Last Updated on February 1, 2026 by Patrick Camuso, CPA
Prediction markets are no longer a niche experiment. They now sit at the intersection of trading, information aggregation, and real capital deployment. What has not evolved at the same pace is prediction market taxes and reporting.
A common assumption among participants and, increasingly, among preparers is that USD-settled prediction market activity is simple. Dollars in. Dollars out.
That assumption is understandable. It is also incomplete and, in many cases, analytically fragile.
Prediction market activity does not consist of mere cash receipts. Participants acquire contractual rights at a price, trade those rights as probabilities change, and resolve them under defined settlement mechanics.
This article does not assert a single “correct” tax outcome. Instead, it explains how prediction market activity fits into U.S. tax law under existing statutory frameworks and why reasonable professionals disagree on characterization. No position is taken here as to whether gains or losses should be treated as capital or ordinary in any specific case; characterization depends on facts, statutory interpretation, and risk tolerance.
What Is a Prediction Market for Tax Purposes?
For U.S. tax purposes, prediction market activity generally involves the acquisition and disposition of a transferable contractual right tied to a contingent future event, purchased for consideration and resolved through sale or settlement.
The tax analysis focuses on the nature of the contractual right, how it is acquired, and how it is disposed of, not merely on the form of settlement.
This definition is descriptive, not determinative. It frames the analytical starting point rather than dictating tax character.
Scope note: who this analysis is most relevant for
This discussion is most relevant where prediction market activity involves multiple contracts, recurring trading, meaningful dollar amounts, or strategies that generate numerous dispositions over a tax year.
Taxpayers with a single, de minimis position may not face the same complexity described below. However, as activity scales, reporting shortcuts that appear harmless in isolation often compound into material distortions.
Key takeaways
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USD settlement does not determine tax character
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Prediction market contracts are generally analyzed as transferable contractual rights, not windfalls
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Platform exports and information returns are often incomplete
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Accurate reporting depends on reconstructing contract lifecycles
- Tax characterization is unsettled in the absence of specific IRS guidance
What Prediction Markets Are (From a Tax Perspective)
Prediction markets are platforms where participants buy and sell event-based contracts tied to real-world outcomes.
Each contract represents a defined contingent right. If a specified outcome occurs, the contract settles at a predetermined value. If it does not, the contract expires worthless or settles differently.
From a structural standpoint, prediction market contracts share several core elements:
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An acquisition at a market price
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A market value that fluctuates as probabilities change
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A defined resolution event that triggers settlement
Platforms differ in implementation with differences including on-chain vs. off-chain, crypto vs. USD settlement, but those differences do not eliminate the presence of a contractual lifecycle.
A contract that resolves unfavorably does not disappear for tax purposes. It generally produces a disposition with zero proceeds, resulting in a loss equal to basis.
From a tax standpoint, the critical fact is that participants are acquiring and disposing of transferable contractual rights. They are not receiving opaque winnings from a closed system.
Where a taxpayer acquires a transferable contractual right for consideration and later disposes of that right through sale or settlement for a determinable amount, the transaction generally implicates realization analysis under §1001, after which character must be separately determined.
This analysis reflects the application of existing U.S. tax principles to common prediction market structures and does not assume uniform treatment across all platforms, participants, or fact patterns.
Are Prediction Markets Taxable?
Yes. Prediction market activity typically produces taxable events under existing U.S. tax law.
The absence of platform-issued tax forms or prediction-market-specific IRS guidance does not eliminate the reporting obligation. When a taxpayer acquires a contract for consideration and later disposes of it through sale or settlement, a taxable event generally occurs.
Why “USD-Settled” Prediction Markets Are Not Simple for Tax Purposes
Tax treatment depends on the nature of the right being exchanged, not the currency used at settlement. A USD-settled prediction contract still involves:
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Acquisition of a contractual right
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Establishment of tax basis
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Disposition through sale or settlement
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Recognition of gain or loss
Regulatory debates about whether a platform resembles gambling, commodities trading, or derivatives activity do not control federal income tax characterization. Tax treatment follows the structure of the transaction unless a specific statutory regime clearly overrides it.
Prediction Market Tax Characterization Under Existing Tax Frameworks
There is currently no IRS guidance specifically governing prediction market contracts. As a result, tax treatment must be analyzed under existing statutory regimes.
Broadly, reasonable professionals have advanced two primary frameworks:
Framework 1: Property / Capital Asset Analysis
Under this view, a prediction market contract is treated as a transferable contractual right acquired for consideration and disposed of for value. Absent a statutory override, gain or loss is analyzed under §1001, with character analyzed under §1221 and related exclusions.
A key question under this framework is whether the contract is a ‘capital asset’ in the taxpayer’s hands under §1221, which is fact-dependent and may be contested.
Framework 2: Non-Equity Contract / Ordinary Income Analysis
Under this view, prediction market contracts resemble non-equity, cash-settled instruments that do not fit comfortably within capital asset concepts. Income and loss are treated as ordinary, typically reported outside Schedule D, without gambling limitations.
This approach emphasizes risk posture and interpretive conservatism in the absence of guidance.
Why Reasonable Professionals Disagree (and Why That Doesn’t Settle the Issue)
The disagreement surrounding prediction market taxation does not stem from ignorance or bad faith. It arises because:
- The Code was not written with event-based markets in mind
- Contracts do not map cleanly to traditional securities or futures
- No explicit IRS guidance exists
- Reporting infrastructure is incomplete
Some preparers default to an ordinary-income reporting path because it minimizes reconstruction and perceived audit friction. Importantly, ordinary income treatment does not imply gambling treatment. Under a non-equity contract or ordinary framework, gains and losses are still generally netted, and losses are not limited in the manner applicable to wagering transactions.
Neither position is frivolous. Each carries tradeoffs in defensibility, complexity, and risk tolerance. Reasonable professionals can disagree here because the Code was not written for event-based contracts, and IRS guidance is limited. The key is consistency, documentation, and aligning the position to the taxpayer’s facts and risk tolerance.
What This Means in Practice
For many individual participants, the economic outcome is often similar regardless of framework because gains are commonly short-term. The main differences tend to be reporting mechanics, documentation expectations, and audit posture, not reliable tax-rate arbitrage. Taxpayers should prioritize an approach that is internally consistent, reconcilable to transaction-level records, and aligned with their risk tolerance.
Why There Are Often No Usable 1099s
The absence of reliable information reporting in prediction markets is structural, not accidental.
Many platforms are not traditional brokers, do not track taxpayer-level basis, and are not designed to produce filing-grade reporting.
When forms or summaries are issued, they are often incomplete. No 1099 does not mean no reporting obligation.
Prediction market activity is not invisible simply because standardized broker reporting is limited. Platforms maintain internal trade logs, payment rails generate financial records, and settlement flows create third-party data trails.
Examinations can begin without a 1099. They often start with mismatches, unexplained income patterns, or reconstructed transaction histories.
How Prediction Market Platforms Like Polymarket and Kalshi Fit Into the Tax Analysis
Prediction market activity commonly occurs on platforms such as Polymarket and Kalshi, which differ in technology stack, regulatory posture, settlement mechanics, and compliance infrastructure.
Those differences matter operationally. They do not, by themselves, control federal income tax characterization.
Kalshi operates as a CFTC-regulated exchange and settles contracts in U.S. dollars. Polymarket operates on-chain and typically settles contracts using digital assets. Despite these distinctions, the foundational tax question remains the same across platforms. Has the taxpayer acquired and disposed of a transferable contractual right for consideration?
If the answer is yes, the transaction enters standard analysis under existing U.S. tax principles.
What Platform Differences Do Affect
Platform design, regulatory status, and settlement rails can materially affect:
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Data availability and completeness (export quality, transaction logs, oracle pricing)
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Valuation mechanics (how fair market value is determined at acquisition and disposition)
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Timing questions (resolution mechanics, year-end positions, settlement conventions)
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Information reporting risk (presence or absence of 1099-series forms)
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Reconstruction burden (how much work is required to produce filing-grade records)
These factors directly influence compliance complexity and audit posture.
CFTC Regulation, §1256 & Why This Is Still Open-Ended
Kalshi’s CFTC-regulated status is frequently cited as a reason to assume favorable derivatives treatment under §1256.
Section 1256 is a statutory override, not a default rule. It applies only if a contract fits specific definitions, such as a regulated futures contract or a qualifying option traded on a qualified board or exchange. While CFTC oversight is necessary for §1256 consideration, it is not sufficient. Event-based prediction contracts settle on binary factual outcomes rather than prices, rates, or indices, which creates genuine interpretive tension under the statute. Absent clear statutory qualification, §1256 treatment should be viewed as elective and defensible only where facts strongly support inclusion.
As a result:
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§1256 treatment may be plausible in narrow, fact-specific cases
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It is not settled law
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It should be treated as an exception supported by facts, not a baseline assumption
Digital Asset Settlement Does Not Change the Framework, But It Radically Increases the Technical Burden
On-chain settlement introduces significant technical and compliance complexity. It does not alter the underlying legal analysis or prediction market tax reporting.
A prediction market contract that settles in a digital asset still involves the same core tax mechanics:
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Acquisition of a contractual right
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Establishment of tax basis
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Disposition through sale or settlement
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Recognition of gain or loss measured in U.S. dollars
What changes is how difficult it is to accurately measure, substantiate, and defend those amounts.
Why Digital Asset Settlement Is Technically Harder
When settlement occurs in a digital asset rather than USD, multiple additional layers must be reconstructed correctly:
The taxpayer must track:
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Basis in the prediction market contract itself
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Fair market value of the digital asset received at settlement
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Subsequent basis and disposition of that digital asset (if held or later sold)
This creates stacked basis chains that must reconcile across instruments, wallets, and tax years.
Digital asset settlement requires determining:
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USD fair market value at the exact moment of settlement
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Reliable pricing sources (oracle, exchange, or index)
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Consistency across all transactions in the same reporting period
Valuation errors compound quickly and directly affect gain recognition.
Unlike USD settlement, on-chain settlement requires:
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Mapping contracts to specific wallet addresses
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Tracing inbound and outbound transfers
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Reconciling internal platform records to on-chain data
This is especially critical where contracts are transferred, rolled, or settled across wallets.
Gas fees may affect:
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Basis in the acquired contract
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Amount realized on disposition
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Basis in the received digital asset
Incorrect treatment can distort gains, losses, and holding periods.
Timing of realization, constructive receipt analysis, and audit defensibility can be affected whether assets are:
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Held in self-custody
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Held via smart contracts
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Temporarily escrowed by the platform
1099-DA Reporting
Digital asset settlement introduces a future-facing compliance risk that does not exist for pure USD platforms, third-party information reporting under Form 1099-DA.
The IRS matching infrastructure is expanding, not contracting, even if:
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prediction market platforms do not issue 1099-DA forms today, and
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current reporting is incomplete or nonexistent,
Digital asset settlement does not recharacterize prediction market activity but it magnifies the technical work required to report it correctly and the exposure created when that work is skipped.
Why Reconstruction Is Required
Platform exports may not be filing-ready.
Accurate reporting requires reconstructing the full contract lifecycle:
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Acquisition validation
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Disposition validation
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Basis-to-proceeds mapping
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Cross-year reconciliation
Offsetting Positions, Straddles, and Loss Deferral Risk
Active prediction market participants often hold economically offsetting positions such as paired “Yes” and “No” contracts, rolling exposures across related events, or layered positions that hedge probability outcomes. At scale, these patterns can implicate federal straddle rules, which are designed to prevent loss acceleration where offsetting positions substantially reduce risk.
While prediction market contracts are not explicitly enumerated under traditional securities rules, the economic substance of offsetting contract positions can still raise loss-timing and capitalization questions. Losses that appear realized on one leg may be deferred if an offsetting position remains open. These issues do not arise in casual use, but they become relevant for traders employing multi-leg strategies. Straddle analysis is fact-specific and requires transaction-level reconstruction to determine whether losses are currently deductible or deferred.
Timing, Settlement Mechanics, and Constructive Receipt
Prediction market tax timing is not always as simple as “when the event resolves.” Platforms may credit balances before funds are withdrawn, settle through escrow-like mechanisms, or temporarily restrict access pending final resolution. In digital asset contexts, settlement may occur through smart contracts or internal ledgers before on-chain transfer.
Tax timing generally follows when the taxpayer has dominion and control over proceeds or the settled asset, not merely when an internal balance changes. Determining the correct recognition date may require reviewing platform terms, settlement mechanics, and wallet activity. Timing differences can affect not only the year of recognition but also character, holding period, and state allocation. These questions are rarely answered correctly by default platform summaries and often require independent validation.
Fees, Incentives, and Basis Distortions
Prediction market transactions frequently involve multiple categories of costs and credits that must be separated correctly for tax purposes. Explicit platform trading fees and gas costs may affect basis or amount realized depending on the transaction structure. Implicit costs, such as bid-ask spreads, are reflected in pricing and must be respected in gain or loss calculations.
Separately, many platforms issue rebates, incentives, referral credits, or promotional rewards. These amounts are often ordinary income and not part of contract disposition proceeds. Failing to segregate these items can distort reported gains, misclassify income, or inflate losses. Accurate reporting requires isolating contract-level economics from platform-level incentives and documenting how each component was treated.
State Tax and Residency Considerations
State taxation adds an additional layer of complexity to prediction market reporting.
State conformity with federal capital loss limitations, netting rules, and income classifications varies. Errors at the federal level often compound at the state level, particularly for high-income taxpayers or those who moved during the year. Proper reconstruction is often necessary to support state allocations and defend filings in jurisdictions with aggressive audit posture.
Entity Structures and Pass-Through Reporting
Prediction market activity conducted through entities introduces additional reporting considerations. Single-member LLCs are generally disregarded for tax purposes, but partnerships and multi-member structures require transaction-level reporting through Schedule K-1, capital account maintenance, and partner-level basis tracking.
Entity use can affect how gains, losses, fees, and incentives are allocated and reported. It can also influence audit risk, documentation requirements, and loss utilization.
High-Volume Traders, Trade-or-Business Status, and Mark-to-Market Elections
In rare cases, extremely active prediction market participants may inquire about trade-or-business treatment or mark-to-market elections. These concepts are highly fact-specific and not triggered by volume alone. They require sustained, continuous activity conducted with profit motive and operational regularity.
Mark-to-market elections can dramatically change timing and character of income and losses, but they are not default treatments and can create adverse consequences if applied incorrectly. These elections should only be considered after a formal analysis. They are not appropriate for most participants and should not be assumed based on platform design or trading frequency.
§1256 Treatment and Form 6781 Considerations
Where taxpayers assert that prediction market contracts qualify for §1256 treatment, additional reporting requirements apply. Gains and losses must be reported on Form 6781, marked to market at year-end, and then flowed through Schedule D. This treatment carries favorable rate mechanics but also increases scrutiny and documentation expectations.
§1256 is a statutory override, not a default rule. It applies only when contract definitions are clearly met. Claiming it without strong factual support can increase audit risk. Where §1256 does not apply, analysis typically returns to general realization principles under §1001, with character determined under the applicable framework (capital-asset or ordinary-income) based on facts and interpretation.
Why Prediction Market Tax Reporting Requires Specialized Digital Asset Expertise
Prediction market tax reporting sits at the intersection of contract-based financial instruments, property disposition mechanics, incomplete or non-broker platform reporting, and in many cases, digital asset accounting.
This combination creates a fact pattern that falls outside the reliable coverage of generalized tax software workflows and routine preparation models.
Accurate tax reporting requires more than form familiarity. It requires the ability to:
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Reconstruct full contract lifecycles from acquisition through disposition or settlement
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Distinguish contract-level gain or loss from settlement-asset gain or loss
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Reconcile platform exports that were not designed for tax reporting
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Apply existing tax principles to novel instruments without explicit IRS guidance
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Document analytical positions in a way that remains defensible under review
When prediction market activity settles in digital assets, the technical burden increases further. Basis must often be tracked across multiple layers (contract basis, settlement asset basis, subsequent dispositions), valuations must be timestamp-accurate, and wallet-level records must reconcile with internal platform data. These are not edge cases, they are structural features of the activity.
Most generalized preparation approaches fail not because the tax law is unclear, but because the data is incomplete, the transactions are non-standard, and the analysis requires judgment rather than automation.
Firms with deep experience in digital asset taxation, contract-based instruments, and audit-ready reconciliation are structurally better positioned to handle this work as prediction markets scale and scrutiny increases. They are accustomed to operating in environments where:
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Information reporting lags economic reality
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Reconstruction precedes compliance
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Defensibility matters more than speed
Prediction market reporting is not a volume-driven compliance task. It is a specialized analytical engagement that rewards technical fluency, reconstruction discipline, and the ability to defend conclusions, not just populate tax forms. At Camuso CPA, we handle tax reporting for trading activity that does not come with broker reporting or clear guidance.
When Not to Hire a Specialist
If activity is minimal and dollar amounts are small a standard preparer may be sufficient.
Future Guidance
The IRS may issue specific guidance addressing prediction market contracts as the market matures. Such guidance could modify or supersede portions of the analysis above on a prospective or retroactive basis. Until then, taxpayers and preparers must apply existing tax principles to the facts presented. Our approach reflects that framework and is documented accordingly.
Related Professional Discussion on Prediction Market Tax Treatment
The analytical issues discussed above are actively being examined among practitioners. A related professional discussion addressing prediction market contract characterization and reporting considerations with Andrea Kramer on The Financial Frontier is included below.
Prediction Market Tax FAQ
Are prediction markets taxable in the United States?
Yes. Prediction market activity is generally taxable under existing U.S. tax law. Even though there is no prediction-market-specific IRS guidance, taxable gain or loss is generally recognized when a taxpayer acquires a contract for consideration and later disposes of that contract through sale or settlement. The absence of a platform-issued 1099 or explicit IRS instructions does not eliminate the reporting obligation.
How are prediction market contracts treated for tax purposes?
Prediction market contracts are generally analyzed as transferable contractual rights acquired for consideration and disposed of for value. Under existing tax principles, transactions involving such rights typically enter realization analysis under §1001.
Characterization (capital vs. ordinary) is a separate question that depends on statutory interpretation, facts, and risk posture. Reasonable professionals disagree on how these contracts should be characterized in practice.
Does USD settlement make prediction market taxes simpler?
No. USD settlement affects how payment is made, not how the transaction is analyzed for tax purposes. Even when a prediction market contract settles in U.S. dollars, the tax analysis still focuses on acquisition, basis, disposition mechanics, and recognition of gain or loss. Cash settlement simplifies payment mechanics, not tax characterization.
Are prediction market profits considered gambling winnings?
Not automatically. While prediction markets may resemble wagering at a surface level, tax treatment depends on transaction structure. Where participants acquire and dispose of transferable contracts with determinable prices and settlement mechanics, the activity is commonly analyzed under contract- or property-disposition principles rather than gambling rules. Ordinary-income treatment does not imply gambling treatment.
Why don’t prediction market platforms issue reliable 1099 forms?
Many prediction market platforms are not traditional brokers and do not track taxpayer-level basis or full contract lifecycles. When summaries or forms are issued, they are often incomplete or not designed for filing-grade reporting. The absence of a usable 1099 does not remove the obligation to report taxable activity accurately.
Is net profit reporting acceptable for prediction market taxes?
Net profit reporting can be misleading when transaction-level data exists. Where acquisition cost and disposition values are determinable, transaction-by-transaction reconstruction is often necessary to accurately reflect gain and loss mechanics. Net reporting can overstate income, omit losses, and create reconciliation issues over time.
What IRS forms are typically used to report prediction market activity?
Reporting depends on the analytical framework applied and the taxpayer’s facts. Common reporting approaches may include Form 8949 and Schedule D where gain-or-loss reporting applies, Schedule 1 in simplified or conservative ordinary-income approaches, and Form 8275 in limited cases where a taxpayer discloses a non-standard position. Form selection does not determine tax character; it reflects how a chosen analytical framework is reported.
Why is transaction reconstruction often required for prediction market taxes?
Platform exports are rarely designed for tax compliance. They may omit basis, misclassify settlement proceeds, or collapse multiple dispositions into summary totals. Accurate reporting often requires reconstructing each contract’s acquisition, disposition, and settlement to ensure correct timing, valuation, and documentation.
Do these tax rules apply to small or casual prediction market users?
This analysis is most relevant for taxpayers with multiple contracts, recurring trading, or meaningful dollar amounts. Individuals with minimal activity may not face the same level of complexity. As activity scales, simplified reporting methods are more likely to produce errors that require correction.
Can I rely on the platform’s profit summary or dashboard totals for my tax return?
Platform dashboards are designed for user experience, not tax compliance. They frequently aggregate outcomes without preserving acquisition cost, disposition timing, or valuation detail required for tax reporting. Dashboards may be useful for orientation, but they are not a substitute for transaction-level records.
If a contract expires worthless, do I still need to report it?
Yes. A contract that expires worthless generally produces a disposition with zero proceeds, resulting in a loss equal to the taxpayer’s basis in the contract. Omitting worthless contracts eliminates legitimate losses and distorts results, especially for active participants.
Does holding a position until settlement change how it is taxed versus selling early?
No. Both a pre-resolution sale and a settlement event constitute a disposition for tax purposes. While valuation and timing mechanics may differ, the analytical framework remains the same.
If I never withdrew funds from the platform, do I still have taxable activity?
Possibly. Tax recognition generally follows when a contract is disposed of or settled and the taxpayer has dominion and control over the proceeds or settled asset, not when funds are withdrawn. Platform mechanics matter.
Are prediction market losses limited the way gambling losses are?
Not automatically. Gambling loss limitations apply only when activity qualifies as wagering under the tax code. Where prediction market activity is analyzed under contract-based or property-based frameworks, losses generally follow the rules applicable to that framework rather than gambling-specific limitations.
Can I aggregate multiple contracts into a single line item to simplify reporting?
Generally no. When contracts have different acquisition dates, bases, or disposition dates, aggregation obscures required detail and undermines defensibility. Contract-level reporting is often necessary for accuracy and audit support.
