Last Updated on July 19, 2026 by Patrick Camuso, CPA
Patrick Camuso’s 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 why the classification remains unsettled 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. For a plain-English overview of the open questions, see our prediction market tax guide.
The One Big Beautiful Bill Act made this question more consequential. Its amendment to section 165(d) limits the deduction to 90 percent of wagering losses, with losses deductible only up to wagering gains, effective for tax years beginning after December 31, 2025. If the wagering rules apply, a trader who broke even under prior law owed nothing, while under the amended provision that same trader can have taxable income. The classification question now has real economic stakes for a large and growing population of taxpayers. For how the loss rules work across frameworks, see our prediction market loss deductions analysis.
The co-author, Sulolit Mukherjee, served as the head of the IRS Office of Digital Assets. 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 Argues
The article analyzes why the prediction-market contracts within its stated scope may not qualify for Section 1256 under the statutory routes considered. Section 1256 is not a taxpayer election, and qualification must be determined under the applicable contract definition. It argues that the classification analysis reaches different conclusions depending on the contract category, and it urges the IRS to issue guidance establishing classification standards by contract category.
The article also addresses the reporting infrastructure gap and the importance of documented analysis for reported positions.
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, may 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 analyzes why the prediction-market contracts within its stated scope may not qualify for Section 1256 under the statutory routes considered. Section 1256 is not a taxpayer election, and qualification must be determined under the applicable contract definition. Section 1256(b)(2)(B)’s exclusion for swaps and similar agreements presents a separate federal tax question. A regulatory label does not independently determine whether the exclusion applies.
What did the OBBBA change for prediction market traders?
The One Big Beautiful Bill Act limited the wagering loss deduction to 90 percent of losses, deductible only up to wagering gains, for tax years beginning after December 31, 2025. If that framework applies, a trader who previously broke even and owed nothing can now have taxable income, which 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. A defensible position requires a written record of the methodology applied and the reasoning supporting it.
Are Kalshi and Polymarket contracts taxed differently?
The article analyzes classification by contract category rather than by platform, and it treats the proper classification of each category as an open question under current law. No published guidance establishes a universal federal tax classification for any platform’s contracts. Platform mechanics can raise separate reporting considerations, including digital asset settlement on some platforms.
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
