Prediction Market Tax Estimator
Traded on Kalshi, Polymarket, or Robinhood this year? The IRS has not issued clear guidance on how to report prediction market profits. This estimator shows what you would owe under three different approaches — so you can have an informed conversation with your CPA.
Worked Example (Illustrative Only)
These examples demonstrate how the formulas work using hypothetical assumptions.
You earn $85,000 per year in salary and are filing as single. You want to know how much you will owe on your prediction market profits under each approach.
Under Section 1256, you would owe roughly $850 on your $5,000 profit because 60% ($3,000) is taxed at the 15% long-term rate and 40% ($2,000) at your 22% marginal rate. Under standard capital gains treatment, the full $5,000 is taxed at 22%, costing you about $1,100. That is a $250 difference — and it grows significantly at higher profit levels. Talk to your CPA about which approach is defensible for your situation.
Prediction Market Taxes Explained
The most common questions traders ask about reporting prediction market income to the IRS.
How are prediction market profits taxed?
The IRS has not issued formal guidance on how prediction market profits should be classified. Most tax professionals treat them as either short-term capital gains (taxed at your ordinary income rate), Section 1256 contracts (60% long-term, 40% short-term), or gambling income (ordinary rates with loss limitations). The correct approach depends on the platform, how the contracts are structured, and your specific tax situation. Consult a CPA before filing.
What is Section 1256 and does it apply to Kalshi?
Section 1256 provides favorable tax treatment for regulated futures contracts — 60% of gains are taxed at the long-term capital gains rate (0%, 15%, or 20%) and 40% at your ordinary rate, regardless of how long you held the position. Kalshi is a CFTC-designated contract market, which creates a plausible argument that its event contracts qualify. However, the IRS has not explicitly confirmed this. Some CPAs recommend it; others take a more conservative position.
Does Kalshi send a 1099?
Kalshi issues Form 1099-B for traders who meet IRS reporting thresholds. However, the form reports gross proceeds — not your cost basis or net profit. You will need to calculate your actual gain or loss from your trade history. Kalshi also provides a P&L statement in your account under Tax Info that summarizes your trading activity, but this is not a tax form. You are responsible for ensuring the accuracy of your return.
Does Polymarket send tax forms?
Polymarket's global (non-US) exchange does not issue tax forms. As a crypto-settled, offshore platform, you are responsible for self-reporting all gains and losses. Polymarket US (via QCEX) may issue forms for US traders, but reporting practices are still being established. If you traded on the global exchange, you will need to reconstruct your trade history from your wallet transactions and calculate gains manually.
Can I deduct prediction market losses?
It depends on how you classify your trading activity. If treated as capital gains, prediction market losses can offset capital gains from other investments, plus up to $3,000 of ordinary income per year. Unused losses carry forward to future years. If treated as gambling income, losses can only offset gambling winnings — not salary, wages, or investment income. This is one of the key reasons the gambling classification is least favorable for most traders.
Do I need to make quarterly estimated tax payments?
If your prediction market profits plus other income will cause you to owe more than $1,000 in federal taxes for the year, you should be making quarterly estimated payments using IRS Form 1040-ES. The safe harbor rule is to pay at least 100% of last year's tax liability (110% if your prior year AGI was over $150,000) through withholding and estimated payments combined. Missing these payments can result in underpayment penalties.
What if I had a net loss for the year?
If your prediction market losses exceed your gains for the year, the treatment depends on your classification. Under capital gains treatment, you can deduct up to $3,000 of net capital losses against ordinary income, with the rest carried forward to future years. Under gambling treatment, net losses cannot offset other income at all — they are just lost. This difference alone can make the capital gains classification worth thousands of dollars for traders with losing years.
Are state taxes different from federal?
Yes. Most states tax capital gains at ordinary income rates (no special long-term rate). Some states like Texas and Florida have no state income tax. States like New Jersey and California have high rates that add significantly to your total tax burden. This estimator covers federal taxes only — check your state's tax rules separately or consult a CPA familiar with your state.