an active trader, and it is a professional's call. Never self-diagnose this from a forum.

Record-keeping

Keep, per trade: date, market, side, contracts, price, fee, and how it settled. Kalshi exports a trade history; on Polymarket the chain is the record and a wallet address is enough to reconstruct it, but a spreadsheet built during the year beats a block explorer in March. Keep the USDC deposit and withdrawal records from the exchange too, since the 1099-DA will match those and not the trades. A year of Fed contracts, eight FOMC decisions at a few trades each, produces a manageable ledger; a year of daily temperature ladders does not.

A worked example

A Kalshi trader closes 2026 with 30 settled positions: 18 winners for $3,400 of gross gains, 12 losers for $2,150 of gross losses, and $210 of fees paid, with gains and losses figured the way payout versus profit figures them. Net profit is $1,040, which is the figure a 1099-MISC would report.

Treatment	Income reported	Losses allowed	Taxable
Capital gains, netted	$1,040	included	$1,040 short-term
Gambling, itemizing	$3,400	90% of $2,360 = $2,124	$1,276
Gambling, standard deduction	$3,400	$0	$3,400
Section 1256	$1,040	included	$624 long-term, $416 short-term

Under gambling treatment the fees count as part of the wager, so the losses are $2,150 plus $210. The same year produces a taxable figure anywhere from $1,040 to $3,400 depending on the box, and a different rate on the 1256 line. That spread is the whole reason to ask a professional before the year ends rather than after. Notice also that under gambling treatment the 1099-MISC, showing $1,040, does not match the $3,400 the return reports, and mismatches generate letters.

What to check before you trade

• Which venue, and which Polymarket, since the reporting shape follows the venue.
• Whether you will itemize in the year, because gambling treatment without itemizing taxes gross wins.
• Whether your preparer has a view on Section 1256 for event contracts, and what it is.
• That your trade export and your exchange's 1099-DA can be reconciled to the dollar.
• The venue's own tax page, which changes as the law does. Check the venue's own page before relying on it.

Nothing on this page is investment advice or tax advice, and the venue's current rule text and fee page are the only things that pay.