Prediction Market Taxes Explained: Why U.S. Tax Characterization Remains Unsettled

Last Updated on July 18, 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.  That assumption can produce material reporting errors.

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 the contract, the taxpayer’s facts, and the applicable statutory rules.

What Is a Prediction Market for Tax Purposes?

For U.S. tax purposes, prediction-market activity generally involves acquiring a contractual right tied to a contingent future event. An actual pre-resolution transfer of that right to another participant for consideration may be described as a sale. Treatment of a position held to resolution depends on the contract terms and platform mechanics.

The tax analysis focuses on the nature of the contractual right, how it is acquired, and how the position ends, not merely on the form of settlement. This definition is descriptive, not determinative. It frames the analytical starting point rather than dictating tax character.

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

• USD settlement does not determine tax character

• Prediction market contracts are generally analyzed as transferable contractual rights

• Platform exports and information returns are often incomplete

• 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 the specified outcome does not occur, the contract may resolve at zero or another amount under its terms.

From a structural standpoint, prediction market contracts share several core elements:

• An acquisition at a market price
• A market value that fluctuates as probabilities change
• 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. The position should be preserved in the taxpayer’s records, and its treatment depends on how the position ended.

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.

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:

• Acquisition of a contractual right

• Establishment of tax basis

• Disposition through sale or settlement

• 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. Whether particular contracts are wagering transactions under Section 165(d) is a separate federal tax question, distinct from regulatory labeling. 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. Potentially relevant regimes include the wagering rules of Section 165(d), Section 1256, and the residual capital-or-ordinary rules. Their application depends on the contract, venue, taxpayer, and manner in which the position ends. This guide does not adopt a universal classification or analytical sequence.

The Wagering Question and the 2026 Limitation

Whether a prediction-market contract is a wagering transaction under Section 165(d) remains unresolved. If Section 165(d) applies, for taxable years beginning after December 31, 2025, the deduction is limited to 90 percent of wagering losses and may not exceed wagering gains. This guide takes no position on the proper transaction or session unit for prediction-market activity; see our specialized wagering analysis and our prediction market loss deductions analysis.

Framework 1: Property / Capital Asset Analysis

Under this view, a prediction market contract is treated as a transferable contractual right that constitutes property. A key question under this framework is whether the contract is a capital asset in the taxpayer’s hands, which is fact-dependent and may be contested.

Framework 2: Non-Equity Contract / Ordinary Income Analysis

Under this view, gain or loss may be ordinary rather than capital. Ordinary character, however, does not establish recognition, deductibility, placement, limitation, or netting. For an individual, an otherwise allowable ordinary nonbusiness Section 165(c)(2) loss outside a sale or exchange is a miscellaneous itemized deduction currently disallowed under Section 67(h). See our prediction-market loss-deductions analysis for the separate business and other specialized branches.

Why Reasonable Professionals Disagree (and Why That Doesn’t Settle the Issue)

The disagreement exists because current tax law does not map neatly onto event contracts:

• 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

Importantly, ordinary income treatment does not imply gambling treatment. Under a nonwagering ordinary framework, the Section 165(d) limitations do not apply, but ordinary character does not establish recognition, deductibility, placement, limitation, or netting.

Neither position is frivolous but 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.

Taxpayer Capacity

Taxpayer status can affect reporting and loss treatment, but business status does not by itself determine the character of a prediction-market position. Investors and taxpayers conducting a trade or business may therefore reach different placement or limitation results without changing the instrument’s character. Dealer, market-maker, hedging, and Section 475 positions require separate analysis and are addressed in specialized articles.

How the Position Ends

An actual pre-resolution transfer of the contract right to another participant for consideration may be described as a sale. Automatic contractual resolution, particularly settlement at zero, should not generically be described as a sale, option lapse, Section 1234A termination, abandonment, or worthlessness event. Treatment of a position held to resolution depends on the contract terms and platform mechanics.

What This Means in Practice

Taxpayers should use a consistent reporting approach supported by the underlying records and the facts of their activity.

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. Platform mechanics and available records vary and can affect timing, valuation, and substantiation. Platform labels, profit-and-loss summaries, and information returns do not determine federal tax classification or replace the underlying records needed to support the return. Current platform-specific reporting information is addressed in our dedicated platform guides.

Despite these distinctions, the foundational tax question remains the same across platforms which is what contractual right did the taxpayer acquire, and how did each position end? Those facts, together with the taxpayer’s own circumstances, drive the analysis under existing U.S. tax principles.

What Platform Differences Do Affect

Platform design, regulatory status, and settlement rails can materially affect:

• Data availability and completeness (export quality, transaction logs, oracle pricing)

• Valuation mechanics (how fair market value is determined at acquisition and disposition)

• Timing questions (resolution mechanics, year-end positions, settlement conventions)

• Information reporting risk (presence or absence of 1099-series forms)

• 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 Section 1256. Section 1256 is not a taxpayer election. CFTC designation is one route by which a venue may qualify as a qualified board or exchange, but venue qualification alone does not establish that a prediction-market contract is a Section 1256 contract. If a contract qualifies as a Section 1256 contract, the statutory mark-to-market and reporting rules apply. This guide takes no position on whether any prediction-market contract qualifies.

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:

• Acquisition of a contractual right

• Establishment of tax basis

• Disposition through sale or settlement

• 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:

• Basis in the prediction market contract itself

• Fair market value of the digital asset received at settlement

• 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:

• USD fair market value at the exact moment of settlement

• Reliable pricing sources (oracle, exchange, or index)

• 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:

• Mapping contracts to specific wallet addresses

• Tracing inbound and outbound transfers

• 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:

• Basis in the acquired contract

• Amount realized on disposition

• 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:

• Held in self-custody

• Held via smart contracts

• 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:

• prediction market platforms do not issue 1099-DA forms today, and

• 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. This is why it’s crucual to work with an experienced Crypto CPA.

Why Reconstruction Is Required

Platform exports may not be filing-ready.

Accurate reporting requires reconstructing the full contract lifecycle:

• Acquisition validation

• Disposition validation

• Basis-to-proceeds mapping

• Cross-year reconciliation

Offsetting Positions, Straddles, and Loss Deferral Risk

Economically offsetting positions may require a separate Section 1092 analysis if the contracts are actively traded personal property and the positions are offsetting; application is fact-specific and is addressed in our specialized loss analysis.

Timing, Settlement Mechanics, and Constructive Receipt

For a cash-method taxpayer, an amount credited to an account or otherwise made available without substantial limitations or restrictions may be constructively received before withdrawal. An amount subject to substantial limitations or restrictions may not be. Platform mechanics therefore matter.

Fees, Incentives, and Basis Distortions

Fees, rebates, incentives, and rewards may require treatment separate from the contract result and should be tracked separately.

State Tax and Residency Considerations

State treatment may differ from federal treatment, including the availability of losses and applicable sourcing or residency rules. State consequences should be analyzed separately.

Entity Structures and Pass-Through Reporting

Using an entity can change reporting, allocation, basis, and compliance requirements, but it does not by itself determine the character of the contracts.

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, and they involve separate eligibility and consequence questions that are addressed in specialized articles.

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:

• Reconstruct full contract lifecycles from acquisition through disposition or settlement

• Distinguish contract-level gain or loss from settlement-asset gain or loss

• Reconcile platform exports that were not designed for tax reporting

• Apply existing tax principles to novel instruments without explicit IRS guidance

• 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.

Active traders and businesses may need specialized reconstruction and tax analysis when platform records are incomplete. That work happens in an environment where:

• Information reporting lags economic reality

• Reconstruction precedes compliance

• 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 guidance changes, taxpayers need a reporting position grounded in the contract terms, platform mechanics, and their facts.

Press Coverage

Patrick Camuso, CPA has been quoted on prediction market taxation across major financial publications:

• Wired Nobody Knows How to File Taxes on Prediction Market Wins
• Business Insider How Prediction Market Winnings May Be Taxed
• MarketWatch This Super Bowl, the Game to Watch Is Prediction Markets Versus Sportsbooks
• Morningstar This Super Bowl, the Game to Watch Is Prediction Markets Versus Sportsbooks

Watch: How Are Prediction Markets Taxed?

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. The absence of a platform-issued 1099 or prediction-market-specific IRS guidance does not eliminate the reporting obligation.

How are prediction market contracts treated for tax purposes?

Prediction market contracts are generally analyzed as contractual rights acquired for consideration. Whether gain or loss is capital or ordinary is a separate question that depends on the contract terms and the taxpayer’s facts. 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, how the position ends, and the resulting gain or loss. Cash settlement simplifies payment mechanics, not tax characterization.

Are prediction-market profits gambling winnings?

Not automatically. No published guidance establishes a universal federal tax classification for prediction-market contracts. The answer depends on the contract terms and relevant facts. See our specialized wagering analysis.

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?

A platform net-profit figure may be insufficient to support a return because it may not show basis, timing, open positions, fees, incentives, or other relevant facts. That recordkeeping concern does not determine the legal unit of account or require contract-level reporting in every case.

What tax forms are used?

Form selection depends on the contract’s classification, the taxpayer’s capacity, the transaction endpoint, and the resulting recognition and deduction rules. The form used does not itself determine tax character. See our specialized reporting analysis.

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 the underlying activity to establish cost, proceeds, timing, and valuation.

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 resolves at zero, do I still need to account for it?

Yes. The position should be preserved in the taxpayer’s records. Automatic zero-value resolution should not, however, be generically classified as a sale, option lapse, Section 1234A termination, abandonment, or worthlessness event. Its tax treatment depends on the contract terms and platform mechanics.

Does holding a position to resolution produce the same tax treatment as selling it early?

Not necessarily. An actual pre-resolution transfer of the contract right to another participant for consideration may be described as a sale. Treatment of a position held to resolution depends on the contract terms and platform mechanics.

If I never withdrew funds from the platform, do I still have taxable activity?

Possibly. For a cash-method taxpayer, an amount credited to an account or otherwise made available without substantial limitations or restrictions may be constructively received before withdrawal. An amount subject to substantial limitations or restrictions may not be. Platform mechanics therefore matter.

Are prediction-market losses limited like wagering losses?

That depends on the applicable classification. Section 165(d) applies only if the activity constitutes wagering. Capital losses are subject to the capital-loss rules. Under a nonwagering ordinary framework, ordinary character alone does not establish recognition, deductibility, placement, limitation, or netting. For an individual, an otherwise allowable ordinary nonbusiness Section 165(c)(2) loss outside a sale or exchange is a miscellaneous itemized deduction currently disallowed under Section 67(h). See our prediction market loss deductions analysis.

Can multiple prediction-market contracts be aggregated for reporting?

This guide does not adopt a universal contract-level, position-level, or other unit-of-account rule. The appropriate reporting unit remains unresolved and depends on the applicable tax treatment and supporting records. Taxpayers should preserve sufficient underlying detail to substantiate the reporting method used.