What to Ask Before Hiring a CPA for a Prediction-Market Trading Firm

Last Updated on August 23, 2026 by Patrick Camuso, CPA

Quick answer (read this first)

A CPA advising a professional prediction-market trading firm may need to do considerably more than transfer annual platform totals onto a tax return. Depending on the operation, the engagement may require analysis of taxpayer capacity, contract and transaction mechanics, source records, loss limitations, partnership reporting, and the relationship between transaction data, the books, and the eventual tax return.

Before hiring an adviser, the more useful inquiry is whether the firm can explain which facts and records are material to the tax issues presented by the particular trading operation. Platform labels, market-participant terminology, and annual profit-and-loss figures can all be relevant, but none necessarily resolves the underlying federal tax analysis.

For a market maker, proprietary trading firm, systematic trader, arbitrage operation, or other professional participant, the questions below provide a framework for evaluating whether the proposed engagement is appropriately matched to the activity.

These questions are issue-spotting tools rather than a universal scope of services when selecting a CPA for prediction market traders. The work required in a particular engagement depends on the contracts, transaction activity, entity structure, available records, tax issues presented, and services actually engaged.

Before hiring a CPA for a professional prediction-market trading operation, the discussion should generally address several distinct areas:

• whether different contracts or transactions require separate tax analysis;
• how the taxpayer’s operating capacity affects the analysis without predetermining contract character;
• what occurred when positions were transferred, offset, settled, corrected, or otherwise ended;
• which transaction, account, settlement, and year-end records are relevant;
• how the source trading activity will be reconciled to the books and ultimately to the tax return;
• how losses, offsetting positions, and year-end open positions will be addressed;
• which matters are determined at the partnership level and which may depend on individual partners;
• how uncertain tax positions, contrary authority, documentation, and disclosure considerations will be evaluated; and
• what changes in law, contract terms, platform mechanics, or taxpayer facts could require the analysis to be revisited.

 

Professional prediction-market activity can present tax and accounting questions that do not arise from a conventional brokerage account. Depending on the operation, the engagement may require analysis of taxpayer capacity, contract and transaction mechanics, source records, loss limitations, partnership reporting, and the relationship between transaction data, the books, and the eventual tax return.

Our broader prediction market tax guide addresses the federal classification framework in greater detail. For purposes of hiring an adviser, the more immediate question is whether the firm can identify which parts of that framework are relevant to the taxpayer’s actual trading activity and supporting records.

For a market maker, proprietary trading firm, systematic trader, arbitrage operation, or other professional participant, the following questions provide a framework for evaluating whether the proposed engagement is appropriately matched to the activity.

These questions are issue-spotting considerations rather than a universal scope of services. The work required in a particular engagement depends on the contracts, transaction activity, entity structure, available records, tax issues presented, and services actually engaged.

1. Do You Assume One Tax Treatment Applies to All Prediction-Market Activity?

A useful starting point is whether the adviser approaches the trading book with a predetermined characterization based primarily on the name of the platform or the general label “prediction market.”

A venue or platform label, by itself, does not necessarily determine the federal tax treatment of every contract traded there. Prediction-market contracts can differ in contractual rights, payout structures, settlement mechanics, referenced events, trading architecture, and the manner in which a participant enters or exits a position. Potentially relevant federal tax provisions also contain distinct statutory requirements that cannot be satisfied merely by assigning an industry label to the activity.

For a trading firm active in more than one contract category, the question becomes more consequential. Financial-reference, sports, political, economic, weather, and other event contracts may present materially different facts even when they are accessed through the same venue. Contract category alone does not predetermine the result, but material differences in rights and transaction mechanics can require separate consideration.

A prospective adviser should therefore be able to explain which differences within the trading book would warrant separate analysis and which can appropriately be addressed under a common framework. The objective is not to produce a different tax theory for every individual contract. It is to avoid allowing a platform label or generalized description of the activity to substitute for the analysis that the actual contracts and transactions require.

2. Do You Separate Taxpayer Capacity From Contract Character?

Professional prediction-market participants frequently describe themselves as market makers, traders, arbitrageurs, liquidity providers, or systematic operators. Those descriptions can be important to understanding the business, but they do not necessarily establish the federal tax character of the contracts or transactions themselves.

For example, a market-making operation may involve continuous execution, two-sided quoting, proprietary systems, personnel, inventory management in the economic sense, spread capture, liquidity incentives, and substantial transaction volume. Those facts may bear on taxpayer-level questions concerning the nature and conduct of the activity. They do not, merely because they exist, establish dealer status, tax inventory treatment, or a particular character for every contract held by the business.

Execution terminology requires similar care. A participant that regularly provides liquidity may also take liquidity to rebalance exposure or respond to changing market conditions. Conversely, a participant that places resting orders may still be operating principally as a directional trader. Maker and taker describe how particular orders interact with available liquidity; they do not themselves supply a federal tax classification.

Our separate analysis of whether prediction-market activity can qualify as a trade or business addresses the taxpayer-capacity question in greater detail. For hiring purposes, the important point is whether the adviser can analyze operating capacity without allowing that determination to substitute for the separate contract-level analysis.

Depending on the issues presented, that inquiry may involve the continuity and scale of the activity, the use of personnel and systems, whether the business acts solely for its own account, the presence or absence of customers, and the economic functions actually performed.

3. Can You Determine What Actually Happened When a Position Was Sold, Offset, Settled, or Closed?

Prediction-market interfaces necessarily use concise operational terminology. A participant may see a position described as bought, sold, closed, offset, paired, or settled. Those labels can describe the user’s economic experience without necessarily resolving the federal tax significance of the underlying event.

Depending on the applicable contract and venue mechanics, a reduction in economic exposure could involve a transfer of an existing contractual position, acquisition of an opposite-side position, contractual pairing or netting, final settlement under the contract, an administrative correction, or another event. The distinction can matter because eliminating economic exposure does not necessarily establish how the taxpayer’s existing contractual rights changed or ended.

For significant activity, it is therefore worth understanding whether the adviser will review the transaction, contractual, and clearing records relevant to the issue rather than relying exclusively on terminology displayed in a trading interface. If a platform describes a position as “sold” or “closed,” the adviser should be able to identify what additional information, if any, would be material to determining the treatment being considered.

Platform-specific reporting can add another layer. Our discussion of Kalshi tax reporting and the information contained in its year-end records illustrates why information reporting and substantive tax characterization should be evaluated separately.

This becomes particularly important for high-volume operations. A characterization assumption that is immaterial for a handful of transactions can become consequential when it is applied systematically across a large trading population. The tax analysis and accounting process should therefore rest on transaction mechanics that can be supported from the available record.

4. What Records Would You Need Before Supporting the Return?

Annual platform statements and profit-and-loss reports are useful components of the tax record. Depending on the activity and tax treatment being evaluated, however, they may not by themselves contain all of the information needed to compute, reconcile, and substantiate the resulting return position.

The relevant record varies with the issue. For a professional trading operation, information concerning account ownership, persistent transaction identifiers, quantities, acquisition costs, fees or credits, settlement history, corrections, transfers, and positions remaining open at year-end may become relevant. Those items are examples rather than a prescribed minimum dataset. A smaller or less complex account may require substantially less, while a multi-venue or highly automated operation may require considerably more.

The important hiring question is whether the adviser can identify the records that matter to the particular tax issues presented and can explain how missing or inconsistent data would affect the engagement. Addressing that question before return preparation can identify record deficiencies while source information remains accessible and before a filing position has been built around assumptions that later prove difficult to verify.

This distinction is especially important where platform reporting and tax reporting serve different purposes. A record that is adequate for showing a participant’s economic performance may not contain every field needed for a particular tax calculation, just as the absence of a particular tax field does not mean the platform’s reporting is deficient for its intended purpose.

For on-chain activity, the record problem can be materially different again. Our Polymarket tax guide discusses the additional reconstruction issues that can arise where activity is conducted through wallets rather than a conventional brokerage reporting structure.

5. Can You Connect the Trading Records to the Books and Ultimately to the Tax Return?

Professional trading operations often maintain several layers of financial information. Exchange or broker records may coexist with API data, internal trading databases, bank records, accounting software, management reports, and year-end tax workpapers. Each layer may serve a legitimate function while recording the same economic activity at a different level of detail.

That structure makes reconciliation an important part of the diligence inquiry.

A general ledger may appropriately contain summarized entries while transaction-level records retain the information necessary to support position quantities, acquisition costs, settlements, and other tax attributes. The relevant question is whether the amounts ultimately reported for tax purposes can be reconciled to the underlying activity through records that are sufficiently complete for the treatment being applied.

A prospective adviser should be able to explain how the source trading records would be connected to the accounting records and how the resulting tax amounts would be reconciled to the return. Depending on the operation, that work may involve transaction completeness, cash movements, costs and economic adjustments, settlements, corrections, year-end positions, and differences between management P&L and tax reporting.

The adviser does not necessarily need to administer the trading firm’s accounting system. The engagement should, however, define who is responsible for producing and reconciling the records on which the tax work will rely.

Our technical guide to prediction-market accounting addresses the distinction among transaction data, accounting records, and tax reporting in substantially greater detail.

For a professional participant, this is often where ordinary return preparation and a broader tax-accounting engagement become distinguishable. A tax conclusion can be analytically supportable while still being difficult to implement if the transaction record cannot produce the amounts required by that conclusion.

6. How Do You Analyze Losses, Offsetting Positions, and Year-End Open Positions?

Characterization is often the most visible prediction-market tax question, but it does not independently resolve recognition, deductibility, timing, limitation, utilization, or reporting.

The distinction becomes particularly important when a trading firm has material losing positions.

A prospective adviser should be able to explain how the existence and amount of a loss would be established, when the loss would be taken into account, and what separate limitations could affect its current use. Depending on the relevant law and facts, the analysis may require consideration of adjusted basis, the finality of the transaction, the tax regime governing the position, economically related or offsetting positions, capitalization rules, entity-level limitations, or limitations that apply only after an item reaches an owner.

Positions that remain open at year-end can create additional timing and substantiation questions. Offsetting positions may also require analysis separate from the character initially assigned to a gain or loss. Whether a particular statutory limitation applies cannot be determined merely from the existence of offsetting economics and instead depends on the relevant statutory requirements and the positions actually held.

For those reasons, annual net economic P&L may be only one component of the tax analysis. A firm can report positive economic performance for the year while the tax record contains separately recognized gains, losses, deferred items, positions extending into the next taxable year, and items subject to different limitations.

The interaction between classification and loss utilization is addressed more fully in our prediction-market loss deduction analysis.

7. If the Trading Firm Is a Partnership, How Do Entity-Level Decisions Flow Into Partner Reporting?

Many professional prediction-market businesses operate through LLCs taxed as partnerships or other pass-through structures. In those cases, completing the partnership return is only one part of the reporting process.

Some determinations are made at the entity level, while other tax consequences depend on the partners’ individual facts. The partnership may need to determine the amount, character, timing, and allocation of its items before those items reach the owners. Partner-level consequences may then depend on matters such as outside basis, applicable loss limitations, ownership changes, compensation arrangements, distributions, or state filing obligations.

This distinction becomes more important when ownership changes during the year or when members enter, exit, receive service-related interests, or have materially different tax profiles. Applying a single year-end ownership snapshot to an economically active partnership can create issues that have little to do with prediction-market classification itself but still affect how the trading activity appears on the eventual partner returns.

Self-employment tax, net investment income tax, and section 199A may also require separate analysis rather than automatically following the initial contract-character conclusion. The appropriate treatment of those matters depends on their own statutory and regulatory requirements and, in some cases, facts specific to the individual partner.

For firms whose needs extend beyond annual return preparation, the broader Trading Firm CPA practice describes Camuso CPA’s work with proprietary trading operations, market makers, and other institutional trading businesses.

8. How Do You Handle a Material Tax Position When the Authorities Are Not Conclusive?

Prediction-market activity can present federal tax questions for which published authorities do not directly address the exact modern contract or transaction structure under review.

The absence of directly applicable published guidance does not make the return position discretionary. Material positions still require analysis under the authorities that bear on the particular contract, transaction, and taxpayer facts, including material contrary authority where applicable.

A prospective adviser should be able to explain how the relevant statutes, regulations, administrative guidance, and judicial authorities will be evaluated, how materially different interpretations will be considered, and how the selected analysis will be documented. Where the treatment creates separate reporting or disclosure considerations, those questions should be evaluated under the standards applicable to the return and engagement rather than treated as an automatic consequence of uncertainty.

The same discipline applies when another professional reaches a different conclusion. An unsettled issue can support serious competing interpretations without making those interpretations interchangeable or allowing the taxpayer to select whichever result produces the lowest tax liability. The adviser remains responsible for exercising professional judgment based on the relevant authorities and facts.

The inquiry also should not be framed as a promise that the IRS will agree with the selected treatment. The more useful question is whether the treatment has been analyzed, documented, and implemented consistently with the applicable facts and professional standards.

If a position has already been reported and later becomes questionable, our article on IRS recharacterization of prediction-market gains and losses addresses the separate procedural and tax consequences that can follow.

In matters requiring legal analysis outside the scope of the CPA engagement, coordination with qualified tax counsel may also be appropriate.

9. What Would Cause You to Revisit the Analysis in a Later Year?

A position adopted for one taxable year should not be treated as immutable when the material facts or governing authorities change.

Prediction markets remain an area in which product structures, contractual rights, venue arrangements, and regulatory frameworks can develop alongside the tax authorities practitioners use to analyze them. Subsequent legislation, published administrative guidance, judicial authority, revisions to contractual rights or settlement mechanics, changes in the venue or intermediary structure, or material changes in the taxpayer’s own operations may affect an analysis that was appropriate on an earlier record.

Not every operational change requires a new tax conclusion. A user-interface update, a new data field, or a change in trading volume does not necessarily alter federal tax treatment. The significance of a development depends on whether it affects a fact or legal predicate material to the previously adopted analysis.

A prospective adviser should therefore be able to explain what categories of change would cause the firm to reconsider an existing position and how that review would be incorporated into later-year tax work.

Consistency is valuable, but it should not become a substitute for reconsidering a position when the law or material facts have changed.

The Practical Question Before the Engagement Begins

The scope required for a prediction-market trading firm can vary materially.

Some taxpayers may already maintain records and documented tax positions sufficient for ordinary return preparation. Others may have significant transaction volume, multiple contract categories, several venues, partnership ownership changes, unsettled classification questions, or accounting records that require additional work before a return can be prepared on a supportable basis.

The practical question is whether the engagement begins with tax-return preparation from an established record, or whether material issues involving the contracts, transaction data, accounting, entity structure, or tax positions must first be addressed.

For readers whose primary need is preparation and filing rather than preliminary advisory work, our prediction-market tax reporting services and reporting guide explain the filing-side engagement in more detail.

For a professional trading operation, resolving the engagement scope before the filing process begins can help identify responsibility for the relevant workstreams and reduce the likelihood that material tax or accounting questions surface only after return preparation is underway.

Request an Institutional Prediction Market Tax & Accounting Assessment

Camuso CPA advises professional prediction-market participants, including market makers, proprietary trading firms, high-volume traders, and other institutional-style operators.

The Prediction Market Tax & Accounting Assessment is designed to identify the material tax, accounting, data, entity, and implementation questions presented by an operation and determine what additional work, if any, may be appropriate before tax positions or filings are implemented.

Request a Prediction Market Tax & Accounting Assessment

Frequently Asked Questions

What should I look for in a CPA for prediction market traders?

Look for an adviser who can evaluate more than the annual profit-and-loss total. Depending on the operation, relevant issues may include contract and transaction mechanics, taxpayer capacity, source records, accounting reconciliation, losses, partnership reporting, and the support for material tax positions.

Does a prediction market trading firm need a specialized CPA?

Not every prediction-market participant requires a specialized advisory engagement. As transaction volume, automation, entity complexity, contract diversity, or tax uncertainty increases, however, it becomes more important to work with an adviser who understands the tax and accounting issues presented by professional prediction-market activity.

Can a CPA use a prediction market platform’s annual P&L to prepare the tax return?

An annual P&L can be an important source record, but it may not contain all of the information required for a particular tax treatment. Depending on the activity, additional records concerning transactions, costs, fees, settlements, corrections, account ownership, or year-end positions may be relevant.

Are all prediction market contracts taxed the same way?

A platform or prediction-market label does not necessarily determine the federal tax treatment of every contract or transaction. The analysis can depend on the contractual rights, transaction mechanics, referenced event, taxpayer facts, and the requirements of potentially applicable federal tax provisions.

Why does transaction-level accounting matter for prediction market traders?

Transaction-level records can help connect trading activity to the accounting records and ultimately to the amounts reported on the tax return. For significant trading operations, those records may also be relevant to basis, settlement, correction, loss, and year-end position analysis.

What additional tax issues arise when a prediction market trading firm is a partnership?

A partnership introduces both entity-level and partner-level considerations. The partnership may need to determine the amount, character, timing, and allocation of tax items, while individual partners may have separate basis, loss-limitation, state, self-employment tax, net investment income tax, or other considerations depending on their circumstances.

When should a prediction market tax position be reviewed again?

A prior treatment may warrant reconsideration when there is a material change in tax law, published administrative guidance, judicial authority, contract terms, settlement or clearing mechanics, venue structure, entity structure, or the taxpayer’s own operating facts.

Does a prediction market market maker need a specialized CPA?

A market-making operation can present additional tax and accounting questions because the activity may involve high transaction volume, automated execution, two-sided quoting, liquidity incentives, frequent position changes, and substantial reconciliation requirements. Whether specialized advisory work is necessary depends on the contracts, entity structure, records, transaction mechanics, and tax issues presented, but a prospective CPA should understand how professional market-making activity differs operationally from occasional prediction-market trading.

Does being a prediction market market maker determine how the contracts are taxed?

No. Market-maker status can be relevant to taxpayer-level questions concerning the nature and conduct of the trading activity, but it does not by itself determine the federal tax character of the contracts or transactions. Contract terms, transaction mechanics, taxpayer facts, and the requirements of potentially applicable federal tax provisions still require separate analysis.