Prediction Market Taxes: How Kalshi and Polymarket Event Contracts Are Taxed in 2026

Not by name. No revenue ruling, regulation, or notice addresses event contracts on Kalshi, Polymarket, or any other venue. The IRS has spoken to neighboring activities. It says "Gambling income includes but isn't limited to winnings from lotteries, raffles, sports betting, horse races, and casinos."^[7] That list is expressly not exhaustive, so an event contract's absence from it proves nothing either way. The agency has reached a close cousin, stating that "Winnings from fantasy sports leagues are gambling winnings."^[13] Non-precedential Chief Counsel Advice has also treated a daily fantasy sports entry fee as a wagering transaction, and the structure it described (an uncertain event, a payout if it resolves your way, consideration lost if it does not) maps closely onto a binary event contract. None of that decides your case, and none of it can be relied on as precedent. It does mean the wagering characterization is a live risk rather than a remote one. Our individual tax return preparation work on these accounts starts from that honest position, not from a promised answer.

Four are commonly discussed. They are not equally strong, they are not an exhaustive list of what a court could reach, and the right answer may differ by contract type: a contract on a sports result sits closer to a wager, while a contract on an inflation print has a better claim to being an investment. Characterize by what the contract references and how you trade it, not by which app you used. The table below is a map of the consequences, not a menu to pick from.

This is the question the internet answers most confidently and least carefully, in both directions. Start with the Code rather than a summary of it. Section 1256(b)(1) provides that the term "section 1256 contract" means "(A) any regulated futures contract, (B) any foreign currency contract, (C) any nonequity option, (D) any dealer equity option, and (E) any dealer securities futures contract."^[1] Five doors, not one. Most commentary walks up to door (A), argues about it, and stops. That is why so much of what you will read is unsatisfying: the analysis is incomplete before it begins.

A regulated futures contract means a contract "(A) with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and (B) which is traded on or subject to the rules of a qualified board or exchange."^[2] Both conditions must hold. Prong (B) is satisfied on a CFTC designated venue, because a qualified board or exchange includes "(B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission"^[4]. Prong (A) is the live question, and it is a question about the contract's economics, not about what any account is labeled. For a conventional fully collateralized binary contract, you post your maximum possible loss when you enter, and the amount required does not move as the price moves. That is a real obstacle to saying deposits and withdrawals depend on a system of marking to market. It is an argument, not a holding: no IRS authority has decided whether these arrangements satisfy prong (A). Note also what the statute does not say. The words margin and account appear nowhere in this definition. That framing comes from an IRS publication summarizing the rule, and a publication is not authority.

This is the route most discussions miss, and it is the strongest argument for 60/40. A nonequity option "means any listed option which is not an equity option"^[3], and a listed option "means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange"^[5]. Read those together: if a binary event contract is an option, and it trades on a CFTC designated market, and it is not an option on stock, then it is arguably a nonequity option and therefore a Section 1256 contract, with no deposit or marking to market prong to satisfy. Whether these instruments are options in the statutory sense is unresolved, and that is the fight worth having. Anyone who tells you the margin analysis settles Section 1256 has not read past subparagraph (A).

Section 1256 also carves things out. The term does not include "(B) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement."^[15] This matters because binary options on a CFTC venue have been analyzed as commodity options, and commodity options are swaps for Dodd-Frank purposes. If an event contract is a commodity swap or a similar agreement, the exclusion applies and the door closes no matter which entrance you tried. The counterargument is that a swap for commodities law purposes is not automatically a swap in the sense this list uses, since the list enumerates specific instruments and a binary event contract is not obviously any of them. Nobody has resolved this. The honest summary is that Section 1256 treatment for event contracts is contested on at least three independent fronts, and confident answers in either direction are not supported by published authority.

The upside is real, which is why the position is popular. Under the regime, "Under the mark-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long you actually held the property."^[12] A long term rate on most of a gain you held for days is a genuine benefit, and it sidesteps the wagering loss limit entirely. The regime is symmetric, though, and the costs are underdiscussed. The same rule forces 60 percent of a loss to be long term, which is worse if you have short term gains elsewhere. More importantly, marking to market means an open position is treated as sold at year end, so tax can land on a contract whose event has not happened yet: a Super Bowl contract could be taxed in December. Reporting runs through Form 6781.^[6]

If your contracts are wagers, this is the rule that changed the math, and it is the one genuinely settled item on this page. The statute now provides that for losses from wagering transactions, the deduction "(A) shall be equal to 90 percent of the amount of such losses during such taxable year, and (B) shall be allowed only to the extent of the gains from such transactions during such taxable year."^[11] It applies to "taxable years beginning after December 31, 2025."^[16] Two limits stack: the haircut applies first, then the gains cap. So a bettor who wins and loses the same amount across a year is economically flat but can still report taxable income, because a tenth of the losing side never comes back. That is taxable income despite no annual net economic profit. Treasury expects this to reach a lot of people, projecting that "The Treasury Department and the IRS project a total of 673,000 taxpayers will take an itemized deduction for wagering losses for tax year 2026."^[39] The reach extends further than most realize: the statute defines losses from wagering transactions to include "any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction."^[17] A professional's business expenses therefore sit inside the same cap. The broader package is covered in What did the One Big Beautiful Bill Act change for my taxes?.

Search for gambling losses and you will land on the IRS gambling income tax topic, which still tells you your losses cannot exceed the income you reported and says nothing about a 90 percent limit. It is not lying to you; it has not been conformed to the statute yet. The proposed regulation makes the same point about the existing rule, noting that after the amendment "the first sentence of §1.165-10, providing that losses from wagering transactions are limited to the extent of gains from such transactions, no longer accurately describes the limitations on wagering losses in section 165(d)."^[18] That regulation is a "Notice of proposed rulemaking"^[19] and is proposed to apply to tax years beginning after December 31, 2025. So the operative authority for the 90 percent rule is the statute itself, not any taxpayer-facing IRS page. This is a live trap: the pages a reader trusts most are the least accurate on this point, for the tax year now being planned.

This is the most valuable and least known part of the analysis, because it operates before any deduction limit does. Winnings are not the gross settlement amount. The IRS has stated that "Gross income from a wagering transaction is calculated by subtracting wagers placed to produce the payouts from the payouts as a preliminary step in determining gross income."^[8] Subtracting the stake is a gross income computation, not a deduction, which is why it survives both the itemizing requirement and the 90 percent haircut. A contract you bought for 40 cents that settles at a dollar produces 60 cents of gross income, not a dollar. The IRS has gone further for one narrow case, saying "Gross income from a slot machine wagering transaction is determined on a session basis."^[10] Be careful with that one. It comes from a notice that was never finalized, its scope is electronically tracked slot machine play, and no authority extends session treatment to a continuously traded order book. Anyone applying a session theory to prediction market trading is taking a filing position, not following a rule.

For a casual bettor, largely yes. IRS guidance addresses "casual gamblers who aren't in the trade or business of gambling"^[20] and tells them "You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040) and kept a record of your winnings and losses."^[21] Take the standard deduction, and a casual bettor's wagering losses are worth nothing. Different rules reach someone whose activity is genuinely a trade or business: "If you're in the trade or business of gambling, use Schedule C (Form 1040)."^[9] That status is hard to establish and is not a cure-all. Because the statute sweeps business expenses into the same limit, "This also means that a professional gambler cannot claim a loss on Schedule C (Form 1040) in a loss year, even if gambling expenses other than losses exceed gross gambling income."^[22] The real Schedule C advantages are where the deduction sits and how the income is treated, not escape from the cap. Note the flip side too: "Engaging in gambling activities as a trade or business is considered self-employment."^[23]

Check your own venue's tax documentation page rather than trusting a blog, including this one, on what any specific platform files. Practices differ across venues and change from year to year, and much of what circulates about which forms prediction market platforms issue is wrong. What matters legally does not depend on the platform. If the contracts are wagers, the information return in this area is the gambling-winnings form, and IRS guidance is explicit that reporting does not depend on receiving one: "You must report all gambling winnings on Form 1040 or Form 1040-SR (use Schedule 1 (Form 1040)"^[24] The same guidance extends that duty to winnings that arrive without any information return at all. So the absence of a form is not the absence of tax. Assume you are the system of record. Export your trade history at least annually and reconcile it while you still remember the positions, because a statement that reports proceeds without basis, or nothing at all, still leaves the burden of proving your numbers with you.

It adds a reporting layer that most traders never consider, though it is narrower than the scare version. A stablecoin is a digital asset, and a digital asset is property, not cash: "Generally, the basis of a digital asset is the cost in U.S. dollars."^[25] Each sale, exchange, or use of the coin is potentially a disposition to report, on top of whatever the event contract itself is. Merely moving your own coins is not. The IRS tells you to answer no to the digital asset question if you only "Transferred digital assets from one wallet or account you own or control to another wallet or account you own or control"^[26], though paying a fee in digital assets is itself a transaction. Gains on any single stablecoin leg are usually near zero because the coin tracks a dollar, but the obligation to track is real and the volume can be large.

The election is broader than commonly described, and narrower in effect than traders hope. It is not limited to stock traders: "A trader in securities or commodities may elect under section 475(f) to use the mark-to-market method to account for securities or commodities held in connection with a trading business."^[27] The election itself is made under "section 475(f)(1) or (f)(2) of the Internal Revenue Code"^[28], and special rules apply "if you are a trader in securities or commodities in the business of buying and selling securities or commodities for your own account."^[29] So the real questions are whether event contracts are commodities for this purpose and whether you conduct a qualifying trading business. Neither has been addressed by the IRS. Being regulated by the CFTC does not make something a commodity under the Code, and for a contract referencing an election or a court ruling there is no underlying commodity at all, which makes the argument weak. A contract referencing natural gas prices is a better candidate. Do not assume an election covering your securities business automatically reaches a separate book of event contracts.

Possibly, and this question is independent of Section 1256. The straddle rules reach offsetting positions in actively traded personal property, and Treasury regulations treat a domestic board of trade designated as a contract market by the CFTC as an established financial market, which is what makes property actively traded. Holding YES and NO on the same market in equal size is the paradigm of offsetting risk, since the combined payout is fixed. Two honest caveats. Whether a wagering contract is personal property for this purpose is unresolved. And the rules defer a loss only against unrecognized gain in the offsetting position, so if both legs settle in the same year there may be nothing to defer. Form 6781 reports straddle positions as well as Section 1256 contracts,^[6] which is worth knowing if you trade both sides.

The mechanics are different and often harsher, and the article you read elsewhere probably skips them. The operative rule is not a filing obligation but withholding at source: "nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U.S. trade or business and is not exempted by treaty."^[30] Thirty percent off the gross, with no deduction for the losing side, because "Generally, nonresident aliens of the United States who aren't residents of Canada can't deduct gambling losses."^[31] Canada's treaty permits deducting losses against winnings; it is not an exemption from the tax. Residents of a number of other treaty countries are exempt from U.S. tax on gambling winnings entirely, so the outcome depends heavily on which treaty applies to you. A narrow statutory carve-out exists but will not help here: "no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States."^[32] An event contract is none of those. For foreign owners this interacts with the rest of a U.S. footprint, which we handle through foreign-owned U.S. entity tax services, and the nonresident filing mechanics are covered in Who must file Form 1040-NR, and how is a nonresident alien's income taxed?.

It removes one layer and concentrates attention on the federal one. Florida imposes no personal income tax, so there is no state return where a different rule might soften a bad federal outcome, and no state loss add back to plan around. Federal characterization still carries consequences beyond the income tax rate: trade or business status brings self-employment tax, and capital treatment can bring the net investment income tax. Elsewhere the state layer can dominate. Several states, among them Connecticut, Illinois, Indiana, and Wisconsin, tax gambling winnings without allowing a corresponding loss offset, so a resident there can owe state tax on a losing year. Two people placing the same trade at the same moment can genuinely land in different places.

Records first, because every characterization needs them and no venue will reconstruct your year later. IRS guidance expects you to "keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses."^[33] Then consider disclosure, understanding precisely what it buys. Form 8275 "is filed to avoid the portions of the accuracy-related penalty due to disregard of rules or to a substantial understatement of income tax for non-tax shelter items if the return position has a reasonable basis."^[34] It is not a blanket shield: the instructions list misconduct whose penalty "cannot be avoided by disclosure on Form 8275."^[35] including negligence and failure to keep proper books. The penalty it addresses "is 20% of the portion of the underpayment of tax that is attributable to negligence or disregard of rules or regulations."^[36] Reasonable basis is a real threshold, not a formality, and disclosure without it accomplishes nothing. Deciding what your facts support, and papering it before you file, is what our advisory solutions engagements are for.

Not so far, and you should file on the law as it stands. Two bills would change it. One would amend section 165(d) "by striking ``90 percent'' and inserting ``100 percent''"^[37], restoring a full deduction while leaving the business expense sweep in place. The other would rewrite the subsection to read "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions."^[38] Neither has been enacted as of July 2026, and the current Code still reads 90 percent. Note that neither bill would restore the older treatment of a professional's expenses, contrary to how they are often described. Planning on the assumption that a rule will disappear is not planning: file on current law and keep records good enough to amend if it changes.