Last Updated on June 11, 2026 by Patrick Camuso, CPA
My co-authored article with Sulolit Mukherjee has been published in Tax Notes Federal: “Prediction Market Event Contracts: A Tax Classification Analysis.” This prediction market tax analysis examines the three competing federal frameworks and where the classification stands under current law.
For those unfamiliar with the publication, Tax Notes is the leading tax policy journal in the United States, widely read by IRS officials, Treasury staff, tax attorneys, and policy professionals. It’s the authoritative source for serious tax policy analysis and commentary.
Why This Article Matters
Prediction market trading volume exceeded $44 billion in 2025. Despite that scale, the IRS has issued no formal guidance on how event contract income should be taxed. The applicable framework matters because treating contracts as wagering income under section 165(d), as section 1256 contracts eligible for 60/40 blended rate treatment, or as capital or ordinary income produces materially different tax outcomes for identical activity.
The One Big Beautiful Bill Act made this question more consequential. Its amendment to section 165(d) caps the gambling loss deduction at 90 percent of wagering gains, effective for tax years beginning after December 31, 2025. Under prior law, a trader who broke even owed nothing. Under the amended provision, that same trader has taxable income. The classification question now has real economic stakes for a large and growing population of taxpayers.
My co-author, Sulolit Mukherjee, served as the head of the IRS Office of Digital Assets and co-authored the Section 6045 digital asset broker reporting regulations. His regulatory background combined with my practitioner perspective allowed us to examine both the statutory framework and the compliance reality practitioners are navigating right now.
What the Article Concludes
The article makes three arguments. Section 1256 treatment is not available for prediction market event contracts under current statutory definitions. The enumerated categories were not designed for binary instruments settling on factual outcomes. The classification analysis reaches different conclusions depending on contract type. Contracts on sporting outcomes sit closer to wagering, while contracts on macroeconomic data and financial indicators traded on CFTC-designated markets present the stronger argument for capital asset treatment. The IRS should issue guidance establishing classification standards by contract category.
The article also addresses the reporting infrastructure gap, preparer liability exposure for positions asserted without documented analysis, and the Third Circuit’s April 2026 decision in KalshiEX LLC v. Flaherty.
Looking Forward
Each filing season without guidance expands the population of returns reflecting divergent approaches to identical activity. The structural conditions that led to Notice 2014-21 for cryptocurrency, accelerating volume, absent classification guidance, and a reporting infrastructure that hasn’t kept pace, are present in the prediction market context in equivalent or greater form.
Read the Full Article
The complete analysis is available at Tax Notes.
If you’re navigating prediction market tax compliance, whether for Kalshi, Polymarket, or other platforms, we are available for consultation.
FAQs
What does the Tax Notes Federal article on prediction market taxation cover?
The article analyzes how the three competing federal tax frameworks, section 165(d) wagering, section 1256 mark-to-market, and capital or ordinary income, apply to prediction market event contracts. Co-authored with the former head of the IRS Office of Digital Assets, the analysis covers the statutory requirements of each framework, the impact of the OBBBA amendment, the reporting infrastructure gap, and the implications of the Third Circuit’s KalshiEX decision.
Does section 1256 apply to prediction market contracts?
The article concludes that section 1256 treatment is unavailable under current statutory definitions. The enumerated categories were designed for price-based financial instruments, the daily mark-to-market requirement is not satisfied by current contract structures, and the CFTC’s characterization of event contracts as swaps independently triggers the section 1256(b)(2)(B) exclusion.
What did the OBBBA change for prediction market traders?
The One Big Beautiful Bill Act capped the gambling loss deduction at 90 percent of wagering gains for tax years beginning after December 31, 2025. A trader who previously broke even and owed nothing now has taxable income equal to 10 percent of gross wagering gains under that framework, a phantom income liability that makes the classification question significantly more consequential.
What should prediction market traders do without IRS guidance?
Document the analytical basis for whatever position is taken. Preparers asserting section 1256 treatment without a documented statutory analysis are exposed to preparer penalties under section 6694. A defensible position requires a written record of the methodology applied and the reasoning supporting it.
How are Kalshi and Polymarket contracts treated differently?
The framework depends on the contract category, not the platform. Contracts on sporting outcomes sit closer to wagering characterization. Contracts on macroeconomic indicators and Federal Reserve rate decisions traded on CFTC-designated markets present the stronger argument for capital asset treatment. Polymarket contracts settling in USDC on the Polygon blockchain also carry separate digital asset tax considerations independent of the prediction market classification question.
This article is provided by Camuso CPA for general informational purposes and does not constitute legal, tax, accounting, or investment advice. Tax laws and regulations are evolving rapidly and the information presented may not reflect current guidance. Reading this article does not create a CPA-client relationship. For advice on your specific situation, schedule a consultation with Camuso CPA.
Camuso CPA, PLLC
