How Are Prediction Markets Taxed?

Introduction

Prediction markets like Kalshi and Polymarket are growing fast, and so are questions about taxes. The short version: yes, your profits are taxable. But because prediction markets live somewhere between gambling and investing, the rules aren’t super clear yet.

Why Tax Treatment Is Murky

Prediction markets sit in a regulatory gray area. Kalshi is regulated by the CFTC like a futures exchange. PredictIt operates under a research exemption. Polymarket runs on crypto rails. The IRS hasn’t issued specific guidance, so most traders currently report profits as “Other Income.”

That makes prediction market taxes more like freelance income than sports betting.

Platform Differences

Kalshi

If you net more than $600 in profits, you’ll likely receive a 1099-MISC (some users have seen 1099-Bs depending on how trades are classified).

PredictIt

Issues a 1099-MISC reflecting profits after their platform fees. Because of the low per-market cap, tax impact is usually limited.

Polymarket

No 1099s, you’re responsible for tracking every trade. Blockchain activity is visible, so it must still be reported.

How to Report It

  • Where: Schedule 1, Line 8z
  • Label: “Prediction market income” (or similar)
  • Amount: Net profits (winnings minus losses and fees)

This is better than gambling rules where losses only help if itemized because losses offset gains dollar-for-dollar.

Example:

Win $10K, lose $7K - Pay tax on $3K, not $10K.

Keep Clean Records

You should maintain:

  • Trade logs (dates, contracts, prices, outcomes)
  • Platform fees and withdrawal charges
  • Account statements
  • A simple running total in a spreadsheet

Don’t wait until April to figure it out.

State Tax Rules Vary

If you live in a state with income tax, expect prediction market profits to be treated as ordinary income. If you live in a state with no income-tax, then you don’t have any state tax. A few states may treat these as gambling so check your local rules.

What Could Change

Three potential directions:

  1. Classified as gambling: less favorable, more restrictions
  2. Classified like futures (Section 1256): blended long-term rate benefits
  3. Status quo: continue using “Other Income”

Expect movement as platforms scale and regulators catch up.

Smart Planning for Active Traders

  • You may need quarterly estimated payments
  • Your rate = ordinary income + possible state taxes
  • If your capital is tied up in markets, consider liquidity options that don’t trigger taxable sales (e.g., loans backed by crypto holdings - platforms like Arch let you access cash without selling BTC or ETH).

For high earners: get a tax pro who understands emerging asset classes.

Quick Takeaways

  • Report all profits, even without a 1099
  • Schedule 1, Line 8z - report net income
  • Losses offset gains fully
  • Rules are evolving so stay up to date
  • Good bookkeeping avoids headaches later

Conclusion

Prediction markets can be a fun (and profitable) way to trade on real-world outcomes, but the tax rules aren’t fully finalized. For now, profits are treated as ordinary income, and staying compliant mostly comes down to tracking your trades and reporting your net results accurately.

The IRS will eventually clarify how these platforms fit into the tax code. Until then, keep clean records, report your earnings honestly, and talk to a tax expert to double check.

About Arch

Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services.

Disclaimer: This article is for informational purposes only and does not constitute investment or tax advice. Cryptocurrency investments are volatile and risky. Always conduct your own research before making investment decisions.