Prediction Market Taxes: What Kalshi and Polymarket Traders Need to Know for 2026

Here is the sentence every other article on this topic buries: the IRS has not issued formal guidance on how prediction market profits are taxed. Everything below is a map of an unsettled area, what is known, what is argued, and how practitioners handle the uncertainty, not advice about your return.

Let us do the disclaimers first, because for once they are not boilerplate. This article is educational information, not tax advice, not legal advice, and not a substitute for a professional who can see your actual numbers. The area is genuinely unsettled; reasonable professionals disagree; and the right answer for you depends on facts we cannot know from here. What this article can do is make you a much better-prepared client.

The one thing no framework changes

You owe tax on your profits whether or not anyone sends you a form. Trading profits are income under US law, and the reporting obligation is yours regardless of what paperwork the platform does or does not issue ^[1].

This matters because the paperwork is inconsistent. Kalshi has issued tax forms to users who cross reporting thresholds; Polymarket US's reporting practices are newer and have been reported as not currently including 1099s for most users ^[2]. Traders sometimes read "no form arrived" as "nothing to report." That reading has never been how the tax code works. The absence of a 1099 changes what the IRS was told, not what you owe.

Why this is genuinely unsettled

Everything else flows from one unanswered question: what kind of income is this? A prediction market contract sits at an awkward three-way intersection ^[3]:

It trades like a financial derivative: it is bought and sold on a CFTC-regulated exchange, has a bid and an ask, and can be exited before resolution, exactly like the instruments in a brokerage account.

It resolves like a wager: binary outcome, event-based, often sports.

And it produces gains like ordinary income: money in, more money out, no obvious holding-period story.

The IRS has not said which lens controls. Courts have not settled it either. So practitioners work from analogy, and three analogies dominate.

The three frameworks professionals actually use

What follows describes positions taken by tax professionals in this space ^[3]. Listing them is not endorsing any of them.

1. Ordinary income (the conservative lane). Report net profits as other income, taxed at your regular rate. Described by practitioners as the most common and most defensible approach in the absence of guidance. Its downsides are the flip side of its safety: no capital-gains rates, and the treatment of losses is less generous than a trading-account intuition would expect.

2. Gambling income (the lane that got worse). Treat profits as gambling winnings and losses as gambling losses. Historically this was at least workable. Under legislation taking effect in 2026, deductible gambling losses are capped at 90% of gambling winnings, meaning a break-even year can still produce taxable income ^[4]. Practitioners now widely describe this as the least favorable characterization for active traders. Whether these contracts are even "gambling" for tax purposes is itself contested, which is a strange place for the worst-case lane to sit.

3. Section 1256 (the aggressive lane). Section 1256 of the tax code gives certain exchange-traded contracts a favorable blended rate: 60% long-term, 40% short-term capital gains, regardless of holding period, plus mark-to-market treatment and cleaner loss handling ^[5]. The argument for: these are contracts on CFTC-regulated exchanges, which is the neighborhood 1256 lives in. The argument against: binary event contracts do not obviously fit the statute's enumerated instrument types, and practitioners consistently describe 1256 treatment for event contracts as unsettled and aggressive without formal guidance ^[5]. Anyone who tells you it obviously applies is selling the answer you want to hear.

The distance between these lanes shows up in real dollars: on the same trading year, they produce meaningfully different bills. Which is exactly why the next section is the actually useful one.

What practitioners suggest while the law catches up

Records. Practitioners uniformly suggest keeping records like a trader: export your complete trade history from every platform, entries, exits, fees, settlements, dates. Every framework above needs the same underlying ledger, and they describe reconstructing a year of trades in April as the most expensive form of procrastination in this pursuit. The same advice usually comes with a quarterly cadence, because platforms change their export tools and their fee schedules more often than you would think.

Fees. The same practitioners suggest tracking trading fees separately: they are real costs across every framework, and they are itemized in your history (what they actually are and on Polymarket).

The professional conversation. The framing practitioners describe as productive with a CPA or tax attorney: "I trade event contracts on CFTC-regulated exchanges; here is my complete ledger; the characterization is unsettled; help me choose a position and document why." Their point being that a professional who recognizes the issue is worth more than one who confidently pattern-matches it to something it is not.

States. State income tax treatment adds its own layer, and practitioners flag multi-state trading as something clients should raise with a preparer explicitly.

The tax tail. One more piece of standard practitioner wisdom: the tax tail should not wag the trading dog. No characterization uncertainty changes whether a trade was good; it changes what you keep, which they frame as a planning question rather than a reason to trade differently mid-game.

Where this leaves you

Three things are true at once: your profits are taxable no matter what forms arrive; nobody, including the IRS, has finally said what kind of taxable they are; and the practical gap between the candidate answers is large enough to be worth a professional's fee. The practitioners who work this area converge on the same posture: trader-grade records, skepticism toward anyone selling certainty in an unsettled area, and actual advice from someone who can see your numbers. This article's job was to make that conversation shorter and sharper. It is not the conversation.

Related reading: Kalshi fees explained · Polymarket fees explained · Are prediction markets legal? · How prediction markets work

This article is educational information about an unsettled area of law as of the date above. It is not tax advice, legal advice, or financial advice, and it does not create any professional relationship. Consult a qualified tax professional about your specific situation. Prediction markets involve risk of loss, and their legal status varies by location and changes over time.