Prediction Market Taxes: Kalshi, Polymarket, and Event Contracts
The platform label is not the tax answer. This guide separates enacted rules from unresolved characterization questions and shows what records a defensible filing needs.
The short answer
A platform label does not make an otherwise taxable event-contract gain tax-free. IRC section 61 is the starting point. The return then depends on the legal character of the particular contract and transaction. Possible analyses include wagering, Section 1256, capital, and ordinary-income rules, but those are questions to test, not interchangeable elections.
Research boundary
As of September 7, 2026, the primary materials reviewed for this guide did not include a published IRS ruling or regulation that specifically classifies modern prediction-market event contracts for federal income-tax purposes. The CFTC status of a venue, a platform statement, or a broker worksheet can be relevant evidence, but none substitutes for the tax-law analysis.
Start with the contract, not the platform
Two trades made through the same interface can reference different events and create different rights. Before selecting a tax form, retain the rulebook and contract terms that were in effect when you traded. Identify what you paid for, whether you could transfer or offset the position, how settlement was calculated, what triggered payment, and what fees or credits changed the economics.
The information return is a reconciliation input, not a characterization opinion. A Form 1099, annual statement, CSV export, or absence of a form should be checked against the underlying activity, regardless of which venue supplied it.
The federal characterization questions
Work through the statutory elements in order. Do not begin with the tax result you prefer and work backward.
| Possible analysis | Threshold question | Consequence only if established |
|---|---|---|
| Wagering analysis | Do the facts and governing authorities support treating the transaction as a wagering transaction? | If yes, IRC section 165(d) governs the deduction limit. Filing mechanics also depend on the taxpayer's activity status and the instructions for the filing year. |
| Section 1256 analysis | Does the instrument satisfy one of the categories in section 1256(b), including every element of the relevant definition, and avoid the statutory exclusions? | Only a qualifying contract receives the section 1256 mark-to-market and 60/40 rules and is reported on Form 6781. |
| Capital analysis | Is the right a capital asset in the taxpayer’s hands, and does the transaction produce gain or loss from a sale, exchange, or a qualifying termination? | Sections 1221 and 1234A are part of the analysis. Section 1234A does not independently make every contract result capital. |
| Ordinary or business analysis | If no special rule applies, what is the nature of the payment and is the activity an investment, a trade or business, or something else? | The answer is fact-specific. Frequency or income level alone does not select a form or override the character of the underlying transaction. |
Contract-specific analysis matters most when the categories point to materially different loss limitations, timing, or rates. It is also why a single platform-wide answer can be misleading.
The 2026 wagering-loss limit
Section 70114 of Public Law 119-21 amended IRC section 165(d) for tax years beginning after December 31, 2025. If an event-contract transaction is properly treated as wagering, the deductible amount is 90% of wagering losses and remains limited to wagering gains. The amended definition also includes otherwise allowable deductions incurred in carrying on wagering transactions.
| Wagering gains | Wagering losses | 90% loss amount | Difference before other items |
|---|---|---|---|
| $10,000 | $10,000 | $9,000 | $1,000 |
The illustration does not decide how gains and losses must be measured or prove that an event contract is a wager. It shows why both questions must be resolved before the return is prepared.
Why Section 1256 is not automatic
Section 1256 does not cover every exchange-traded contract. Subsection (b) lists defined categories, including a regulated futures contract and a nonequity option. Those definitions contain their own elements. The statute also excludes enumerated swaps and “similar agreements.”
A designated-contract-market status can satisfy the qualified-board-or-exchange part of a definition, but it does not establish that a binary event contract is an enumerated Section 1256 instrument. A Commodity Exchange Act “swap” label is relevant context, not automatic application of the tax statute’s swap-or-similar-agreement exclusion. Form 6781 is a consequence of qualification, not proof of it.
Section 1234A also requires care. It provides a character rule for certain gains or losses attributable to cancellation, lapse, expiration, or other termination of a right or obligation involving property that is, or on acquisition would be, a capital asset in the taxpayer’s hands. That premise must be established; the section is not a universal capital-gain rule for event contracts.
A position that does not qualify under Section 1256 is not automatically marked to market at year-end. Income timing must be analyzed under IRC section 451, loss timing under section 165, and both remain subject to any realization, accounting-method, or characterization rule that applies.
What the Kalshi court decisions do and do not decide
In KalshiEX LLC v. Flaherty, the Third Circuit affirmed preliminary relief after finding Kalshi had a reasonable chance of success on its Commodity Exchange Act swap and preemption theory. In KalshiEX, LLC v. Assad, the Ninth Circuit affirmed in part the dissolution of preliminary relief after concluding that the sports contracts likely were not swaps and that Kalshi had not shown a likelihood that the Commodity Exchange Act preempted Nevada’s gaming regulations.
The limit of both decisions
Neither court decided the federal income-tax character of a customer’s gain or loss, and neither interpreted IRC section 1256. The cases show that the Commodity Exchange Act classification is contested; they do not convert a CEA label into a tax conclusion.
Current 17 C.F.R. section 40.11 prohibits a registered entity from listing for trading or accepting for clearing an excluded-commodity contract involving gaming. The Ninth Circuit concluded that the current rule bars the gaming-related sports contracts before it. The CFTC proposed revisions in June 2026, but a proposal has no legal effect unless and until finalized. A later CFTC change also would not by itself amend the Internal Revenue Code.
Forms and information returns
First reconcile the economics, then determine character, and only then map the result to a form. The following table is a routing aid, not a filing conclusion.
| Established treatment or fact | Reporting consideration |
|---|---|
| Wagering treatment, if established | Apply amended IRC section 165(d) and the filing-year instructions appropriate to the taxpayer's activity status; the absence of an information return does not make winnings nonreportable or losses automatically deductible. |
| Section 1256 treatment, if established | Form 6781 and its instructions govern reporting. Eligibility must be resolved before using the form. |
| Capital treatment, if established | Form 8949 and Schedule D may apply, subject to their current instructions and any reporting exception. |
| Digital-asset disposition | Apply the IRS digital-asset rules separately. Preserve proceeds, basis, date, units, wallet or account, and transaction identifiers. |
| Non-US taxpayer or treaty position | Forms 1040-NR, 8833, W-8 series forms, or withholding forms may be relevant, but only after residence, source, character, and treaty eligibility are established. |
Do not force a return to match a document that uses a different label or aggregation method. Reconcile gross proceeds, deposits and withdrawals, realized results, open positions, fees, credits, and any withholding. Keep the original statement with the reconciliation that explains each adjustment.
The separate digital-asset layer
The IRS treats digital assets as property. If a transaction involving an event contract also causes a sale, exchange, or other disposition of a digital asset, the digital-asset event must be analyzed separately. That can happen at funding, settlement, conversion, withdrawal, or another transfer; the actual transaction history controls.
Record the asset and units, wallet or account, transaction identifier, date and time, fair-market value used, fees, proceeds, and basis. Do not assume that a dollar-pegged token produces zero gain or loss, and do not combine the event-contract result with a digital-asset disposition without a traceable reconciliation.
State and cross-border issues
State treatment cannot safely be inferred from the federal return. A state may use a different starting point, deduction rule, conformity date, or definition. This guide intentionally does not publish a static list of “nonconforming states.” Confirm the rules for every relevant state for the filing year with that state’s current forms, instructions, statutes, and agency guidance.
For a non-US taxpayer, first establish tax residence, entity classification, whether the income is effectively connected with a US trade or business, the governing source rule, payer documentation and withholding, and any treaty article and eligibility limits. IRC section 871(j) names a narrow group of gambling games, but that text does not itself classify an event contract or establish the source of an online transaction.
A treaty claim requires the actual treaty text and taxpayer facts. The IRS maintains the official treaty documents, and Publication 515 describes the withholding framework. Do not assume that an “Other Income” article, a capital-gains article, or a platform’s US location controls before the income has been characterized.
Records and disclosure
Preserve the evidence before preparing the return. A defensible file should let another reviewer reproduce the economics and understand why the reported characterization follows from the taxpayer’s actual contracts.
- Original annual statements, information returns, native transaction exports, and account-level cash activity.
- Contract identifiers and terms, event definition, side, quantity, entry and exit or settlement values, dates, fees, credits, cancellations, and open positions.
- For digital assets, wallet addresses, transaction identifiers, units, valuation support, proceeds, and basis records.
- A reconciliation from platform totals to the amounts reported on the return, without overwriting the original files.
- A dated characterization memorandum identifying the facts, authorities considered, contrary authority, uncertainties, and form mapping.
Form 8275 is not a cure-all
The current instructions explain that Form 8275 is used for items or positions not otherwise adequately disclosed, except positions taken contrary to a regulation; those use Form 8275-R. Adequate disclosure may affect specified penalty components only if the position independently has reasonable basis. The form does not create reasonable basis, cure substantiation, protect fraudulent positions, or provide an automatic penalty defense.
Frequently asked questions
Primary sources
- 26 U.S.C. section 61, gross income defined (Office of the Law Revision Counsel)
- 26 U.S.C. section 165, including the wagering-loss rule in subsection (d) (Office of the Law Revision Counsel)
- Public Law 119-21, section 70114, amendment and effective date for wagering losses (authenticated PDF)
- 26 U.S.C. section 1256, defined contracts, exclusions, mark-to-market, and 60/40 treatment (Office of the Law Revision Counsel)
- 26 U.S.C. section 1221, capital asset defined (Office of the Law Revision Counsel)
- 26 U.S.C. section 1234A, certain terminations of rights or obligations (Office of the Law Revision Counsel)
- 26 U.S.C. section 451, general timing rule for items of gross income (Office of the Law Revision Counsel)
- IRS Topic No. 419, general casual-gambler reporting framework (read with amended section 165(d) for tax years beginning after 2025)
- IRS Form 6781 and current instructions, gains and losses from Section 1256 contracts and straddles
- IRS Form 8949 and current instructions, sales and other dispositions of capital assets
- IRS Instructions for Form 8275, Disclosure Statement
- IRS digital-asset guidance
- KalshiEX LLC v. Flaherty, No. 25-1922 (3d Cir. Apr. 6, 2026), official court record hosted by GovInfo
- KalshiEX, LLC v. Assad, No. 25-7516 (9th Cir. Aug. 28, 2026), official Ninth Circuit opinion
- 17 C.F.R. section 40.11, event contracts (official eCFR)
- CFTC proposed rule, Prediction Markets; Public Interest Determinations, 91 Fed. Reg. 35806 (June 12, 2026)
- 26 U.S.C. section 871, tax on nonresident alien individuals (Office of the Law Revision Counsel)
- IRS Publication 515, withholding for nonresident aliens and foreign entities
- IRS list of United States income tax treaties and official treaty documents
Primary-source review current through September 7, 2026. The cited appellate decisions interpret the Commodity Exchange Act in preliminary-injunction disputes, not the Internal Revenue Code. Re-check statutes, forms, instructions, agency guidance, and later court history before filing.
Need a contract-specific reporting review?
Send the platforms used, tax year, residence, approximate transaction count, and the records available. Arc & Ledger will confirm whether the matter fits its services and provide scope, availability, and pricing before any engagement begins.
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Disclaimer: This guide is general information, not tax advice for your specific situation. Tax law changes, and how a rule applies depends on your facts. Reading this page does not create a client relationship with Arc & Ledger LLC. Before acting on anything here, confirm how it applies to your circumstances with a qualified tax professional.