Prediction Market Taxes: What US Traders Need to Know

This guide provides general educational information about how prediction market gains may be taxed in the United States. It is not tax advice. Tax laws are complex, change frequently, and depend on your individual circumstances. Consult a qualified tax professional before filing any returns that include prediction market activity.

With that said, here is a practical framework for understanding your likely tax obligations as a US-based prediction market trader.

Polymarket operates on the Polygon blockchain using USDC. From a US tax perspective, each settled market is generally treated as a taxable event — similar to disposing of cryptocurrency.

Short-term capital gains: Positions held for less than one year before resolution are typically taxed at your ordinary income rate (10–37% depending on your bracket).

Long-term capital gains: Positions held for more than one year before resolution may qualify for preferential rates (0%, 15%, or 20% depending on income). However, most Polymarket contracts resolve within months, making long-term treatment relatively uncommon.

Cost basis: Your cost basis is generally the amount you paid for the contract in USDC. Your gain or loss is the difference between that basis and the settlement amount.

Note: The IRS classifies crypto assets as property. Each Polymarket trade may require reporting on Form 8949. If you made hundreds of trades, crypto tax software (Koinly, CoinTracker, TaxBit) can help automate this reconciliation.

Kalshi is a CFTC-regulated designated contract market (DCM). Its event contracts may be treated similarly to other regulated futures or derivatives.

Under current guidance, gains from Kalshi's regulated event contracts may qualify for Section 1256 treatment — a blended tax rate of 60% long-term / 40% short-term capital gains regardless of actual holding period, subject to mark-to-market rules.

If Section 1256 applies, the effective maximum federal rate for most traders is approximately 28% (vs 37% ordinary income), and losses can be carried back up to 3 years.

However, the application of Section 1256 to Kalshi's specific contract types remains an area of evolving guidance. Consult a CPA or tax attorney familiar with derivatives taxation before treating Kalshi gains as Section 1256 income.

In traditional finance, the IRS distinguishes between investors (occasional buyers and sellers) and traders (those in the business of trading for their own account). Traders may be eligible to deduct trading-related expenses as business expenses.

Most casual prediction market participants will not qualify as traders under IRS standards. If you trade at a professional level — daily activity, significant volume, primary occupation — it may be worth exploring trader status with a tax professional for its expense deduction benefits.

Regardless of how your gains are ultimately classified, thorough records are essential. For each prediction market trade, you should record:

• Date of purchase and settlement
• Contract purchased (market name, side)
• Amount paid (cost basis in USD)
• Amount received at settlement (proceeds in USD)
• Gain or loss
• For crypto-based platforms: the USD value of USDC at time of each transaction

Polymarket doesn't provide tax documents. Kalshi may provide some reporting for US accounts. In both cases, maintaining your own detailed records from the start of the year — not reconstructing them at tax time — saves significant headaches.

A simple spreadsheet tracking entry date, market, side, cost basis, settlement amount, and gain/loss is sufficient for most traders.

For a casual US-based prediction market trader with under $10,000 in annual gains:

• Polymarket gains are most likely treated as short-term capital gains at your ordinary income rate
• Report each settled market on Form 8949, aggregated if using crypto tax software
• Keep records of every deposit, trade, and withdrawal from the platform
• Losses can offset gains (capital losses offset capital gains; any remaining losses up to $3,000 can offset ordinary income per year)

For traders with larger gains or complex situations — especially those trading on multiple platforms, using DeFi protocols, or earning trading income as their primary income — professional tax advice is essential, not optional.

PaperPoly uses only virtual money, so paper trading does not create any tax obligations. This is one more reason to practice on PaperPoly before committing real capital.