Prediction Market Taxes: How to Report Kalshi, Polymarket, and Robinhood Event Contracts on Your Tax Return

In This Article

1. What Is the Prediction Market Tax Question Nobody Can Agree On?
2. How Are Prediction Markets Regulated and Why Does That Affect Taxes?
3. What Are the Three Possible Tax Treatments for Prediction Markets (Ranked by Defensibility)?
4. How Does Each Prediction Market Platform Handle Tax Reporting?
5. How Do States Like New Jersey Tax Prediction Market Income?
6. How Do I Actually File My Taxes for Each Prediction Market Tax Approach?
7. What Records Do I Need to Track for Prediction Market Taxes?
8. Recommendation
9. Key Takeaway
10. Frequently Asked Questions
11. Ready to File With Confidence?

What Is the Prediction Market Tax Question Nobody Can Agree On?

You just made $3,000 profit betting on the next Fed rate decision on Robinhood Prediction Markets. Or Kalshi. Or an old-school Polymarket position you've held since 2024. Now tax time arrives.

And you face a problem: the IRS has issued zero formal guidance on how to report prediction market trades.

Not one.

This creates a dangerous knowledge gap. Unlike crypto trading (where Form 1099-DA clarifies how to report), or stock trading (where Form 1099-B does the job), prediction markets operate in regulatory gray space. The platforms may or may not send you a 1099, and even if they do, the IRS hasn't officially blessed any particular reporting method.

This post walks through three defensible tax treatments, the regulatory landscape, platform-specific notes, and the unique traps NJ residents face. If you need professional help, the tax preparation services cover all prediction market filing approaches.

How Are Prediction Markets Regulated and Why Does That Affect Taxes?

What Are Prediction Markets?

Prediction markets (also called event contracts) are financial instruments that settle based on real-world outcomes:

• Kalshi: Binary yes/no bets on events (Fed rate decisions, election outcomes, sports results, economic data, etc.). ~200+ active contracts at any time.
• Polymarket: DeFi-native prediction market with a slightly more permissive regulatory posture toward traders outside the US (though US traders are permitted under specific conditions).
• Robinhood Prediction Markets: Brand-new (launched Jan 2026). Binary outcomes, settled by Robinhood, launched with ~50 contracts on economics, politics, and sports.

All three are binary: you buy a contract for $X at time T, the outcome resolves to YES (you get $1, maybe $0.99 on Robinhood due to fees) or NO (you get $0), and you pocket the difference (or loss).

Why the Regulatory Confusion?

The CFTC vs. SEC showdown. Kalshi is a CFTC-regulated exchange under the Dodd-Frank Act. It explicitly operates as a derivatives exchange and has specific exemptions for "prediction contracts" narrowly defined by size, outcome, and contract type. Polymarket and Robinhood are in grayer territory. Are they security exchanges (SEC), commodities exchanges (CFTC), or gambling-adjacent platforms (state regulators)?

The swap exclusion question. Dodd-Frank includes a "swap exclusion" that exempts certain small contracts from being classified as swaps. Kalshi bets are intentionally structured to qualify. But the IRS has never formally said what the tax treatment of a swap exclusion contract is -- is it a derivative? Is it gambling? Is it ordinary income?

State-level gambling laws. Even though the platforms claim their products aren't "gambling" (because the outcomes are objective, not games of chance), many states classify binary outcome contracts as wagers and subject them to gambling tax rules. NJ specifically has an "insurance/wagering" framework that creates unique traps.

The 1099 inconsistency. Some platforms send traders 1099-MISC or 1099-B or nothing at all. The IRS hasn't clarified whether prediction market trades are reportable on Form 1099-DA (crypto), Form 1099-B (equities/derivatives), or Form 1040, Schedule C (business income) or Schedule 1 (miscellaneous).

The IRS Stays Silent

As of March 1, 2026, the IRS has not issued a Revenue Ruling or Private Letter Ruling on prediction market taxation, has not clarified whether prediction markets are securities, derivatives, or something else, has not defined whether traders should use Section 1256 treatment (60/40 long-term/short-term) or ordinary income rates, and has not clarified the CFTC swap exclusion's tax implications. The IRS has implicitly acknowledged prediction markets exist through various enforcement actions and CFTC coordination.

This silence forces traders and CPAs into an interpretive vacuum. The three approaches below are the most defensible, but none is bulletproof.

What Are the Three Possible Tax Treatments for Prediction Markets (Ranked by Defensibility)?

Approach 1: Speculative Derivatives (Section 1256) -- Most Aggressive

What it is: You classify your prediction market positions as Section 1256 contracts (commodities derivatives regulated by the CFTC).

How it works: All gains and losses are aggregated for the year. 60% of the net gain is treated as long-term capital gain (taxed at favorable rates). 40% is treated as short-term capital gain (taxed at ordinary income rates). This is regardless of your holding period. Even if you hold the contract for one day, you get the 60/40 split. Form 8949 is not used; instead, you report it on Schedule D under "Section 1256 contracts."

Example: You net $10,000 in prediction market gains for 2025. 60% ($6,000) is taxed as long-term cap gain. 40% ($4,000) is taxed as short-term cap gain. On a $10,000 net gain, your tax bill is ~$2,100 (assuming 24% marginal rate and 20% LTCG rate).

Why it's defensible: Kalshi contracts are explicitly exempted from being "swaps" under Dodd-Frank and the CFTC rules. Section 1256 applies to commodities contracts traded on CFTC-regulated exchanges. Kalshi is a CFTC exchange, so the argument is: "These are Section 1256 derivatives, period." Some tax attorneys and crypto-focused CPAs have been quietly using this method.

Why it's risky: The IRS has not formally blessed this approach. If the IRS decides prediction markets are not Section 1256 contracts, you could owe additional tax, penalties, and interest. The swap exclusion was designed to exempt prediction contracts from Dodd-Frank's swap regulation, not to define their tax treatment. Robinhood and Polymarket are not CFTC exchanges in the same way Kalshi is. The CFTC's regulatory framework and the IRS's tax framework are not aligned.

Who it suits: High-volume traders who realize large net gains and want to minimize their tax rate. Kalshi traders specifically (Kalshi is explicitly CFTC-regulated).

Red flag: If you get audited and the IRS challenges this, you'd likely lose and owe back taxes plus penalties. I would not recommend this without a written opinion letter from a tax attorney.

Approach 2: Gambling/Gaming Income (Ordinary Income) -- Moderate Conservative

What it is: You classify your prediction market trading as gambling income, subject to the hobby loss rules and gaming taxes.

How it works: All wins are reported as taxable income on Schedule 1, Line 8b (Gambling Income) or Schedule C (if you're a professional gambler). Losses are deductible on Schedule A, Line 16 if you itemize, up to the amount of your winnings. Starting in 2026, the OBBBA caps the loss deduction at 90% of total losses. If you're a professional gambler, losses are deducted as business expenses on Schedule C.

The key question: Are you a "professional-gambler" or an amateur? Professional: You spend significant time, have trading records, pursue it like a business. Your net gains over time. Amateur: Casual, you play for fun, you lack a systematic approach.

If you're a professional gambler, you file Schedule C and can deduct all losses as business expenses. If you're an amateur, you report winnings on Schedule 1, Line 8b and deduct losses on Schedule A, Line 16 if you itemize, up to the amount of your winnings. Starting in 2026, the OBBBA caps the loss deduction at 90% of total losses. If you take the standard deduction, you cannot deduct any gambling losses.

Example: You have $50,000 in prediction market wins and $40,000 in losses in 2025. If you're a professional gambler: You report on Schedule C, deduct your $40,000 in losses, and pay tax on the $10,000 net. If you're an amateur who itemizes: You report $50,000 in winnings on Schedule 1, Line 8b and deduct $40,000 in losses on Schedule A, Line 16. Your taxable gambling income is $10,000. For 2026 activity, the loss deduction would be capped at $36,000 (90% of $40,000), leaving $14,000 taxable. If you take the standard deduction, you cannot deduct any losses and owe tax on the full $50,000.

Why it's defensible: Gambling winnings are taxable income under IRC Section 61. Prediction markets have binary outcomes based on real-world events -- this resembles wagering, not investment. Many states, including NJ, classify prediction markets as "wagers" or "gaming activity." The IRS has long experience auditing gambling income.

Why it's risky: If the IRS takes the position that prediction markets are not "gambling" but rather speculative derivatives or ordinary business income, you might have reported too much. The gambling framework is less favorable for large traders because losses are harder to deduct.

Who it suits: Conservative traders who want alignment with state-level gambling classifications. Small-to-medium traders. Traders in states where gambling is heavily regulated (e.g., NJ, NY).

Approach 3: Taxable Event / Ordinary Business Income -- Most Conservative

What it is: You report prediction market gains as miscellaneous ordinary income, filed as Schedule 1 income (other income) or Schedule C (if you're in the business of trading).

How it works: Each win (when a contract settles in your favor) is reported as ordinary income. Each loss (when a contract settles against you) is reported as a loss. If you're not a business, you report the net on Schedule 1, Line 8z (Other Income). If you are a business, you file Schedule C and claim all losses as business deductions. This is the most straightforward, least aggressive approach.

Example: You net $10,000 in prediction market gains in 2025. You report it on Schedule 1 as "Other Income." You pay tax at your marginal rate (~24%), i.e., ~$2,400.

Why it's defensible: The IRS taxes all income from any source unless specifically excluded by law. This approach doesn't require you to make a theory about whether they're derivatives or gambling. You're just reporting them as income. This is what the vast majority of traders and CPAs are likely to do by default.

Why it's safe: You're taking the most conservative position. The IRS is unlikely to challenge you for reporting too much income. It's consistent with the principle of "when in doubt, report more income and claim fewer deductions."

Who it suits: Traders who prefer certainty over optimization. Traders with small net gains or losses. Traders who are not confident in their ability to defend a more aggressive position.

How Does Each Prediction Market Platform Handle Tax Reporting?

Kalshi

Scale: Kalshi posted $23.8 billion in total 2025 trading volume (1,108% year-over-year increase). As of early March 2026, rolling 30-day volume sits at approximately $6.7 billion with open interest of $433.6 million. Sports contracts represent 85-92% of volume.

Regulatory status: CFTC Designated Contract Market. Kalshi appears on EY's official Section 1256 qualified board or exchange list. However, the CFTC itself classifies event contracts as "binary options" categorized as "swaps" under 7 U.S.C. Section 1a(47). This swap classification may trigger the Dodd-Frank exclusion under IRC Section 1256(b)(2)(B) that Congress enacted to prevent such contracts from receiving 60/40 treatment.

Tax reporting: Kalshi issues 1099-INT for interest earned on cash balances (at or above $10), 1099-MISC for referral bonuses or credits (at or above $600), and a limited 1099-B for crypto transfer transactions only. Kalshi does not issue a 1099-B for event contract trades. You must self-report. Kalshi provides year-end trade history and P&L reports. Kalshi uses FIFO accounting for its P&L display but explicitly disclaims this as tax advice.

Fee structure (updated February 5, 2026): Taker fees follow the formula 0.07 x C x P x (1-P), producing a maximum of approximately $0.02 per contract at the $0.50 midpoint. Maker fees are one-quarter of the taker rate. Kalshi pays up to 4.05% APY on idle cash balances.

Why Kalshi traders might prefer Approach 1: Kalshi's explicit CFTC DCM registration and presence on EY's Section 1256 QBE list is the strongest factual support for the Section 1256 argument.

Risk: The CFTC's own swap classification creates a strong argument against Section 1256 eligibility. In its February 2026 amicus brief in North American Derivatives Exchange v. State of Nevada, the CFTC argued that event contracts on CFTC-registered DCMs are swaps under the CEA. The IRS has consistently taken a narrow view of Section 1256 categories (IRS Notice 2007-71, Summitt v. Commissioner 134 T.C. 248, Wright v. Commissioner 809 F.3d 877). File Form 8275 if taking this position.

State restrictions: 9 states have issued cease-and-desist letters to Kalshi (NJ, NY, NV, MA, MD, OH, MT, AZ, AR, IL). Massachusetts issued a preliminary injunction (January 2026, currently stayed on appeal). Federal courts are split on whether CFTC preemption overrides state gambling laws. A coalition of 39 state attorneys general plus D.C. has filed amicus briefs against Kalshi.

Polymarket

Two platforms now exist: Polymarket International continues to operate at massive scale (smart contracts operated by Blockratize, Inc.). Polymarket US (QCX LLC d/b/a Polymarket US) launched in beta on November 12, 2025 via a $112 million acquisition of QCEX, and operates as a CFTC-registered DCM requiring full KYC. As of March 2026, Polymarket US remains invite-only with 6-12 week waits for new signups.

Volume caveat: A December 2025 Paradigm Research report revealed that most Polymarket dashboards have been double-counting volume due to how on-chain OrderFilled events work. Reported figures may be roughly twice the actual volume.

Tax reporting: Polymarket International issues no tax forms. Polymarket US is expected to issue 1099 forms once past beta, but this has not been confirmed. For International trades, you must reconstruct P&L from blockchain records.

Polymarket International (offshore): The US is among 33 completely blocked countries. VPN use is prohibited under Section 2.1.4 of the Terms of Service. The Section 1256 argument is significantly weaker for offshore trades, as Polymarket International is not a CFTC-regulated exchange. FBAR and FATCA reporting obligations may apply (see the prediction market tax services page for details).

Polymarket US (beta): Because Polymarket US is a CFTC-regulated DCM, the Section 1256 argument is stronger here than for International trades (similar to Kalshi). Available markets are more limited: sports, crypto, and entertainment. Political/election markets are delayed pending further CFTC review.

Recommendation: Approach 2 (gambling) or Approach 3 (ordinary income) is more defensible for Polymarket International trades. For Polymarket US trades, the analysis is similar to Kalshi.

Taker fees: Polymarket introduced taker fees on select crypto and sports markets in early 2026. Polymarket US charges a 0.10% flat taker fee.

Robinhood Prediction Markets

Scale: Over 1 million customers have traded prediction markets on Robinhood. CEO Vlad Tenev reported on the February 2026 earnings call that 12+ billion contracts were traded in 2025, with 4 billion already in 2026. Prediction markets are Robinhood's fastest-growing product line by revenue, on pace for $300+ million annualized.

Regulatory status: Robinhood routes orders through Robinhood Derivatives, LLC (a CFTC-registered Futures Commission Merchant) to Kalshi's exchange. Robinhood is preparing to leave Kalshi's exchange: in January 2026, it closed its acquisition of MIAXdx through a joint venture with Susquehanna International Group called Rothera, giving Robinhood its own CFTC-licensed DCM and clearinghouse. This exchange is expected to begin operations in 2026.

Tax reporting: Robinhood explicitly states "Robinhood will not be providing 1099s for event contract trades." Robinhood provides an Event Contracts Annual Statement summarizing trades, but labels it "not a substitute tax reporting form." Robinhood charges $0.01 per contract per side as commission, on top of Kalshi's exchange fees, for approximately $0.02 per contract total.

Recommendation: Use the same analysis as Kalshi (since Robinhood trades execute on Kalshi's infrastructure). Robinhood is restricted in Maryland (no event contracts at all) and Nevada/New Jersey (no sports contracts). File conservatively and amend later if the IRS clarifies.

PredictIt

PredictIt survived its CFTC challenge with final judgment in its favor on July 22, 2025. The $850 per-contract position limit has been raised to $3,500 (indexed to the Federal Election Campaign Act limit under CFTC Letter No. 25-20). The 5,000-trader-per-contract cap was eliminated. PredictIt charges 10% on gross profits plus a 5% withdrawal fee (the highest fee structure in the industry). PredictIt remains restricted to political event contracts only. PredictIt issues 1099-MISC for net winnings above $600.

How Do States Like New Jersey Tax Prediction Market Income?

Federal vs. State Tax Treatment

The federal IRS framework above doesn't prevent states from imposing their own taxes on prediction market activity. Some states treat prediction markets as gambling and impose a wagering tax (e.g., New Jersey, Nevada, Illinois). Others treat them as capital gains and apply state income tax. Others treat them as business income and require a state license or business registration.

New Jersey Specifics

If you're a NJ resident, pay close attention. NJ has a historically strict gambling and insurance regulatory framework that creates unique traps for prediction market traders.

The NJ Insurance/Wagering Distinction. NJ classifies contracts on uncertain future events in two buckets: (1) Insurance, where you have an insurable interest and the contract indemnifies you against loss, and (2) Wagering, where you have no insurable interest and the contract is purely speculative. Prediction markets are almost certainly wagering under NJ law, not insurance.

NJ Gambling Winnings. Professional gamblers file Schedule C (business income) and deduct losses. Casual gamblers file ordinary income tax on net winnings; losses are not deductible beyond winnings. NJ allows full netting of wins and losses (unlike federal, which caps at 90% for 2026+).

The Trap for NJ Residents. If you use Approach 1 (Section 1256) federally, you get favorable 60/40 rates on your federal return. But NJ may not recognize Section 1256 treatment for prediction markets and could tax the full amount at ordinary income rates (up to 10.75%). You could pay federal tax at favorable rates and NJ tax at unfavorable rates.

Example: NJ resident realizes $10,000 net gain on Kalshi. Federal: Uses Approach 1, taxes $6,000 at 20% (LTCG) and $4,000 at 24% (short-term). Total federal = ~$2,100. NJ: Taxes $10,000 at ordinary income rates (~4-10.75% depending on bracket). Total NJ = ~$850. Total tax: ~$2,950 (effective rate ~29.5%). Compare to a resident of Florida or Texas: Total tax: ~$2,100 (effective rate ~21%). NJ residents are penalized by ~$850 for each $10,000 in gains.

What NJ Traders Should Do. Track gross winnings and losses separately -- you may need this for NJ reporting. Consult a NJ-licensed CPA before filing. Consider the state tax impact when deciding between Approaches 1, 2, and 3. File Form NJ-1040 with itemized deductions if you have substantial losses.

How Do I Actually File My Taxes for Each Prediction Market Tax Approach?

If You Choose Approach 1: Section 1256 Derivatives

1. Calculate your net P&L for the year from all prediction market trades.
2. On Schedule D (Capital Gains and Losses), go to Part III: "Gain from Form 6781, Section 1256 Contracts and Straddles." Enter your unrealized and realized gains/losses. Do NOT use Form 8949. The 60/40 split is automatic.
3. Report 60% as long-term capital gain and 40% as short-term capital gain.
4. For NJ residents: File Schedule A and note the state tax impact. You may owe ordinary income tax on the full amount in NJ even though you reported long-term gains federally.

If You Choose Approach 2: Gambling Income

1. Calculate your gross winnings and gross losses separately.
2. Determine if you're a "professional gambler." If yes: File Schedule C (Business Income and Loss). Report gross winnings as income and deduct all losses as business expenses. If no: Report gross winnings on Schedule 1, Line 8b. Deduct losses on Schedule A, Line 16 if you itemize (up to the amount of winnings; capped at 90% of losses starting 2026). If you take the standard deduction, losses are not deductible.
3. On Schedule 1, Line 8b: "Gambling income." Enter your gross gambling winnings. Deduct losses on Schedule A, Line 16 if you itemize.
4. For NJ residents: NJ allows full 100% netting of gambling wins and losses on the NJ-1040 regardless of the federal 90% cap. Report net gambling income on NJ-1040.

If You Choose Approach 3: Ordinary Income (Schedule 1 or C)

1. Calculate your net P&L for the year.
2. On Schedule 1 or C: If Schedule 1, report the net as "Other Income." If Schedule C, report it as business income and deduct all losses as business expenses.
3. For NJ residents: Same as Approach 2, but note that you're treating it as miscellaneous income, not gambling income. This is the least defensive position for state purposes, but the safest federally.

What Records Do I Need to Track for Prediction Market Taxes?

Regardless of which approach you choose, document everything:

Trade history. Date of purchase, contract ID (e.g., Kalshi contract number), amount invested, date of settlement/sale, amount received (or lost), and net P&L.

Platform statements. Year-end P&L report from Kalshi, Polymarket, or Robinhood. Monthly trade confirmations (if available). Any 1099 forms sent by the platform.

Intent and records. Document whether you're trading as a hobby, professional gambler, or business. Keep records of your trading strategy, time spent, and volume. This is crucial if the IRS audits and asks whether you meet the "professional trader" threshold.

State-specific records. If in NJ, separate records of gross winnings vs. gross losses. Any state-specific forms or disclosures required.

Professional advice. If you pay a CPA or tax attorney for guidance, keep the invoice and correspondence. This is a defense against penalties if the IRS later clarifies the treatment differently.

Recommendation

The IRS has left a dangerous gap in guidance on prediction market taxation. Three approaches are defensible, but none is bulletproof:

Approach 1 (Section 1256 derivatives) is the most tax-efficient but the riskiest. Use it only if you're a high-volume Kalshi trader and comfortable with potential amendments.

Approach 2 (gambling income) aligns with state-level classifications and is consistent with how the IRS treats similar wagering. Use it if you're a semi-professional trader or in a state with strong gambling tax rules (like NJ).

Approach 3 (ordinary income) is the most conservative. Use it if you want to minimize audit risk and don't mind paying the extra tax now.

For NJ residents: Factor in state taxes. Approach 1 looks great federally but may be taxed at high rates in NJ. Approach 2 is more aligned with NJ's wagering framework. Consult a NJ CPA before filing.

My recommendation: Unless you're a high-volume Kalshi trader with a CPA or tax attorney advising you, use Approach 3 (ordinary income on Schedule 1 or C). It's the safest and most defensible. You'll pay more federal tax now, but you'll avoid audit risk and penalties. If the IRS later clarifies that Approach 1 is correct, you can file an amended return and claim a refund of the overpayment.

For 2026 filing: The situation may change. Watch for new IRS guidance (Revenue Ruling, Notice, or FAQ), CFTC clarification on Polymarket and Robinhood's regulatory status, state-level guidance from NJ or other high-tax states, and platform 1099 policies. File conservatively, document well, and be ready to amend if guidance clarifies.

Readers uncertain whether prediction markets are "gambling" or "investment income" should read the gambling tax services page, which walks through the distinction and covers the "professional trader" test in detail.

Key Takeaway

The IRS has issued zero formal guidance on prediction market taxation, leaving traders to choose between three defensible approaches with wildly different tax consequences. Section 1256 treatment is the most aggressive but tax-efficient; gambling income aligns with state classifications; ordinary income is the safest. NJ residents face unique traps regardless of which approach they choose. Document everything, consider filing Form 8275 if you take a non-obvious position, and work with a CPA who understands both federal and NJ rules. See the full prediction market tax service page for details on how Monaco CPA handles these filings.

Related reading: Prediction Market Tax Services | Iran Prediction Market Taxes | The 90% Gambling Loss Cap | How New Jersey Taxes Your Gambling and Sports Betting Winnings | DraftKings and FanDuel Tax Guide for NJ | Gambling tax services

For tax preparation and planning services specific to prediction market income, visit the prediction market tax service page.

Frequently Asked Questions

Ready to File With Confidence?

Tax rules change frequently. If anything in this guide applies to your situation, a quick review with a CPA can prevent costly mistakes. Greg Monaco is a NJ-licensed CPA (License #20CC04711400) who prepares every return personally.

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