How to File Taxes on Kalshi and Polymarket Earnings

Prediction markets have emerged as one of the fastest-growing (and most controversial) corners of American "finance". You can now place a contract on who wins the Super Bowl, whether the Fed raises rates, or even whether Jesus Christ returns before 2027. Platforms like Kalshi and Polymarket let Americans bet on almost anything - over $3.3B was wagered on the 2024 U.S. presidential race alone on Polymarket! That's some wild betting.

But here's where things get tricky. What happens to those earnings? The IRS has yet to issue clear guidance, leaving things open to interpretation. Axios reports that 61% of Americans say prediction market trading is "closer to gambling," while only 8% say it's "closer to investing," according to a March 2026 Ipsos poll of 2,363 adults. Meanwhile, the platforms themselves insist they're offering regulated financial contracts, not bets.

What that means for YOU is your earnings could be treated as ordinary income, capital gains... or something else. And that can swing your tax bill. This guide helps break down the different tax treatments and what you should consider for YOUR taxes.

Are prediction market earnings taxable?

Yes. Profits from prediction markets are generally taxable even if you don't receive a tax form. The hard part is determining how those profits and losses should be classified.

How are earnings from Kalshi or Polymarket taxed?

Maybe you bet correctly on a Fed rate decision or... made a good call on whether there'd be more tech layoffs this year or what gas prices would be tomorrow.

But as of 2026, the IRS hasn't issued specific guidance establishing one tax treatment for every prediction-market contract. Depending on the platform and contract, taxpayers and tax professionals may consider the earnings as ordinary income, capital gains or gambling.

That distinction matters because different classifications have different rules for:

• tax rates,

• how gains and losses are calculated,

• which tax forms you use,

• whether losses can offset other income, and

• whether special rules such as Section 1256 or the wagering-loss limitation apply.

The appropriate treatment should be based on the actual contract, platform, transaction, and applicable tax law.

1. Ordinary Income Treatment

This is the most conservative and most common tax treatment that essentially reports your net profits from prediction markets as "Other Income" on Schedule 1, Line 8z of your Form 1040, with a label like "Kalshi prediction market earnings" or "Polymarket contract gains."

Your gains are taxed at your ordinary income tax rate, which could be anywhere from 10% to 37% depending on your tax bracket. For example, if you're in the 24% tax bracket, and net $12,000 in Kalshi profits, you'd owe $2,880 in federal taxes with this approach.

This treatment is straightforward and defensible, but high earners pay more taxes than if the income was treated differently.

2. Capital Gains Treatment

Some tax professionals argue that prediction market contracts should be treated as capital assets, similar to stocks or options, with gains and losses reported on Schedule D via Form 8949. Under this treatment, positions held for more than one year would qualify for long-term capital gains rates (0%, 15%, or 20%).

However, most prediction market contracts resolve quickly (days or weeks), meaning the majority of gains would still be taxed as short-term capital gains, which are taxed at the same rate as ordinary income anyway.

That said, capital asset treatment allows you to offset losses against gains dollar-for-dollar, which can meaningfully reduce your bill if you've had a rough stretch betting. If your losses exceed your gains, individuals can generally deduct up to $3,000 of net capital loss against other income per year ($1,500 if married filing separately), with unused losses carried forward.

3. Section 1256 Contract Treatment

This treatment can result in the lowest tax rate, but is high risk. Section 1256 of the Internal Revenue Code covers a specific category of regulated futures contracts. Gains and losses from these contracts are taxed using a 60/40 split: 60% is treated as long-term capital gains (regardless of how long you held the position), and 40% as short-term. That blended rate is significantly lower for most traders.

For example, a trader in the 32% bracket with $50,000 in Kalshi gains would owe roughly $13,400 under Section 1256 treatment versus approximately $18,500 at ordinary income rates!

While all that sounds nice on paper, the problem arises in whether Kalshi event contracts qualify as Section 1256 contracts. Kalshi is CFTC-regulated, which makes it a stronger candidate than Polymarket, but the IRS has consistently taken a narrow view of Section 1256 categories. Without a formal ruling, you're operating in murky waters. If you take this position, most CPAs recommend filing Form 8275 (a disclosure form) to flag the aggressive stance and reduce potential penalties in an audit. We wouldn't recommending pursuing this strategy without professional guidance. Need help? Chat with a Keeper CPA!

4. Gambling Treatment

There's another possibility that deserves particular attention in 2026: Could some prediction-market transactions be treated as wagering transactions for federal income-tax purposes?

The CFTC regulates prediction markets as derivatives markets, and many event contracts are structured as financial contracts. But financial-market regulation doesn't, by itself, definitively answer how every contract should be characterized under the Internal Revenue Code.

This distinction became much more important in the beginning of 2026.

Under current federal law, the deduction for losses from wagering transactions is generally limited to the lesser of:

• 90% of wagering losses, or

• wagering gains.

For casual gamblers, gambling losses are generally claimed as itemized deductions. Taxpayers who don't itemize generally don't receive a separate deduction for those losses.

That can create a surprisingly harsh result.

Example: $100,000 of wins and $100,000 of losses

Suppose you have:

• $100,000 of winning wagering transactions
  $100,000 of losing wagering transactions

Economically, you've broken even.

But if the activity is treated as wagering for federal tax purposes, the 2026 loss limitation can restrict the deductible losses to:

90% × $100,000 = $90,000

That can leave $10,000 of net taxable wagering income even though your economic profit was $0.

For an active prediction-market trader with substantial losses as well as wins, it can dramatically affect the tax bill.

How to file Kalshi taxes

Kalshi operates as a CFTC-registered Designated Contract Market (DCM).

What tax documents does Kalshi send you?

Kalshi issues 1099 documentation for certain transactions, but does not currently generate a comprehensive Form 1099-B covering all event contract trades. You'll need to export your full trade history from your account dashboard and calculate your own cost basis and proceeds.

How to file (using the ordinary income approach):

1. Export your complete trade history from Kalshi's platform.

2. Calculate your net profit (total proceeds minus total amounts paid for contracts).

3. Report that net figure on Schedule 1, Line 8z of your Form 1040, labeled "Kalshi prediction market earnings."

4. Pay taxes at your ordinary income rate.

What if I lost money on Kalshi?

This is where the characterization of Kalshi transactions can product different outcomes. If you have significant gross wins and losses, this is one of the strongest reasons to have a tax professional review the activity before filing. Need help? Book a consultation with a Keeper CPA.

How to file Polymarket taxes

Polymarket now has a U.S. regulated-market structure through QCEX.

If you're trading through the U.S. regulated product, analyze the specific prediction contracts you traded much like you would other regulated event contracts: determine what the contract actually is and which federal tax characterization is supportable.

But CFTC regulation alone still doesn't establish the federal income-tax treatment.

On-chain Polymarket

The on-chain Polymarket product adds another tax issue: digital assets. Positions are generally transacted using USDC, a dollar-pegged stablecoin. For U.S. federal tax purposes, the IRS treats digital assets, including stablecoins, as property rather than U.S. currency.

That means on-chain Polymarket activity can potentially create two separate layers of tax accounting:

1. the gain or loss associated with the prediction-market contract, and

2. gain or loss associated with disposing of USDC or another digital asset.

How USDC can create a taxable event

Using USDC to purchase property or enter a transaction generally involves disposing of that USDC. If its fair market value when disposed of differs from your tax basis, that can produce a digital-asset gain or loss.

Because USDC is designed to remain close to $1, the economic gain or loss on the stablecoin itself may often be small.

Receiving USDC, by itself, shouldn't be described as a second disposition of that newly received USDC. Instead, the receipt can establish basis in the USDC you receive while the settlement of the underlying prediction contract may have its own tax consequence.

That's why on-chain Polymarket bookkeeping can become complicated quickly.

What records should Polymarket traders keep?

• Date of acquisition (when you bought the position)

• Date of disposition (when you sold or the contract resolved)

• Proceeds (the USDC value received)

• Cost basis (what you paid, in USD terms)

• Resulting gain or loss

For digital assets such as USDC, you may also need:

• Date of acquisition

• Tax basis

• Date of disposition

• Fair market value at disposition, and

• Resulting digital-asset gain or loss

Starting with the 2025 tax year, Form 1040 has a checkbox asking whether you received, sold, or exchanged any digital assets. If you traded on Polymarket, the answer is yes. The IRS uses blockchain analytics tools that can trace wallet activity back to individuals through centralized on-ramps and off-ramps (like Coinbase or Kraken, where you converted dollars to crypto).

If you're an active trader with lots of transactions, tools like Koinly, CoinTracker, or specialized services like PolyTax can import your Polygon wallet history, calculate your gains and losses per trade, and generate a pre-filled Form 8949.

Your next steps: a rough guide

• If you traded on Kalshi: Download your P&L statement, complete transaction history, and tax forms available in your account. Determine the appropriate tax characterization before deciding where the activity belongs on your return. Need help? Book a call with a Keeper tax pro today.

• If you used on-chain Polymarket: Download your wallet history and preserve your USDC basis and disposition records in addition to your prediction-market records.

• If you traded through Polymarket US: Confirm which entity and contracts you actually traded.

• If you had substantial wins and losses: Get professional guidance. Loss treatment can differ dramatically depending on whether the transactions are characterized as capital assets, qualifying Section 1256 contracts, wagering transactions, or something else.

• If you traded on multiple platforms: Don't assume every contract necessarily receives the same tax treatment.

FAQs

Do I need to report prediction market earnings if I didn't receive a 1099?

‍Yes. The absence of a 1099 does not change your reporting obligation. The IRS requires you to report all income, regardless of whether a third party notified them.

What if I lost money on prediction markets?

‍Losses may be deductible. Under capital gains treatment, losses offset gains dollar-for-dollar and up to $3,000 of ordinary income annually. Under ordinary income treatment, net losses are deductible as ordinary losses. The gambling treatment is the least favorable: under the One Big Beautiful Bill Act, only 90% of losses can be offset against winnings.

Are prediction markets taxed the same as sports betting?

‍No. Sports betting winnings are clearly gambling income, trigger a W-2G above certain thresholds, and are subject to specific withholding rules. Prediction markets on regulated platforms like Kalshi are structured as financial contracts, not wagers, and are generally not treated as gambling for federal tax purposes.

Will Kalshi send me a 1099?

If you hit certain reporting thresholds, Kalshi says they'll send you tax documentation. However, do not rely on receiving a complete tax document. Download your full trade history and calculate your net gains yourself.

What tax rate will I pay on prediction market income?

‍Under the most common treatment (ordinary income), you'll pay your marginal federal income tax rate (between 10% and 37%) depending on your total income. Under capital gains treatment, short-term gains are taxed at the same ordinary rate; long-term gains (positions held over a year) are taxed at 0%, 15%, or 20%.

Disclaimer: This article is for informational purposes only and does not constitute tax advice. Tax law in this area is actively evolving. Consult a qualified CPA or tax attorney before making filing decisions.