Are Prediction Markets Gambling for Tax Purposes?
Not necessarily.
The fact that a contract depends on an uncertain future event does not automatically mean the transaction is treated as gambling for federal income tax purposes.
Some prediction markets operate through federally regulated derivatives exchanges rather than traditional sportsbooks.
For example, Kalshi is registered with the Commodity Futures Trading Commission as a Designated Contract Market, or DCM.
That regulatory structure matters.
However, being traded on a CFTC-regulated exchange does not by itself determine the federal income tax treatment of a particular contract.
The legal classification and terms of the individual contract still matter.
A contract predicting:
- Bitcoin’s price
- The Federal Reserve’s next interest-rate decision
- An election result
- Inflation
- Weather
- A sporting event
- An economic statistic
may economically resemble a wager, but federal tax treatment depends on more than simply what event is being predicted.
Three Potential Tax Treatments
For many prediction-market traders, the tax analysis may involve three primary possibilities:
- Capital gain or loss treatment
- Section 1256 treatment for contracts that actually qualify
- Wagering or gambling treatment
There is currently no simple rule that says all prediction-market contracts fall into one of these categories.
The proper treatment should be determined based on the actual contract being traded.
Could Prediction-Market Contracts Qualify for Section 1256?
Section 1256 provides special tax treatment for certain derivatives.
Section 1256 generally includes qualifying:
- Regulated futures contracts
- Foreign currency contracts
- Nonequity options
- Dealer equity options
- Dealer securities futures contracts
One of the most attractive features of Section 1256 is its 60/40 tax treatment.
Generally:
60% of the gain or loss is treated as long-term
and
40% is treated as short-term
regardless of how long the position was actually held.
This means a qualifying contract held for only a few minutes could potentially receive the same 60/40 tax characterization as one held for months.
Example
Assume a trader generates:
$100,000 of net Section 1256 gain
The tax characterization would generally be:
- $60,000 long-term capital gain
- $40,000 short-term capital gain
This can produce a substantially different federal tax result from treating the entire $100,000 as short-term capital gain.
Section 1256 contracts are generally reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.
Section 1256 also generally requires qualifying open contracts to be marked to market at year-end.
Is Kalshi Section 1256?
This is where the analysis becomes more complicated.
Kalshi is a CFTC-regulated Designated Contract Market.
A domestic board of trade designated as a contract market by the CFTC can generally satisfy the “qualified board or exchange” component of Section 1256.
But that does not mean every contract traded on that exchange automatically qualifies for Section 1256 treatment.
The contract itself still must fall within one of the categories covered by Section 1256.
This distinction is particularly important for prediction markets.
Current CFTC product filings classify many Kalshi event contracts as “Swap (Binary Option).”
Meanwhile, Section 1256 specifically excludes certain swaps and similar agreements from its definition of a Section 1256 contract.
Therefore, taxpayers should not automatically assume:
Kalshi + CFTC regulation = Section 1256.
Instead, the particular contract should be reviewed.
There may also be products offered through regulated exchanges that are structured differently, including products classified as futures or options rather than swaps.
The distinction can materially change the tax result.
How Does Interactive Brokers Classify Event Contracts?
Interactive Brokers provides another useful example of why prediction-market contracts should be analyzed individually.
Interactive Brokers states in its event-contract disclosures that most event contracts are classified as swaps under CFTC rules, while certain event contracts offered by CME are structured as cash-settled options on futures.
That is an important distinction.
Interactive Brokers separately identifies qualifying regulated futures contracts, foreign currency contracts, nonequity options and other eligible instruments as potential Section 1256 contracts for tax-reporting purposes.
In other words, even a major brokerage that offers access to event contracts does not treat every prediction or event-based product as automatically falling into the same regulatory or tax category.
Interactive Brokers’ treatment reinforces an important point:
The fact that an event contract trades through a regulated broker or exchange does not automatically make it a Section 1256 contract.
Taxpayers should look at the legal structure and classification of the specific product.
Interactive Brokers also models different event-contract products differently within its trading systems. For example, ForecastEx event contracts may be represented as options for platform purposes, while CME event contracts can be represented as futures options.
Those trading-system classifications do not independently determine federal tax treatment, but they further demonstrate that the term “event contract” can encompass multiple types of financial instruments.
What About Kalshi’s Short-Term Crypto Contracts?
Kalshi also offers contracts tied to movements in cryptocurrency prices.
For example, a trader may take a position on whether Bitcoin will be above or below a specified price at a particular time.
One important point is that the trader generally is not purchasing Bitcoin itself.
Instead, the taxpayer is trading a contract whose settlement depends on what happens to Bitcoin’s price.
That means the tax question is not simply:
“How is Bitcoin taxed?”
The better question is:
“What legal and tax classification applies to the contract whose value references Bitcoin?”
This distinction is critical.
A crypto-referenced event contract should not automatically be treated as a direct cryptocurrency purchase or sale simply because Bitcoin or another digital asset determines the outcome.
Likewise, traders should not automatically assume the contract qualifies for Section 1256 solely because it is offered on a regulated exchange.
The specific contract terms and regulatory classification should be reviewed.
Capital Gain Treatment
If a prediction-market position does not qualify for Section 1256 but is treated as a capital asset, normal capital-gain rules may potentially apply.
The basic calculation would generally look like:
Sales Proceeds or settlement value minus Cost basis
minus applicable transaction costs equals
Capital gain or loss
Because many prediction-market positions are held for very short periods, the resulting gain would often be a short-term capital gain.
Short-term capital gains are generally taxed at ordinary federal income-tax rates.
This can produce a very different result from Section 1256’s 60/40 treatment.
Could Prediction Markets Be Treated as Gambling?
This is another unresolved and heavily debated area.
Some event contracts—particularly sports and outcome-based markets—can economically look very similar to traditional wagers.
That does not necessarily mean the IRS will treat every federally regulated event contract as gambling.
However, wagering treatment needs to remain part of the analysis, particularly because Congress significantly changed the gambling-loss rules beginning in 2026.
The New 90% Gambling-Loss Limitation
Beginning in 2026, federal law limits the deductible amount of wagering losses to 90% of wagering losses, and the deduction remains limited to wagering gains.
This can produce an unusual result.
Assume a taxpayer has:
Winning wagers: $100,000
Losing wagers: $100,000
Economically, the taxpayer broke even.
But under the 2026 wagering-loss limitation:
90% × $100,000 = $90,000 deductible losses
Potential taxable wagering income:
$10,000
even though the taxpayer had no actual economic profit.
This makes the distinction between capital trading, Section 1256 contracts and wagering activity increasingly important.
Prediction-Market Example
Assume a trader executes thousands of prediction-market contracts during 2026 and has:
Winning positions: $180,000
Losing positions: ($100,000)
Net economic profit: $80,000
The federal tax result can vary dramatically depending on classification.
Scenario 1: Qualifying Section 1256 Contracts
If the contracts legitimately qualify under Section 1256:
Net gain: $80,000
Potential characterization:
- $48,000 long-term capital gain
- $32,000 short-term capital gain
The activity would generally be reported through Form 6781 and Schedule D.
Scenario 2: Short-Term Capital Gains
If the positions are capital assets but do not qualify under Section 1256:
Net gain: $80,000
The $80,000 may generally be treated as short-term capital gain if the contracts were held for one year or less.
Scenario 3: Wagering Transactions
If the activity is ultimately classified as wagering, the calculation changes substantially because of Section 165(d) and the 90% wagering-loss limitation beginning in 2026.
The same underlying economic activity can therefore produce materially different federal
What About Polymarket?
Polymarket presents its own set of tax issues.
Historically, much of Polymarket’s activity involved blockchain-based transactions and digital assets such as USDC.
That potentially creates two layers of tax analysis:
- The tax treatment of the prediction contract itself
- The tax consequences of any digital assets used to enter, exit or settle the transaction
The U.S. regulatory landscape has also changed considerably, making it increasingly important to distinguish between:
- Polymarket US activity
- Legacy or offshore Polymarket activity
- Blockchain transactions
- Digital-asset transfers
- The underlying event contract
It may not be appropriate to apply one tax methodology to every transaction carrying the Polymarket name.
Recordkeeping Is Critical
Prediction-market traders should retain transaction-level information showing:
- Platform
- Contract name
- Contract type
- Date opened
- Date closed or settled
- Number of contracts
- Purchase price
- Sale or settlement value
- Fees
- Realized profit or loss
- Open positions at year-end
- Deposits and withdrawals
- Digital-asset transfers, where applicable
For a trader making hundreds or thousands of transactions, manually reconstructing this activity can quickly become difficult.
A year-end account balance alone is not sufficient to properly analyze the activity.
Using QastLedger for Prediction-Market Tax Records
For traders with significant Kalshi, Polymarket or other prediction-market activity, QastLedger can help organize the underlying transaction data.
QastLedger is built specifically around prediction-market and forecast-contract activity and can help traders consolidate transactions, calculate realized profit and loss, review trading activity and create cleaner records for tax preparation.
This can be particularly useful for taxpayers with hundreds or thousands of contracts who would otherwise have to reconstruct the activity manually.
However, transaction software does not determine the legal tax classification of a contract.
QastLedger can help establish what happened economically.
The tax professional still has to determine how the transactions should be reported for federal tax purposes.
That distinction is important.
Can Prediction-Market Traders Qualify for Trader Tax Status?
Possibly.
Trader Tax Status, commonly called TTS, generally depends on the nature of the taxpayer’s overall trading activity.
Factors can include:
- Trading frequency
- Number of transactions
- Regularity and continuity
- Time devoted to trading
- Holding periods
- Whether the taxpayer attempts to profit from short-term market movements
Someone occasionally purchasing prediction contracts is very different from a trader executing thousands of positions throughout the year.
However, obtaining Trader Tax Status does not automatically change the underlying character of a financial instrument.
The classification of the contract itself still matters.
What About a Section 475 Mark-to-Market Election?
Section 475 can provide mark-to-market tax treatment for qualifying traders in securities or commodities.
But this area also requires caution.
A taxpayer should not assume that an existing Section 475 election covering securities automatically applies to prediction contracts, event contracts or every product traded on a derivatives exchange.
The taxpayer, entity, election and instruments must all be reviewed.
Prediction-market traders considering Trader Tax Status or a Section 475 election should generally address these issues before the applicable election deadline, rather than waiting until tax preparation.
There Is No One-Size-Fits-All Answer
Prediction markets are developing faster than federal tax guidance.
Terms such as:
prediction market
forecast contract
event contract
binary option
futures contract
swap
derivative
and
wager
can sound interchangeable to the average trader.
For tax purposes, they are not necessarily the same.
The appropriate tax treatment can depend on:
- The platform
- The exchange
- The specific contract
- The CFTC classification
- Whether the product satisfies Section 1256
- Whether the contract is classified as a swap
- Whether digital assets were involved
- Whether wagering rules apply
- Whether the taxpayer qualifies for Trader Tax Status
- Whether a Section 475 election exists
For that reason, taxpayers should avoid automatically reporting every prediction-market transaction as gambling.
They should also avoid automatically putting every contract traded on a CFTC-regulated exchange on Form 6781.
The contract matters.
Need Help With Kalshi, Polymarket or Prediction-Market Taxes?
Trader Tax CPA works with active traders, derivatives traders, cryptocurrency traders and taxpayers trading on emerging financial platforms.
If you traded:
- Kalshi
- Polymarket
- ForecastEx
- Interactive Brokers event contracts
- Crypto event contracts
- Economic event contracts
- Election markets
- Sports event contracts
- Weather contracts
- Other prediction markets
we can review the activity and determine an appropriate federal tax reporting position based on the specific instruments involved.
Our work may include:
- Prediction-market tax analysis
- Section 1256 eligibility
- Form 6781 reporting
- Capital gain and loss reporting
- Kalshi transaction analysis
- Polymarket transaction analysis
- Cryptocurrency basis reconciliation
- Trader Tax Status
- Section 475 elections
- Entity structuring for active traders
For traders who need to organize their transaction history before tax preparation, QastLedger can also help consolidate prediction-market activity into cleaner tax records.
As prediction markets continue to grow, getting both the transaction data and the tax classification right will become increasingly important.
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This article is intended for general informational purposes only and does not constitute tax, legal or investment advice. Prediction-market taxation is an evolving area of law, and the appropriate treatment may vary depending on the platform, specific contract, taxpayer and individual facts.