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 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?

Did you make some money on Kalshi or Polymarket? 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. Well, that good outcome is taxable, because it's income, period. Well, then the next question is: how should that income be taxed?

How are earnings from Kalshi or Polymarket taxed?

Because the IRS has not officially provided guidance for prediction market earnings, tax professionals currently recognize three viable approaches to how that income should be taxed, and each approach effectively leads to different outcomes.

1. Ordinary Income

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.

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!

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How to file Kalshi taxes

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

What Kalshi sends 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.

If you had a losing year: Under ordinary income treatment, losses are deductible as ordinary losses and aren't subject to the $3,000 annual capital loss cap that applies to investment losses.

How to file Polymarket taxes

Polymarket is a completely different animal. It operates as a decentralized, offshore platform built on the Polygon blockchain, with positions denominated in USDC (a dollar-pegged stablecoin). Polymarket issues no tax forms whatsoever, meaning you'r entirely on your own when it comes to reporting your income.

USDC is not cash in the eyes of the IRS. It's property. That means every time you use USDC to buy a "Yes" share, sell a position, or receive a payout when a contract resolves, you've triggered a taxable cryptocurrency event, even if you never converted to dollars.

In practical terms, if you made 50 trades on Polymarket in 2025, you potentially have 50+ separate reportable transactions. Each one needs to be logged on Form 8949, which then flows to Schedule D and ultimately your Form 1040.

Make sure to keep track of the following for each transaction

• 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

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 acive 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 made less than $5,000 in net profits: Report as ordinary income on Schedule 1, Line 8z.‍
• If you made more than $5,000: Talk to a CPA before you file. The difference between ordinary income treatment and capital gains (or Section 1256) treatment becomes material at higher income levels, and the right strategy depends on your overall tax picture.‍
• If you traded on Polymarket: Get your wallet history and use crypto tax software to generate your Form 8949. Do not attempt to reconstruct this manually for more than a handful of trades.‍
• If you traded on both: You may be filing under two different frameworks (ordinary income for Kalshi and capital gains for Polymarket) which adds complexity. This is a conversation worth having with a tax professional. Need help? Book a call with a Keeper tax pro today.

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%.

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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.