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, losses may offset gains. If classified as gambling, losses are limited to winnings under Section 165(d). 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?

Yes. Prediction market income is investment income for purposes of the 3.8% Net Investment Income Tax under IRC Section 1411. If your AGI exceeds $200,000 (Single) or $250,000 (MFJ), NIIT will apply to your net investment income.

Prediction Market Tax Checklist - Kalshi & Polymarket | Monaco CPA

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

Contract Classification Records

Note: binary event contracts may be reported as ordinary income on Schedule 1, Line 8z
Records of expired worthless contracts (reported as sale at $0 proceeds)
Year-end open positions with fair market values
Prize or competition income records with breakdown by source (if applicable)

Federal Items

Prior year tax return for comparison
Quarterly estimated tax payment receipts
Note: NIIT (3.8%) applies if AGI exceeds $200K (Single) / $250K (MFJ) - prediction market income is investment income for NIIT purposes

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

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

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

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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