You Won Money on Kalshi or Polymarket. Here's What You Owe the IRS (and What Nobody Can Tell You Yet)

You called it. The election, the championship game, the Fed's next rate move — your contracts settled at a dollar, the cash landed in your account, and for a moment it felt like free money. It wasn't. Somewhere between the confetti and tax season sits a question the IRS has never answered: how, exactly, are prediction market winnings taxed?

That is not an exaggeration. As these markets have exploded in popularity, the IRS has still issued no formal guidance on the federal tax treatment of prediction market winnings and losses. Tax professionals are left arguing over three very different answers, and the one you pick can change your bill by thousands of dollars. This guide walks through each treatment, what forms to expect, the 2026 rule change that punishes one of them, and the recordkeeping system that keeps you safe no matter which answer ultimately wins.

The One Certainty: Your Winnings Are Taxable Income​

Start with the part nobody disputes. Every dollar of net profit you make trading event contracts is taxable income, and you owe tax on it whether or not any platform sends you a tax form.

Two myths die here:

• "No 1099 means no tax." False. Information reporting is the platform's obligation; reporting income is yours. If you cleared $400 on a market and got nothing in the mail in January, you still report the $400.
• "Under $600 doesn't count." False. The $600 figure is a reporting threshold for certain payer-issued forms, not a threshold for owing tax. The first dollar of profit is taxable.

So the question was never whether you pay. It is how — which line of the return your profits land on, which rate applies, and what happens to your losses.

The Three Ways Your Winnings Might Be Taxed​

Because no IRS guidance exists, practitioners have converged on three candidate treatments. Which fits you depends on the contracts you traded, how you traded them, and how aggressive a position you and your tax preparer are comfortable defending.

1. Ordinary "Other Income" — The Conservative Default​

The most common and most defensible treatment for a casual trader is also the simplest: report net profits as ordinary "Other Income" on Schedule 1, Line 8z of Form 1040, with a label like "Kalshi prediction market earnings."

Under this treatment your gains are taxed at your ordinary income rates — anywhere from 10% to 37% depending on your bracket. A $12,000 net profit for someone in the 24% bracket costs roughly $2,880 in federal tax before state taxes enter the picture.

Why this is the default: it makes the fewest assumptions. It doesn't require your contracts to be something the tax code hasn't said they are. Most mainstream tax software and preparers land here for occasional traders, and it is the easiest position to unwind if the IRS eventually rules differently.

The downside is the rate. Ordinary rates are the highest rates available, and as you'll see in the next section, loss treatment under the neighboring gambling rules just got worse.

2. Gambling Income Under Section 165(d) — Familiar Rules, New Pain​

The second candidate treats your activity as wagering. Winnings go on the "Other Income" line just the same, but your losses fall under Section 165(d): deductible only if you itemize, only on Schedule A, and only to the extent of your winnings.

Three consequences follow:

• You must itemize to deduct a dollar of losses. If you take the standard deduction — as most taxpayers do — your losing contracts are worth nothing at tax time while every winning contract is fully taxable.
• You cannot net first and report the difference. The IRS is explicit: report the full amount of winnings as income and claim losses separately. Your records must show winnings and losses apart from each other.
• Starting in 2026, you can only deduct 90% of your losses. The 2025 tax-and-spending law cut the wagering-loss deduction from 100% of losses (up to winnings) to 90%. A trader who wins $50,000 and loses $50,000 in 2026 has a true economic profit of zero but a taxable profit of $5,000. That provision alone is scored at over a billion dollars of revenue through 2034 — money coming directly out of break-even bettors' pockets. A pending bill, the FAIR BET Act, would restore the full 100% deduction, but as of this writing it has not become law, so plan on the haircut.

Gambling treatment also drags along gambling-style recordkeeping: an accurate diary or similar record of winnings and losses showing the date and type of each wager, where it was placed, and the amounts won and lost — backed by tickets, statements, Forms W-2G, and bank records. For prediction markets, "where" is a URL and "tickets" are trade confirmations and CSV exports. The form changes; the obligation doesn't.

3. Section 1256 60/40 Treatment — The Attractive Argument You Probably Shouldn't Make Alone​

The third candidate is the one traders want to be true. Section 1256 of the tax code gives certain futures contracts a blended rate: 60% of gain taxed at the lower long-term capital gains rate, 40% at short-term rates. On a big winning year that blend can beat ordinary rates by a wide margin.

The argument runs like this: Kalshi operates a derivatives exchange designated by the Commodity Futures Trading Commission, Section 1256 covers regulated futures contracts, therefore Kalshi event contracts qualify. It is a short walk from plausible to wrong. Many tax professionals consider this an aggressive position, because Section 1256 turns on the contract being a regulated futures contract, not merely on the venue being a regulated exchange — and binary event contracts that pay out on a yes-or-no outcome look very little like the futures contracts Congress had in mind. A detailed classification analysis published in Tax Notes Federal, co-authored with the former head of the IRS Office of Digital Assets, works through wagering treatment, Section 1256 treatment, and capital-or-ordinary treatment without crowning a winner — which itself tells you how unsettled this is.

If Section 1256 treatment is on the table for you — typically only for high-volume or professional-scale activity — get it in writing from a CPA who specializes in trader taxation before you file that way. The rate savings are real; so is the exposure if the IRS disagrees.

What Tax Forms You'll Actually Get (and the Gaps That Bite)​

Whatever treatment you choose, you still have to reconcile it against whatever paper arrives in January. Here's the honest map, platform by platform:

• Kalshi. Expect limited, incomplete reporting — not broker-style coverage of your trading. Based on the platform's public disclosures, referral bonuses and similar credits may arrive on Form 1099-MISC once they total $600 or more, interest on cash balances may arrive on Form 1099-INT at $10 or more, and Form 1099-B is currently used only for limited broker-type transactions, not standard event-contract trading. Your actual contract profits may arrive on no form at all. Reconcile every form against your own trade log; when your log shows more profit than the forms do, the log wins.
• Platforms routing through regulated exchanges (several brokerages and apps offer event contracts executed on Kalshi's exchange) may generate different paperwork than trading directly — read each 1099's instructions rather than assuming two platforms' forms mean the same thing.
• Offshore or crypto-settled venues. Expect nothing. No US information return is coming, which changes your paperwork burden, not your tax bill. Self-report everything.
• Timing. Miscellaneous and interest forms typically land in late January through February. Mark your calendar and don't file early and then amend — amended returns cost you a second round of preparer fees and delay any refund.

And remember the golden rule of information reporting: a missing form never means missing income. The IRS matches what payers file against what you file, but "they didn't tell the IRS" has never been a defense that worked.

The Polymarket Crypto Wrinkle: Possibly Two Taxable Events​

Trading on a crypto-settled venue adds a second layer of tax accounting that dollar-settled traders never see. Because the IRS treats cryptocurrency as property, funding your account, converting between tokens, and settling contracts in stablecoins or other crypto can each carry its own gain-or-loss computation on top of the contract outcome itself.

In practice that means tracking two things, not one: the profit or loss on every event contract, and the cost basis of every unit of crypto you used to enter and exit it. A trader who buys stablecoins, watches them depeg slightly, trades fifty markets, and withdraws has a stack of micro-gains and micro-losses sitting underneath the headline trading result. Crypto tax software can ingest these flows, but only if you connect the wallet or import the full transaction history — a year-end CSV with just deposits and withdrawals won't reconstruct basis.

If dollar-settled trading needs a diary, crypto-settled trading needs a diary plus a ledger. Keep both.

What If You Do This Full-Time? Trader Status Is Narrower Than You Think​

Heavy-volume traders sometimes ask about professional treatment — trader tax status, business-expense deductions, or the Section 475 mark-to-market election that lets securities and commodities traders convert trading results to ordinary income and deduct losses without the $3,000 capital-loss cap.

Handle this corner with care. Trader-in-securities status is a facts-and-circumstances test the IRS applies strictly: frequent, regular, continuous activity aimed at short-term price swings, with trading as a substantial livelihood — and courts have denied it to taxpayers with hundreds of trades a year. The Section 475 election is available to traders in securities and commodities, must generally be made by the tax return due date for the year before it takes effect, and once made can only be revoked with IRS consent. Whether event contracts count as securities or commodities for this purpose is exactly as unresolved as everything else in this article.

The practical takeaway: don't self-declare as a professional trader because your volume feels big. If your activity is anywhere near that scale, that is precisely the year to pay for specialist advice rather than to improvise.

The Recordkeeping System That Survives an Audit​

Here's the good news: every candidate tax treatment rewards the same underlying habit. Whoever you are and whichever position you file, the trader with complete records wins — bigger deductions defended, 1099 mismatches explained, and an audit that ends quickly instead of expensively.

Build this system before your volume grows, not after:

1. Export everything, monthly. Download trade histories, settlement records, and account statements from every venue every month — not next April, when platforms redesign their export pages or close your account. Store the raw files; summaries are not substitutes.
2. Log each market separately. Date opened and closed, contract description, number of contracts, entry and exit prices, fees, and net result. A spreadsheet works; a real ledger works better.
3. Keep winnings and losses visibly apart. Never track only net profit per month. Every treatment — gambling rules explicitly, the others practically — requires gross winnings and gross losses stated separately.
4. Save the money trail. Bank transfers in and out, crypto wallet movements with timestamps and fair-market values, every 1099 received, and notes on anything unusual (bonuses, referrals, promotions, account credits).
5. Reconcile quarterly. Tie your log to platform statements and bank deposits four times a year. Catching a missing export in July is a chore; catching it the following April is a crisis.
6. Plan for estimated tax. No tax is withheld from most prediction-market payouts up front, so a breakout year can produce a painful April surprise — plus underpayment penalties if you owed $1,000 or more and didn't pay quarterly. If your winning pace suggests you'll owe, make estimated payments with Form 1040-ES during the year instead of meeting the whole bill at filing time.

This is also where your bookkeeping setup earns its keep. Prediction market activity looks trivially simple — one account, a handful of trades — right up until it produces five hundred settlements across three platforms in two currencies. Tracking each venue and each strategy as its own category, the way a business tracks revenue streams, turns a shoebox of CSVs into a return your preparer can actually file. If you already keep your finances in a structured ledger, add trading as its own section now; if you don't, a year with real trading income is the year to start.

What to Do Before You File​

Close out the year with this checklist:

• Pick your position deliberately. Ordinary income, gambling treatment, or — with professional backing — something more aggressive. Apply it consistently across every venue, document why, and don't switch methods mid-return because one market had a better answer than another.
• Reconcile every form to your log. If a 1099 disagrees with your records, figure out why before you file. Payer errors happen; your log is your evidence.
• Check your state. States tax gambling and trading income under their own rules, and several states don't mirror the federal loss deduction at all. A federally sensible position can still be a state-level surprise.
• Watch for guidance. The IRS will eventually weigh in, and prediction-market taxation is prominent enough that practitioner groups are actively publishing analyses. A ruling could arrive any filing season — set a reminder to check before you file, not after.
• Hire out the hard parts. A generalist preparer who has never seen an event contract is guessing just like you are. For a year with meaningful volume, a CPA experienced in trader and gambling taxation pays for itself in defended deductions alone.

You made the right call on the event. Make the right call on the paperwork too: report everything, log it like a business, pick a defensible position, and keep records good enough that whichever treatment the IRS eventually blesses, you're already compliant with it.

Simplify Your Financial Management​

Trading profits are only one stream in your financial life — alongside your salary, your bank accounts, your investments, and everything else your tax return has to reconcile. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data, so every dollar from every venue is tracked, categorized, and ready at tax time. Get started for free and see why developers and finance professionals are switching to plain-text accounting.