Are prediction market profits taxed as capital gains or ordinary income?

The tax classification of prediction market contracts is unsettled. Binary event contracts on platforms like Kalshi may be classified as ordinary income, gambling income under Section 165(d), or potentially Section 1256 contracts with 60/40 treatment. The appropriate classification depends on the contract types and individual facts. A CPA can help determine the best approach for your situation.

Do I need to report prediction market losses?

Yes. All prediction market activity should be reported. If contracts are classified as ordinary income, a losing contract generally requires an authorizing provision (e.g., IRC Section 165(c)(2) profit-seeking transaction) to offset gains - document the theory for each losing position. If classified as gambling, losses are deductible only against winnings under Section 165(d), and for tax years beginning in 2026 the OBBBA caps the deduction at 90% of wagering losses. The classification affects how losses are treated.

What if Kalshi didn't send me a 1099?

Kalshi may not issue a 1099-B for all traders. You are still required to report all income. When reporting self-calculated income without a matching information return, a Form 8275 disclosure is recommended to document the reporting position.

Does the NIIT apply to prediction market income?

It depends on the unsettled classification. If prediction market contracts are treated as investment or derivative positions, gains are net investment income subject to the 3.8% NIIT under IRC §1411 when MAGI exceeds $200,000 (Single/HoH), $250,000 (MFJ), or $125,000 (MFS). If the activity is instead classified as casual gambling, the income generally falls outside the NIIT. Because the IRS has not resolved the classification, discuss your facts with a CPA before assuming either way. MAGI = AGI plus foreign earned income exclusion (so for domestic-only taxpayers, MAGI typically equals AGI).

Prediction Market Tax Checklist - Kalshi & Polymarket

Section 01

Platform Documents

Platform CSV exports with all trades accounted for (no missing rows)
All 1099-MISC and 1099-INT forms verified against platform statements
All brokerage 1099-B forms reconciled (trades, basis, proceeds)
All W-2 forms from employers
Written confirmation of all income sources
Confirm whether any contracts were open as of December 31 - if yes, obtain year-end FMV from the platform

Section 02

Contract Classification Records

Note: binary event contracts may be reported as ordinary income on Schedule 1, Line 8z
Records of expired worthless contracts - how they are reported depends on the classification (e.g., disposition at $0 proceeds under a property/option approach; a wagering loss under a gambling approach; part of the year-end mark under Section 1256). Keep cost, dates, and settlement records for each
Year-end open positions with fair market values
Prize or competition income records with breakdown by source (if applicable)
List of offsetting or hedged positions across platforms (same event, opposite sides) - straddle rules (IRC Section 1092) may defer losses

Section 03

Federal Items

Prior year tax return for comparison
Quarterly estimated tax payment receipts
Note: NIIT (3.8%) may apply if MAGI exceeds $200K (Single/HoH) / $250K (MFJ) / $125K (MFS) per IRC §1411(b). Whether prediction market income counts as net investment income depends on the unsettled classification - if treated as investment/derivative income it generally would; if treated as gambling income of a casual bettor it generally would not. MAGI = AGI plus foreign earned income exclusion (typically MAGI = AGI for domestic-only taxpayers)
If a Section 475(f)(2) election is in place or planned: copy of the election statement, Form 3115, and investment-position identifications

Section 04

Multi-State Items (If Applicable)

Identify all states with filing obligations
NJ resident return (NJ-1040) documents
NJ-COJ records for credit on taxes paid to other states
Each nonresident state return documents

Section 05

Special Items (If Applicable)

Roth IRA excess contribution correction records (if applicable)
Kiddie Tax documentation (if applicable - age, student status, unearned income)

Section 01

Platform Documents

Platform CSV exports with all trades accounted for (no missing rows)
All 1099-MISC and 1099-INT forms verified against platform statements
All brokerage 1099-B forms reconciled (trades, basis, proceeds)
All W-2 forms from employers
Written confirmation of all income sources
Confirm whether any contracts were open as of December 31 - if yes, obtain year-end FMV from the platform

Section 02

Contract Classification Records

Note: binary event contracts may be reported as ordinary income on Schedule 1, Line 8z
Records of expired worthless contracts - how they are reported depends on the classification (e.g., disposition at $0 proceeds under a property/option approach; a wagering loss under a gambling approach; part of the year-end mark under Section 1256). Keep cost, dates, and settlement records for each
Year-end open positions with fair market values
Prize or competition income records with breakdown by source (if applicable)
List of offsetting or hedged positions across platforms (same event, opposite sides) - straddle rules (IRC Section 1092) may defer losses

Section 03

Federal Items

Prior year tax return for comparison
Quarterly estimated tax payment receipts
Note: NIIT (3.8%) may apply if MAGI exceeds $200K (Single/HoH) / $250K (MFJ) / $125K (MFS) per IRC §1411(b). Whether prediction market income counts as net investment income depends on the unsettled classification - if treated as investment/derivative income it generally would; if treated as gambling income of a casual bettor it generally would not. MAGI = AGI plus foreign earned income exclusion (typically MAGI = AGI for domestic-only taxpayers)
If a Section 475(f)(2) election is in place or planned: copy of the election statement, Form 3115, and investment-position identifications

Section 04

Multi-State Items (If Applicable)

Identify all states with filing obligations
NJ resident return (NJ-1040) documents
NJ-COJ records for credit on taxes paid to other states
Each nonresident state return documents

Section 05

Special Items (If Applicable)

Roth IRA excess contribution correction records (if applicable)
Kiddie Tax documentation (if applicable - age, student status, unearned income)

Prediction Market Tax Checklist

Quick Answer

Platform Documents

Contract Classification Records

Federal Items

Multi-State Items (If Applicable)

Special Items (If Applicable)

Frequently Asked Questions

Related Pages

Have Your Documents Ready?

Prediction Market Tax Checklist

Quick Answer

Platform Documents

Contract Classification Records

Federal Items

Multi-State Items (If Applicable)

Special Items (If Applicable)

Frequently Asked Questions

Related Pages

Have Your Documents Ready?

Prediction Market Tax Checklist

Quick Answer

Platform Documents

Contract Classification Records

Federal Items

Multi-State Items (If Applicable)

Special Items (If Applicable)

Frequently Asked Questions

Related Pages

Have Your Documents Ready?

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Prediction Market Tax Checklist

Quick Answer

Platform Documents

Contract Classification Records

Federal Items

Multi-State Items (If Applicable)

Special Items (If Applicable)

Frequently Asked Questions

Related Pages

Have Your Documents Ready?