TL;DR
Prediction market profits are taxable in the United States and most other jurisdictions. The IRS generally treats prediction market gains as short-term or long-term capital gains, depending on your holding period — though some positions may be classified as ordinary income. You must report every resolved contract on Form 8949 and Schedule D. Platforms like Polymarket do not issue 1099s to most users, making self-reporting and meticulous record-keeping essential. This guide covers US federal treatment, international considerations, tax-loss harvesting strategies, and exactly what records you need to keep. This is not tax advice — consult a qualified tax professional for your specific situation.
Why Prediction Market Taxes Are Complicated
Prediction market taxation sits in a regulatory gray area that the IRS has not fully clarified. Unlike stocks, options, or even standard cryptocurrency, prediction market contracts do not fit neatly into a single category in the US tax code. Whether your gains are capital gains, ordinary income, or even gambling winnings depends on several factors: the platform you use, whether it is CFTC-regulated, the type of contract, your trading frequency, and your jurisdiction.
This ambiguity creates real compliance risk. The IRS has not issued specific guidance on prediction market contracts as of 2026, which means traders and their accountants must apply existing rules by analogy — drawing from how the tax code treats options, futures, commodities, and gambling.
What is clear: you owe taxes on your net prediction market profits. The question is how those profits are classified and reported. Getting this wrong can result in penalties, interest, or an audit. Getting it right can save you thousands of dollars through proper classification and strategic loss harvesting.
OctoTrend's AI analytics dashboard tracks your positions across platforms, making it significantly easier to compile the records you need at tax time.
How the IRS Classifies Prediction Market Income
The tax treatment of your prediction market gains depends primarily on what type of platform you used and how the IRS classifies the contracts you traded.
Scenario 1: CFTC-Regulated Platforms (Kalshi, CME Event Contracts)
Platforms regulated by the Commodity Futures Trading Commission — like Kalshi — offer contracts that are classified as regulated futures contracts or event contracts under US law. These receive the most favorable and most clearly defined tax treatment.
CFTC-regulated event contracts are generally treated under Section 1256 of the Internal Revenue Code, which provides the 60/40 rule:
- 60% of your net gains are taxed at the long-term capital gains rate (0%, 15%, or 20% depending on income)
- 40% of your net gains are taxed at the short-term capital gains rate (your ordinary income tax bracket)
This applies regardless of how long you held the position. Even a contract you bought and sold within the same day receives the 60/40 split on a Section 1256 platform.
| Tax Rate Category | Portion of Gains | 2026 Top Rate | |-------------------|-----------------|---------------| | Long-term capital gains (60%) | 60% | 20% | | Short-term capital gains (40%) | 40% | 37% | | Blended effective top rate | 100% | 26.8% |
Section 1256 contracts also benefit from mark-to-market accounting. At year-end, all open positions are treated as if they were sold at fair market value on December 31, and unrealized gains or losses are recognized. You report these on Form 6781, which flows into Schedule D.
Additionally, Section 1256 contracts allow three-year loss carrybacks — if you have a net Section 1256 loss in 2026, you can amend returns for 2023, 2024, or 2025 to offset prior gains.
Scenario 2: Unregulated / Offshore Platforms (Polymarket, Augur)
Polymarket operates on the Polygon blockchain and is not CFTC-regulated for most of its markets. Augur, Azuro, and other decentralized prediction markets fall into the same bucket. The tax treatment here is less favorable and less clear.
The most defensible position — and the one most tax professionals recommend — is to treat gains and losses from unregulated prediction markets as capital gains and losses:
- Short-term capital gains (held ≤ 1 year): taxed at your ordinary income tax rate (up to 37%)
- Long-term capital gains (held > 1 year): taxed at preferential rates (0%, 15%, or 20%)
Since most prediction market contracts resolve within weeks or months, the vast majority of your gains will be short-term, taxed at your full marginal rate.
| Holding Period | Classification | 2026 Top Federal Rate | |---------------|---------------|----------------------| | ≤ 1 year | Short-term capital gain | 37% | | > 1 year | Long-term capital gain | 20% | | Unregulated, frequent trading | Possibly ordinary income | 37% + SE tax risk |
Scenario 3: Gambling Income Classification
There is a credible argument — and one the IRS might assert — that prediction market profits constitute gambling winnings, taxed as ordinary income under Section 61 and reportable on Schedule 1 (Form 1040). Gambling losses are deductible only if you itemize, and only up to the amount of gambling winnings. You cannot net gambling losses against other income.
This is the worst-case classification for most traders because:
- All gains are ordinary income (up to 37%)
- Losses only offset gains, not other income
- You must itemize to deduct losses at all
- Professional gambler status adds self-employment tax
The gambling classification is most likely to apply if you are trading on platforms that the IRS views as prediction betting sites rather than financial exchanges, and if your trading behavior looks more like wagering than investing (single-event bets, no portfolio strategy, no hedging rationale).
Which Classification Should You Use?
| Platform Type | Recommended Classification | Form | |--------------|---------------------------|------| | CFTC-regulated (Kalshi) | Section 1256 contracts | Form 6781 → Schedule D | | Unregulated crypto-based (Polymarket) | Capital gains/losses | Form 8949 → Schedule D | | Casual / small-scale betting | Gambling income | Schedule 1 + Schedule A |
The capital gains treatment is the most commonly adopted position for Polymarket traders and the one most crypto-focused CPAs recommend. Document your rationale for the classification you choose.
How to Report Prediction Market Gains: Step by Step
Step 1: Gather Your Transaction Records
Prediction market platforms — especially decentralized ones — typically do not send you a 1099-B or any other tax form. Kalshi is an exception and issues 1099-B forms for US users. For Polymarket and similar platforms, you are responsible for reconstructing your own records.
For each resolved contract, you need:
- Date acquired (when you bought/received the shares)
- Date sold or resolved (when you sold or the contract settled)
- Cost basis (what you paid per share, including any fees)
- Proceeds (what you received — $1.00 per share for winning contracts, $0.00 for losing contracts, or the sale price if you sold before resolution)
- Gain or loss (proceeds minus cost basis)
OctoTrend's portfolio tracking tools can aggregate your positions across multiple prediction market platforms and export transaction histories in tax-ready formats.
Step 2: Calculate Your Cost Basis
Your cost basis is the total amount you paid to acquire the position, including:
- The purchase price of the shares
- Blockchain gas fees paid to execute the transaction
- Any deposit or conversion fees (e.g., converting USD to USDC)
Example:
| Field | Value | |-------|-------| | Contract | "Will ETH hit $10K by Dec 2026?" | | Shares purchased | 200 YES shares | | Purchase price | $0.35 per share | | Gas fee | $0.02 | | USDC conversion fee | $0.70 | | Total cost basis | $70.72 | | Outcome | Contract resolves YES | | Proceeds | 200 × $1.00 = $200.00 | | Capital gain | $129.28 |
If the contract resolved NO, your proceeds would be $0.00 and your capital loss would be $70.72.
For more on how contract pricing works and what these share prices represent, see our prediction market odds guide.
Step 3: Fill Out Form 8949
Report each transaction on Form 8949, which has two parts:
- Part I: Short-term transactions (held one year or less)
- Part II: Long-term transactions (held more than one year)
For each transaction, enter:
| Column | What to Enter | |--------|---------------| | (a) Description | e.g., "Polymarket — ETH $10K YES shares" | | (b) Date acquired | Purchase date | | (c) Date sold or disposed of | Resolution/sale date | | (d) Proceeds | Amount received | | (e) Cost basis | Amount paid (including fees) | | (f) Adjustment code | Leave blank (or "B" if no 1099-B received) | | (g) Adjustment amount | N/A | | (h) Gain or loss | (d) minus (e) |
Check Box C (short-term, no 1099-B) or Box F (long-term, no 1099-B) at the top of the form, since Polymarket does not issue 1099s.
Step 4: Transfer Totals to Schedule D
The totals from Form 8949 flow to Schedule D (Form 1040):
- Part I: Short-term capital gains and losses
- Part II: Long-term capital gains and losses
Your net short-term and long-term gains are then combined. If you have a net capital loss, you can deduct up to $3,000 per year ($1,500 if married filing separately) against ordinary income. Excess losses carry forward to future years.
Step 5: Consider State Taxes
Most US states with an income tax also tax capital gains. Some states tax capital gains at the same rate as ordinary income (California, New York), while others offer preferential rates or exemptions. Nine states have no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Tax-Loss Harvesting With Prediction Markets
Tax-loss harvesting is one of the most powerful strategies available to prediction market traders, and prediction markets offer unique opportunities for it that traditional investments do not.
How It Works
When a prediction market contract resolves against you — your YES shares on "Will X happen?" settle at $0 — you realize a capital loss equal to your full cost basis. This loss offsets capital gains from other winning contracts, and up to $3,000 of excess losses can offset ordinary income.
The key advantage of prediction markets: contracts resolve with finality. Unlike stocks, where you might hold a losing position hoping for recovery, a prediction market contract that resolves NO is definitively worth zero. There is no wash-sale ambiguity about "substantially identical" replacements, because resolved prediction markets are unique, time-bound events.
Wash Sale Considerations
The IRS wash sale rule prevents you from claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale. For prediction markets, this raises an interesting question: if you sell a "Will Bitcoin hit $100K by June 2026?" contract at a loss and immediately buy a "Will Bitcoin hit $100K by December 2026?" contract, are these substantially identical?
Most tax professionals say no. The contracts have different expiration dates and different probabilities — they are not substantially identical. However, the IRS has not ruled on this directly. To be conservative:
- Avoid buying a nearly identical contract on the same platform within 30 days of harvesting a loss
- Document why the replacement contract is materially different (different timeframe, different resolution criteria)
- Consider buying the replacement position on a different platform for additional separation
For strategies on structuring positions to maximize after-tax returns, explore our prediction market strategies guide.
Strategic Loss Harvesting Example
| Quarter | Action | Gain/Loss | |---------|--------|-----------| | Q1 | Win: "Fed holds rates in March" resolves YES | +$450 | | Q1 | Loss: "BTC hits $120K by March" resolves NO | -$300 | | Q2 | Win: "ETH hits $10K by June" resolves YES | +$800 | | Q2 | Loss: "Trump executive order by April" resolves NO | -$200 | | Net short-term gain | | +$750 |
Without harvesting, you might report $1,250 in gains. By properly netting gains and losses, you owe tax on only $750.
OctoTrend's AI signals can help you identify mispriced contracts where the risk/reward ratio is asymmetric — positioning you not just for profits but for tax-efficient portfolio construction.
International Tax Considerations
United Kingdom
The UK treats prediction market and betting profits as tax-free for casual bettors. Her Majesty's Revenue and Customs (HMRC) does not tax gambling winnings under the Betting and Gaming Duties framework — the betting operator pays the tax, not the individual.
However, if you trade prediction markets as a business (frequent trading, systematic strategies, treating it as a primary income source), HMRC could argue your profits are trading income subject to Income Tax and National Insurance.
| UK Trader Type | Tax Treatment | Rate | |---------------|---------------|------| | Casual/recreational | Tax-free | 0% | | Professional/business trader | Trading income | 20–45% |
European Union
EU tax treatment varies by country. Key examples:
| Country | Treatment | Notes | |---------|-----------|-------| | Germany | Tax-free if held > 1 year; otherwise income tax | Crypto-specific rules may apply | | France | 30% flat tax on crypto gains | "Prélèvement Forfaitaire Unique" | | Netherlands | Wealth tax on portfolio value | No capital gains tax per se | | Portugal | 28% capital gains tax on crypto | Previously tax-free; changed in 2023 |
Australia
The Australian Taxation Office (ATO) treats crypto prediction market profits as capital gains events. The 50% CGT discount applies to assets held for more than 12 months. Gambling winnings from licensed operators are generally tax-free, but the classification of prediction markets as gambling vs. financial contracts is unresolved.
Canada
The Canada Revenue Agency (CRA) treats 50% of capital gains as taxable income. Whether prediction market profits qualify as capital gains or business income depends on frequency, intention, and whether you are "in the business" of trading. Business income is 100% taxable.
India
India imposes a 30% tax on crypto gains with no deduction for losses and a 1% TDS (Tax Deducted at Source) on crypto transactions above certain thresholds. Prediction market contracts settled in crypto would fall under these provisions.
Japan
Crypto-related income in Japan is classified as miscellaneous income, taxed at progressive rates up to 55% (including local inhabitant tax). There is no preferential capital gains rate for crypto.
Record-Keeping Requirements
The IRS requires you to maintain records that substantiate your tax return for a minimum of three years from the filing date (or six years if you underreport income by more than 25%). For prediction market traders, this means preserving:
Essential Records Checklist
| Record Type | What to Keep | Why | |-------------|-------------|-----| | Transaction history | Every buy, sell, and resolution with timestamps | Proves cost basis and proceeds | | Wallet addresses | All addresses used on each platform | Links on-chain activity to you | | Blockchain receipts | Transaction hashes for every trade | Immutable proof of transactions | | Gas fee records | Fees paid per transaction | Adds to cost basis | | Deposit/withdrawal records | Fiat on-ramps, USDC transfers, bridge transactions | Proves money flow | | Platform screenshots | Account balances, position history at key dates | Backup if platform data lost | | Exchange rate data | USD value of crypto at time of each transaction | Required for cost basis in USD | | Tax classification rationale | Written memo explaining your chosen treatment | Defends your position if audited |
Tools for Tracking
Most crypto tax software (Koinly, CoinTracker, TokenTax, CoinLedger) can import on-chain data from Polygon, but prediction market contract resolution data often requires manual entry or custom CSV imports. Polymarket's API and transaction history exports are your primary source.
OctoTrend's portfolio analytics at /en/markets consolidate your positions and P&L across platforms, making it easier to generate the transaction records your accountant needs.
What Happens If You Do Not Report
The IRS has significantly expanded its crypto enforcement through the John Doe summons program and third-party reporting requirements. Starting in 2026, crypto brokers are required to report transactions on Form 1099-DA. While Polymarket may not yet qualify as a "broker" under these rules, the trend is toward more reporting, not less.
Failure to report prediction market gains can result in:
- Accuracy-related penalties: 20% of the underpayment
- Failure-to-file penalties: 5% per month, up to 25%
- Interest: accrues on unpaid taxes from the due date
- Criminal penalties: for willful evasion (rare but possible for large amounts)
When Prediction Market Income Is Ordinary Income
Not all prediction market gains are capital gains. Several scenarios push your income into the ordinary income category, which is taxed at higher rates and may trigger additional taxes:
Professional Trader Status
If you trade prediction markets as your primary occupation — full-time hours, systematic strategies, expectation of regular income — the IRS may classify you as a professional trader or even a business. This means:
- All gains are ordinary income (up to 37%)
- You may owe self-employment tax (15.3% on the first $168,600 of net earnings in 2026, 2.9% above that)
- On the upside, you can deduct trading-related expenses (software, data feeds, hardware) as business expenses
Receiving Prediction Market Shares as Payment
If you receive prediction market shares as compensation (e.g., for providing liquidity, referral bonuses, or airdrops), the fair market value at the time of receipt is ordinary income, regardless of what happens to the shares later. If you then sell or the contract resolves, the difference between your ordinary income basis and the proceeds is a capital gain or loss.
Market-Making Income
If you systematically provide liquidity by placing both buy and sell orders to earn the spread, the IRS may treat your spread income as ordinary income from a trading business rather than capital gains. This is analogous to how dealer/broker income is treated in traditional securities markets.
For deeper insight into how market liquidity works on prediction platforms, see our prediction market liquidity guide.
Hedging and Prediction Markets: Tax Implications
One growing use case for prediction markets is hedging — using a prediction market position to offset real-world risk. For example, a crypto portfolio manager might buy "Will ETH drop below $3K?" YES shares to hedge their spot ETH holdings.
The tax treatment of hedging transactions depends on whether the hedge qualifies as a bona fide hedging transaction under Treasury regulations:
- Qualifying hedge: gains and losses on the hedge are matched with the hedged position, potentially converting capital gain/loss into ordinary income/loss (or vice versa)
- Non-qualifying hedge: treated as a separate capital transaction
To qualify, the hedge must be clearly identified as a hedge in your records on the day you enter the position, and it must reduce a specific, identifiable risk.
For strategies on using prediction markets as portfolio hedges, see our crypto portfolio hedging guide.
Arbitrage and Tax Treatment
Prediction market arbitrage — simultaneously buying and selling positions across platforms to lock in risk-free profits — creates frequent, small gains. The tax implications:
- Each leg of the arbitrage is a separate transaction that must be reported
- High-frequency arbitrage may push you toward professional trader/dealer status
- The IRS could treat arbitrage profits as ordinary income if your activity resembles a business
- Cross-platform arbitrage adds complexity with different cost basis tracking per platform
| Arbitrage Style | Likely Classification | Key Risk | |----------------|----------------------|----------| | Occasional, manual | Short-term capital gains | Moderate — keep good records | | Systematic, software-driven | Ordinary income / business income | High — professional trader status | | Cross-platform | Short-term capital gains | Very high — record-keeping burden |
OctoTrend's AI analytics can flag arbitrage opportunities and log the transactions automatically, helping you maintain the documentation trail needed for tax compliance.
CFTC Regulation and Tax Treatment: What Changes Are Coming
The regulatory landscape for prediction markets is shifting rapidly. Key developments as of 2026:
- Kalshi won its lawsuit against the CFTC allowing election-related event contracts, expanding the scope of Section 1256 treatment
- Polymarket remains outside CFTC jurisdiction for most markets, though regulatory pressure is increasing
- Proposed IRS guidance on digital asset event contracts could arrive in 2026 or 2027, potentially creating a new reporting category
- Crypto broker reporting rules (Form 1099-DA) are being phased in, which may eventually encompass prediction market platforms
If Polymarket or similar platforms become CFTC-regulated or are classified as brokers, the tax treatment of existing positions could change. Traders should monitor regulatory developments and adjust their reporting strategy accordingly.
Practical Tax Planning for Prediction Market Traders
Estimated Tax Payments
If you expect to owe $1,000 or more in federal tax from prediction market gains, you must make quarterly estimated tax payments (Form 1040-ES) to avoid underpayment penalties. Due dates: April 15, June 15, September 15, and January 15.
Choosing Your Accounting Method
- FIFO (First In, First Out): default method; earliest-purchased shares are sold first
- Specific identification: allows you to choose which shares are sold, optimizing for tax efficiency
- Average cost: not generally available for non-mutual-fund assets
Specific identification gives you the most control. If you bought shares at $0.30 and $0.50, and want to sell some, selling the $0.50 shares first produces a smaller gain (or larger loss). You must identify the specific shares at the time of sale and keep records documenting your choice.
Year-End Strategies
| Strategy | Action | Benefit | |----------|--------|---------| | Harvest losses | Sell losing positions before Dec 31 | Offset gains, reduce tax bill | | Defer gains | Hold winning positions past Dec 31 if possible | Push income to next tax year | | Donate appreciated shares | Contribute high-gain positions to charity | Deduct FMV, avoid capital gains | | Contribute to retirement accounts | Max out IRA/401(k) contributions | Reduce taxable income | | Review position sizing | Ensure realized gains stay within target bracket | Avoid bracket creep |
Frequently Asked Questions
Does Polymarket send a 1099 tax form?
No. As of 2026, Polymarket does not issue 1099-B, 1099-MISC, or any other tax reporting form to users. Because it operates on the Polygon blockchain and does not function as a traditional US broker, it has no current obligation to do so. You are responsible for self-reporting all gains and losses. Keep detailed records of every transaction — date, cost basis, proceeds, and outcome. Crypto tax software that supports Polygon can help, but resolved contract data often requires manual entry.
Are prediction market losses tax deductible?
Yes, if you classify your prediction market activity as capital transactions. Capital losses offset capital gains dollar-for-dollar, and up to $3,000 of net capital losses per year can offset ordinary income. Excess losses carry forward indefinitely. However, if your prediction market activity is classified as gambling, losses are only deductible up to the amount of your gambling winnings, and only if you itemize deductions on Schedule A. The classification matters enormously. For strategies that help manage losses, see our strategy guide.
Do I owe taxes if I only traded USDC on Polymarket and never converted to USD?
Yes. Tax liability is triggered when a contract resolves or you sell shares — not when you convert to fiat currency. If you bought YES shares for $0.40 in USDC and the contract resolved YES, you received $1.00 in USDC per share. The $0.60 per share gain is taxable in the year the contract resolved, regardless of whether you withdrew to a bank account. The IRS taxes realization events, not cash-out events.
How are prediction market gains taxed differently from crypto trading gains?
The federal tax rates are generally the same — short-term capital gains at your ordinary rate, long-term at preferential rates. The key differences are: (1) prediction market contracts usually resolve within months, so most gains are short-term; (2) CFTC-regulated prediction markets may qualify for the favorable 60/40 Section 1256 treatment that crypto spot trades do not; (3) prediction market contracts are binary (resolve to $0 or $1), making gain/loss calculation simpler; (4) wash sale rules are easier to navigate because each contract is unique. For an overview of how AI compares to human prediction accuracy, see our analysis.
Can I use a crypto tax tool for Polymarket reporting?
Partially. Most crypto tax platforms (Koinly, CoinTracker, TokenTax) can import on-chain Polygon transactions and calculate cost basis for USDC movements. However, they generally cannot automatically interpret Polymarket contract resolutions — they see USDC going out (purchase) and USDC coming in (resolution) but may not correctly pair them as a single position. You will likely need to manually categorize or adjust transactions. Export your Polymarket history, map each contract's buy and resolution, and import as a custom CSV. OctoTrend's analytics tools can help bridge this gap by tracking your prediction market positions separately from raw on-chain data.
Disclaimer
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex, vary by jurisdiction, and change frequently. Prediction market taxation is a developing area where IRS guidance is limited and subject to future revision. Consult a qualified tax professional or CPA experienced with cryptocurrency and prediction market transactions before making any tax-related decisions. The authors and OctoTrend are not responsible for any tax positions taken based on this article.
Last updated: May 2026. Tax rules discussed reflect 2026 US federal law. Revisit OctoTrend's insights for updates as regulatory guidance evolves.