Prediction markets and forecast contracts have exploded in popularity.<\/p>\n\n\n\n
Platforms such as Kalshi, Polymarket, Novig and other event-contract exchanges allow traders to take positions on everything from elections and economic data to cryptocurrency prices, sports, weather and other real-world events.<\/p>\n\n\n\n
But as prediction-market trading volume grows, one major question remains:<\/p>\n\n\n\n
How are prediction-market profits and losses taxed?<\/strong><\/p>\n\n\n\n The answer is not as simple as calling every prediction a gambling wager.<\/p>\n\n\n\n Depending on the platform, the specific contract and how the product is structured, prediction-market activity may potentially involve capital gains and losses, Section 1256 treatment for qualifying contracts, wagering rules, or other tax treatment.<\/p>\n\n\n\n Unfortunately, the federal tax rules have not developed as quickly as the prediction-market industry.<\/p>\n\n\n\n That makes understanding exactly what you traded increasingly important.<\/p>\n\n\n\n\n\n\n\n Not necessarily.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Some prediction markets operate through federally regulated derivatives exchanges rather than traditional sportsbooks.<\/p>\n\n\n\n For example, Kalshi is registered with the Commodity Futures Trading Commission as a Designated Contract Market, or DCM.<\/p>\n\n\n\n That regulatory structure matters.<\/p>\n\n\n\n However, being traded on a CFTC-regulated exchange does not by itself determine the federal income tax treatment of a particular contract.<\/p>\n\n\n\n The legal classification and terms of the individual contract still matter.<\/p>\n\n\n\n A contract predicting:<\/p>\n\n\n\n may economically resemble a wager, but federal tax treatment depends on more than simply what event is being predicted.<\/p>\n\n\n\n For many prediction-market traders, the tax analysis may involve three primary possibilities:<\/p>\n\n\n\n There is currently no simple rule that says all prediction-market contracts fall into one of these categories.<\/p>\n\n\n\n The proper treatment should be determined based on the actual contract being traded.<\/p>\n\n\n\n Section 1256 provides special tax treatment for certain derivatives.<\/p>\n\n\n\n Section 1256 generally includes qualifying:<\/p>\n\n\n\n One of the most attractive features of Section 1256 is its 60\/40 tax treatment.<\/p>\n\n\n\n Generally:<\/p>\n\n\n\n 60% of the gain or loss is treated as long-term<\/p>\n\n\n\n and<\/p>\n\n\n\n 40% is treated as short-term<\/p>\n\n\n\n regardless of how long the position was actually held.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Assume a trader generates:<\/p>\n\n\n\n $100,000 of net Section 1256 gain<\/strong><\/p>\n\n\n\n The tax characterization would generally be:<\/p>\n\n\n\n This can produce a substantially different federal tax result from treating the entire $100,000 as short-term capital gain.<\/p>\n\n\n\n Section 1256 contracts are generally reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.<\/p>\n\n\n\n Section 1256 also generally requires qualifying open contracts to be marked to market at year-end.<\/p>\n\n\n\n This is where the analysis becomes more complicated.<\/p>\n\n\n\n Kalshi is a CFTC-regulated Designated Contract Market.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n But that does not mean every contract traded on that exchange automatically qualifies for Section 1256 treatment.<\/p>\n\n\n\n The contract itself still must fall within one of the categories covered by Section 1256.<\/p>\n\n\n\n This distinction is particularly important for prediction markets.<\/p>\n\n\n\n Current CFTC product filings classify many Kalshi event contracts as “Swap (Binary Option).”<\/p>\n\n\n\n Meanwhile, Section 1256 specifically excludes certain swaps and similar agreements from its definition of a Section 1256 contract.<\/p>\n\n\n\n Therefore, taxpayers should not automatically assume:<\/p>\n\n\n\n Kalshi + CFTC regulation = Section 1256.<\/strong><\/p>\n\n\n\n Instead, the particular contract should be reviewed.<\/p>\n\n\n\n There may also be products offered through regulated exchanges that are structured differently, including products classified as futures or options rather than swaps.<\/p>\n\n\n\n The distinction can materially change the tax result.<\/p>\n\n\n\n Interactive Brokers provides another useful example of why prediction-market contracts should be analyzed individually.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n That is an important distinction.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Interactive Brokers’ treatment reinforces an important point:<\/p>\n\n\n\n The fact that an event contract trades through a regulated broker or exchange does not automatically make it a Section 1256 contract.<\/strong><\/p>\n\n\n\n Taxpayers should look at the legal structure and classification of the specific product.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Kalshi also offers contracts tied to movements in cryptocurrency prices.<\/p>\n\n\n\n For example, a trader may take a position on whether Bitcoin will be above or below a specified price at a particular time.<\/p>\n\n\n\n One important point is that the trader generally is not purchasing Bitcoin itself.<\/p>\n\n\n\n Instead, the taxpayer is trading a contract whose settlement depends on what happens to Bitcoin’s price.<\/p>\n\n\n\n That means the tax question is not simply:<\/p>\n\n\n\n “How is Bitcoin taxed?”<\/strong><\/p>\n\n\n\n The better question is:<\/p>\n\n\n\n “What legal and tax classification applies to the contract whose value references Bitcoin?”<\/strong><\/p>\n\n\n\n This distinction is critical.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Likewise, traders should not automatically assume the contract qualifies for Section 1256 solely because it is offered on a regulated exchange.<\/p>\n\n\n\n The specific contract terms and regulatory classification should be reviewed.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The basic calculation would generally look like:<\/p>\n\n\n\n Sales Proceeds or settlement value<\/em> minus Cost basis<\/em><\/p>\n\n\n\n minus applicable transaction costs equals<\/p>\n\n\n\n Capital gain or loss<\/p>\n\n\n\n Because many prediction-market positions are held for very short periods, the resulting gain would often be a short-term capital gain.<\/p>\n\n\n\n Short-term capital gains are generally taxed at ordinary federal income-tax rates.<\/p>\n\n\n\n This can produce a very different result from Section 1256’s 60\/40 treatment.<\/p>\n\n\n\n This is another unresolved and heavily debated area.<\/p>\n\n\n\n Some event contracts\u2014particularly sports and outcome-based markets\u2014can economically look very similar to traditional wagers.<\/p>\n\n\n\n That does not necessarily mean the IRS will treat every federally regulated event contract as gambling.<\/p>\n\n\n\n However, wagering treatment needs to remain part of the analysis, particularly because Congress significantly changed the gambling-loss rules beginning in 2026.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n This can produce an unusual result.<\/p>\n\n\n\n Assume a taxpayer has:<\/p>\n\n\n\n Winning wagers: $100,000<\/strong><\/p>\n\n\n\n Losing wagers: $100,000<\/strong><\/p>\n\n\n\n Economically, the taxpayer broke even.<\/p>\n\n\n\n But under the 2026 wagering-loss limitation:<\/p>\n\n\n\n 90% \u00d7 $100,000 = $90,000 deductible losses<\/strong><\/p>\n\n\n\n Potential taxable wagering income:<\/p>\n\n\n\n $10,000<\/strong><\/p>\n\n\n\n even though the taxpayer had no actual economic profit.<\/p>\n\n\n\n This makes the distinction between capital trading, Section 1256 contracts and wagering activity increasingly important.<\/p>\n\n\n\n Assume a trader executes thousands of prediction-market contracts during 2026 and has:<\/p>\n\n\n\n Winning positions: $180,000<\/strong><\/p>\n\n\n\n Losing positions: ($100,000)<\/strong><\/p>\n\n\n\n Net economic profit: $80,000<\/strong><\/p>\n\n\n\n The federal tax result can vary dramatically depending on classification.<\/p>\n\n\n\n If the contracts legitimately qualify under Section 1256:<\/p>\n\n\n\n Net gain: $80,000<\/strong><\/p>\n\n\n\n Potential characterization:<\/p>\n\n\n\n The activity would generally be reported through Form 6781 and Schedule D.<\/p>\n\n\n\n If the positions are capital assets but do not qualify under Section 1256:<\/p>\n\n\n\n Net gain: $80,000<\/strong><\/p>\n\n\n\n The $80,000 may generally be treated as short-term capital gain if the contracts were held for one year or less.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The same underlying economic activity can therefore produce materially different federal<\/p>\n\n\n\n Polymarket presents its own set of tax issues.<\/p>\n\n\n\n Historically, much of Polymarket’s activity involved blockchain-based transactions and digital assets such as USDC.<\/p>\n\n\n\n That potentially creates two layers of tax analysis:<\/p>\n\n\n\n The U.S. regulatory landscape has also changed considerably, making it increasingly important to distinguish between:<\/p>\n\n\n\n It may not be appropriate to apply one tax methodology to every transaction carrying the Polymarket name.<\/p>\n\n\n\n Prediction-market traders should retain transaction-level information showing:<\/p>\n\n\n\n For a trader making hundreds or thousands of transactions, manually reconstructing this activity can quickly become difficult.<\/p>\n\n\n\n A year-end account balance alone is not sufficient to properly analyze the activity.<\/p>\n\n\n\n For traders with significant Kalshi, Polymarket or other prediction-market activity, QastLedger<\/strong><\/a> can help organize the underlying transaction data.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n This can be particularly useful for taxpayers with hundreds or thousands of contracts who would otherwise have to reconstruct the activity manually.<\/p>\n\n\n\n However, transaction software does not determine the legal tax classification of a contract.<\/p>\n\n\n\n QastLedger can help establish what happened economically.<\/p>\n\n\n\n The tax professional still has to determine how the transactions should be reported for federal tax purposes.<\/p>\n\n\n\n That distinction is important.<\/p>\n\n\n\n Possibly.<\/p>\n\n\n\n Trader Tax Status, commonly called TTS<\/strong>, generally depends on the nature of the taxpayer’s overall trading activity.<\/p>\n\n\n\n Factors can include:<\/p>\n\n\n\n Someone occasionally purchasing prediction contracts is very different from a trader executing thousands of positions throughout the year.<\/p>\n\n\n\n However, obtaining Trader Tax Status does not automatically change the underlying character of a financial instrument.<\/p>\n\n\n\n The classification of the contract itself still matters.<\/p>\n\n\n\n Section 475 can provide mark-to-market tax treatment for qualifying traders in securities or commodities.<\/p>\n\n\n\n But this area also requires caution.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The taxpayer, entity, election and instruments must all be reviewed.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Prediction markets are developing faster than federal tax guidance.<\/p>\n\n\n\n Terms such as:<\/p>\n\n\n\n prediction market<\/p>\n\n\n\n forecast contract<\/p>\n\n\n\n event contract<\/p>\n\n\n\n binary option<\/p>\n\n\n\n futures contract<\/p>\n\n\n\n swap<\/p>\n\n\n\n derivative<\/p>\n\n\n\n and<\/p>\n\n\n\n wager<\/p>\n\n\n\n can sound interchangeable to the average trader.<\/p>\n\n\n\n For tax purposes, they are not necessarily the same.<\/p>\n\n\n\n The appropriate tax treatment can depend on:<\/p>\n\n\n\n For that reason, taxpayers should avoid automatically reporting every prediction-market transaction as gambling.<\/p>\n\n\n\n They should also avoid automatically putting every contract traded on a CFTC-regulated exchange on Form 6781.<\/p>\n\n\n\n The contract matters.<\/p>\n\n\n\n Trader Tax CPA works with active traders, derivatives traders, cryptocurrency traders and taxpayers trading on emerging financial platforms.<\/p>\n\n\n\n If you traded:<\/p>\n\n\n\n we can review the activity and determine an appropriate federal tax reporting position based on the specific instruments involved.<\/p>\n\n\n\n Our work may include:<\/p>\n\n\n\n For traders who need to organize their transaction history before tax preparation, QastLedger<\/strong><\/a> can also help consolidate prediction-market activity into cleaner tax records.<\/p>\n\n\n\n As prediction markets continue to grow, getting both the transaction data and the tax classification right will become increasingly important.<\/p>\n\n\n\n Help Us Track How Traders Are Reporting Prediction Markets<\/strong><\/p>\n\n\n\n Take our anonymous survey<\/a> and share how you’re handling prediction-market taxes.<\/p>\n\n\n\nAre Prediction Markets Gambling for Tax Purposes?<\/h2>\n\n\n\n
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Three Potential Tax Treatments<\/h2>\n\n\n\n
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Could Prediction-Market Contracts Qualify for Section 1256?<\/h2>\n\n\n\n
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Example<\/h3>\n\n\n\n
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Is Kalshi Section 1256?<\/h2>\n\n\n\n
How Does Interactive Brokers Classify Event Contracts?<\/h2>\n\n\n\n
What About Kalshi’s Short-Term Crypto Contracts?<\/h2>\n\n\n\n
Capital Gain Treatment<\/h2>\n\n\n\n
Could Prediction Markets Be Treated as Gambling?<\/h2>\n\n\n\n
The New 90% Gambling-Loss Limitation<\/h3>\n\n\n\n
Prediction-Market Example<\/h2>\n\n\n\n
Scenario 1: Qualifying Section 1256 Contracts<\/h3>\n\n\n\n
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Scenario 2: Short-Term Capital Gains<\/h3>\n\n\n\n
Scenario 3: Wagering Transactions<\/h3>\n\n\n\n
What About Polymarket?<\/h2>\n\n\n\n
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Recordkeeping Is Critical<\/h2>\n\n\n\n
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Using QastLedger for Prediction-Market Tax Records<\/h2>\n\n\n\n
Can Prediction-Market Traders Qualify for Trader Tax Status?<\/h2>\n\n\n\n
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What About a Section 475 Mark-to-Market Election?<\/h2>\n\n\n\n
There Is No One-Size-Fits-All Answer<\/h2>\n\n\n\n
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Need Help With Kalshi, Polymarket or Prediction-Market Taxes?<\/h2>\n\n\n\n
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