How Are Prediction Market Winnings Taxed? (2026)

No IRS guidance yet

There is no IRS notice, ruling, regulation or form instruction on event contracts traded on CFTC-regulated exchanges. Tax professionals argue for three treatments: (1) gambling income, reported as other income, with losses deductible only as an itemized deduction up to winnings; (2) ordinary income or capital gains on a derivative; (3) Section 1256 contracts with 60% long-term / 40% short-term treatment. KPMG's 2026 analysis doubts that fully collateralized event contracts meet the Section 1256 definitions.

What platforms send you

Kalshi's help center lists 1099-INT for interest, 1099-MISC for credits and rewards, 1099-B for crypto transfers and 1099-DA for digital assets, plus a downloadable profit-and-loss statement for event-contract trades. Polymarket hasn't clearly published what the US app issues. Either way, your trading profit is reportable whether or not you receive a form.

Losses: why the classification matters

If profits are treated as gambling income, losses count only as an itemized deduction up to your winnings, and from tax year 2026 only 90% of gambling losses are deductible, so a break-even trader can still owe tax. Capital-gains and Section 1256 treatment handle losses differently.

State tax

State treatment follows your state's income-tax rules. California taxes these profits at its regular rates (1% to 13.3%) with no lower capital-gains rate; states such as Texas and Florida have no state income tax. Check your own state's rules.

What records to keep

Keep each platform's year-end statement or trade history (Kalshi's profit-and-loss statement), bank statements for deposits and withdrawals, and any 1099s you receive. This guide is general information, not tax advice; for large positions or multi-state situations, work with a tax professional familiar with derivatives and gambling tax.

Last reviewed by Catie Di Stefano on September 30, 2026. We re-verify market prices, polling, and citations on every update.