Prediction Market Taxes in California: What Traders Need to Know

California state tax: what you'll owe

California taxes most income, including trading profits and gambling winnings, as regular income at rates from 1% to 12.3%, plus a 1% surcharge on income over $1 million (13.3% top rate). California has no lower rate for capital gains, so prediction-market profits are taxed at your normal state bracket whichever federal treatment applies.

Federal tax: profits are taxable, but the classification is unsettled

Prediction-market profits are taxable, but as of September 2026 the IRS has not issued guidance on how event contracts on CFTC-regulated exchanges should be classified. Tax professionals argue for three treatments: gambling income; ordinary income or capital gains on a derivative; or, more aggressively, Section 1256 contracts with 60/40 long-/short-term treatment. KPMG's 2026 analysis doubts fully collateralized event contracts meet the Section 1256 definitions, and none of these positions has been confirmed by the IRS.

Why the classification matters

Under gambling treatment, losses are deductible only as an itemized deduction up to your winnings, and from tax year 2026 only 90% of gambling losses count, so even a break-even trader can owe tax. Capital-gains or Section 1256 treatment handle losses differently. Ask a tax professional which position fits your situation.

How to work out your profit

"Profit = (Payout received) – (Amount paid for contracts) – (Fees paid)

Example: you buy 100 Lakers contracts at 45¢ ($45). The Lakers win and you receive $100. After a $1.50 fee, your profit on that trade is $53.50.

What Kalshi sends you

According to Kalshi's help center, it issues 1099-INT for interest, 1099-MISC for credits and rewards, 1099-B for crypto transfers and 1099-DA for digital assets. For your event-contract trades it provides a downloadable profit-and-loss statement, not a 1099 showing your trading profit, so you report that profit yourself.

Polymarket US and other apps

California residents use the Polymarket US app, which trades in US dollars on a CFTC-regulated exchange. Polymarket hasn't clearly published which tax forms the US app issues, so keep your own trade history and any documents the app provides. The same applies to ProphetX and Novig.

Practical tips for California traders

Download each platform's year-end statement or trade history, keep your deposit and withdrawal records for at least three years, and set money aside for both federal and California tax on profitable years. This is general information, not tax advice; for anything material, talk to a California tax professional.

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