The confusion is compounded by the lack of a unified regulatory framework. The CFTC claims prediction market contracts are swaps, while several states argue they constitute illegal sports betting. This jurisdictional conflict makes the IRS hesitant to issue clear tax guidance.
If you have been trading on platforms like Kalshi or Polymarket, congratulations on your wins. Now for the hard part: figuring out what you owe the IRS.
The IRS has provided zero formal regulations covering prediction market earnings. It just means nobody knows which set of existing rules applies.
Former IRS special agent Ryan Schutz, now a tax consultant, calls it "extremely confusing for the users of prediction markets because they're getting a lot of conflicting guidance."
Some contracts look like sports bets. Others act more like financial derivatives with no fixed end date. And a few platforms have started offering perpetual futures - contracts that never expire - which Schutz says "felt more like a real financial contract because they don't have a specific end date and that kind of tracks with the mechanics of 1256."
The CFTC claims authority over prediction markets, arguing that the platforms' event contracts are swaps. The CFTC has sued to defend its exclusive jurisdiction. Schutz says the IRS "might be hesitant to come out with guidance that conflicts with the CFTC position."
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Tax experts are running the math on a few possible outcomes.
The worst case for your portfolio? The IRS treats prediction market winnings as gambling income. The One Big Beautiful Bill Act contains a rule that caps gambling loss deductions at 90%.
In the past, a person with $100 in winnings and $100 in losses paid no tax. Under the revised rules, that taxpayer can only deduct $90, leaving $10 of winnings taxable. Nathan Goldman, a professor at North Carolina State University, says "sports gambling is actually in very bad tax treatment right now."
A better outcome would be that your trades qualify under Section 1256 of the tax code. Under those rules, 60% of the gain receives the lower long-term rate, while 40% faces the higher short-term rate, which can reach 37%. This 60/40 ratio applies no matter the holding period. Schutz says "for the vast majority of people, the 1256 treatment or capital gain treatment would result in the least amount of tax."
There is also the capital loss question. With capital gains treatment, investors whose losses outweigh gains can offset up to $3,000 of ordinary income.
States are adding their own layer. North Carolina applies a 6% levy to prediction market firms and a 23% rate to sports betting platforms. After the 2018 Supreme Court decision, Oregon, New York, and New Hampshire, for example, each imposed a 50% or higher tax on online sports betting.
Both Kalshi and Polymarket issue a Form 1099 to users for reporting. Even without a 1099, taxpayers must still disclose their earnings.
George Salis, chief economist at Vertex, points out that "some contracts may look more like sports wagering, while others may resemble financial or economic forecasting. That range makes it harder to create one simple tax framework that applies cleanly across every type of contract."
Several states are engaged in legal battles with prediction market platforms, alleging they operate illegal sports betting. The CFTC has also sued to defend its jurisdiction. Goldman notes that "if states come in and they start enacting their own laws, we have these converging laws all over the place and that makes what Washington ultimately does a lot more challenging."
Schutz says: "I would love to see IRS guidance. I think that would be the most definitive solution. I think the IRS might be hesitant to come out with guidance that conflicts with the CFTC position."
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