Prediction Market Taxes: How to Report Kalshi, Polymarket, and Robinhood Event Contracts on Your Tax Return

The Prediction Market Tax Question Nobody Can Agree On

You just made $3,000 profit betting on the next Fed rate decision on Robinhood Prediction Markets. Or Kalshi. Or an old-school Polymarket position you've held since 2024. Now tax time arrives.

And you face a problem: the IRS has issued zero formal guidance on how to report prediction market trades.

Not one.

This creates a dangerous knowledge gap. Unlike crypto trading (where Form 1099-DA clarifies how to report), or stock trading (where Form 1099-B does the job), prediction markets operate in regulatory gray space. The platforms may or may not send you a 1099, and even if they do, the IRS hasn't officially blessed any particular reporting method.

This post walks through three defensible tax treatments, the regulatory landscape, platform-specific notes, and the unique traps NJ residents face.

The Regulatory Landscape

What Are Prediction Markets?

Prediction markets (also called event contracts) are financial instruments that settle based on real-world outcomes:

• Kalshi: Binary yes/no bets on events (Fed rate decisions, election outcomes, sports results, economic data, etc.). ~200+ active contracts at any time.
• Polymarket: DeFi-native prediction market with a slightly more permissive regulatory posture toward traders outside the US (though US traders are permitted under specific conditions).
• Robinhood Prediction Markets: Brand-new (launched Jan 2026). Binary outcomes, settled by Robinhood, launched with ~50 contracts on economics, politics, and sports.

All three are binary: you buy a contract for $X at time T, the outcome resolves to YES (you get $1, maybe $0.99 on Robinhood due to fees) or NO (you get $0), and you pocket the difference (or loss).

Why the Regulatory Confusion?

The CFTC vs. SEC showdown. Kalshi is a CFTC-regulated exchange under the Dodd-Frank Act. It explicitly operates as a derivatives exchange and has specific exemptions for "prediction contracts" narrowly defined by size, outcome, and contract type. Polymarket and Robinhood are in grayer territory. Are they security exchanges (SEC), commodities exchanges (CFTC), or gambling-adjacent platforms (state regulators)?

The swap exclusion question. Dodd-Frank includes a "swap exclusion" that exempts certain small contracts from being classified as swaps. Kalshi bets are intentionally structured to qualify. But the IRS has never formally said what the tax treatment of a swap exclusion contract is -- is it a derivative? Is it gambling? Is it ordinary income?

State-level gambling laws. Even though the platforms claim their products aren't "gambling" (because the outcomes are objective, not games of chance), many states classify binary outcome contracts as wagers and subject them to gambling tax rules. NJ specifically has an "insurance/wagering" framework that creates unique traps.

The 1099 inconsistency. Some platforms send traders 1099-MISC or 1099-B or nothing at all. The IRS hasn't clarified whether prediction market trades are reportable on Form 1099-DA (crypto), Form 1099-B (equities/derivatives), or Form 1040, Schedule C (business income) or Schedule 1 (miscellaneous).

The IRS Stays Silent

As of March 1, 2026, the IRS has not issued a Revenue Ruling or Private Letter Ruling on prediction market taxation, has not clarified whether prediction markets are securities, derivatives, or something else, has not defined whether traders should use Section 1256 treatment (60/40 long-term/short-term) or ordinary income rates, and has not clarified the CFTC swap exclusion's tax implications. The IRS has implicitly acknowledged prediction markets exist through various enforcement actions and CFTC coordination.

This silence forces traders and CPAs into an interpretive vacuum. The three approaches below are the most defensible, but none is bulletproof.

Three Tax Treatments (Ranked by Defensibility)

Approach 1: Speculative Derivatives (Section 1256) -- Most Aggressive

What it is: You classify your prediction market positions as Section 1256 contracts (commodities derivatives regulated by the CFTC).

How it works: All gains and losses are aggregated for the year. 60% of the net gain is treated as long-term capital gain (taxed at favorable rates). 40% is treated as short-term capital gain (taxed at ordinary income rates). This is regardless of your holding period. Even if you hold the contract for one day, you get the 60/40 split. Form 8949 is not used; instead, you report it on Schedule D under "Section 1256 contracts."

Example: You net $10,000 in prediction market gains for 2025. 60% ($6,000) is taxed as long-term cap gain. 40% ($4,000) is taxed as short-term cap gain. On a $10,000 net gain, your tax bill is ~$2,100 (assuming 24% marginal rate and 20% LTCG rate).

Why it's defensible: Kalshi contracts are explicitly exempted from being "swaps" under Dodd-Frank and the CFTC rules. Section 1256 applies to commodities contracts traded on CFTC-regulated exchanges. Kalshi is a CFTC exchange, so the argument is: "These are Section 1256 derivatives, period." Some tax attorneys and crypto-focused CPAs have been quietly using this method.

Why it's risky: The IRS has not formally blessed this approach. If the IRS decides prediction markets are not Section 1256 contracts, you could owe additional tax, penalties, and interest. The swap exclusion was designed to exempt prediction contracts from Dodd-Frank's swap regulation, not to define their tax treatment. Robinhood and Polymarket are not CFTC exchanges in the same way Kalshi is. The CFTC's regulatory framework and the IRS's tax framework are not aligned.

Who it suits: High-volume traders who realize large net gains and want to minimize their tax rate. Kalshi traders specifically (Kalshi is explicitly CFTC-regulated).

Red flag: If you get audited and the IRS challenges this, you'd likely lose and owe back taxes plus penalties. I would not recommend this without a written opinion letter from a tax attorney.

Approach 2: Gambling/Gaming Income (Ordinary Income) -- Moderate Conservative

What it is: You classify your prediction market trading as gambling income, subject to the hobby loss rules and gaming taxes.

How it works: All wins are reported as taxable income on Schedule 1 (Other Income) or Schedule C (if you're a professional gambler). All losses are deducted as miscellaneous itemized deductions (if you itemize) or, if you're deemed a "professional gambler," as a business deduction against the income.

The key question: Are you a "professional gambler" or an amateur? Professional: You spend significant time, have trading records, pursue it like a business. Your net gains over time. Amateur: Casual, you play for fun, you lack a systematic approach.

If you're a professional gambler, you file Schedule C and can deduct all losses. If you're an amateur, losses are limited to miscellaneous itemized deductions, which are not allowed under current law (2025+). So, amateur gamblers pay tax on wins but cannot deduct losses.

Example: You net $10,000 in prediction market gains in 2025. If you're a professional gambler: You report $10,000 on Schedule C, deduct your losses, and pay tax on the net. If you're an amateur: You report $10,000 as income, but you cannot deduct losses. Your tax bill is ~$2,400 (assuming 24% marginal rate).

Why it's defensible: Gambling winnings are taxable income under IRC Section 61. Prediction markets have binary outcomes based on real-world events -- this resembles wagering, not investment. Many states, including NJ, classify prediction markets as "wagers" or "gaming activity." The IRS has long experience auditing gambling income.

Why it's risky: If the IRS takes the position that prediction markets are not "gambling" but rather speculative derivatives or ordinary business income, you might have reported too much. The gambling framework is less favorable for large traders because losses are harder to deduct.

Who it suits: Conservative traders who want alignment with state-level gambling classifications. Small-to-medium traders. Traders in states where gambling is heavily regulated (e.g., NJ, NY).

Approach 3: Taxable Event / Ordinary Business Income -- Most Conservative

What it is: You report prediction market gains as miscellaneous ordinary income, filed as Schedule 1 income (other income) or Schedule C (if you're in the business of trading).

How it works: Each win (when a contract settles in your favor) is reported as ordinary income. Each loss (when a contract settles against you) is reported as a loss. If you're not a business, you report the net on Schedule 1, line 21 (Other Income). If you are a business, you file Schedule C and claim all losses as business deductions. This is the most straightforward, least aggressive approach.

Example: You net $10,000 in prediction market gains in 2025. You report it on Schedule 1 as "Other Income." You pay tax at your marginal rate (~24%), i.e., ~$2,400.

Why it's defensible: The IRS taxes all income from any source unless specifically excluded by law. This approach doesn't require you to make a theory about whether they're derivatives or gambling. You're just reporting them as income. This is what the vast majority of traders and CPAs are likely to do by default.

Why it's safe: You're taking the most conservative position. The IRS is unlikely to challenge you for reporting too much income. It's consistent with the principle of "when in doubt, report more income and claim fewer deductions."

Who it suits: Traders who prefer certainty over optimization. Traders with small net gains or losses. Traders who are not confident in their ability to defend a more aggressive position.

Platform-Specific Notes

Kalshi

Regulatory status: CFTC-regulated exchange. Contracts are explicitly exempt from Dodd-Frank swap definition.

Tax reporting: Kalshi does not send 1099s (as of March 2026). You must self-report. Kalshi provides year-end trade history and profit/loss reports. If you use Approach 1 (Section 1256), cite Kalshi's CFTC status. If you use Approach 2 or 3, just report the net gain.

Why Kalshi traders might prefer Approach 1: Kalshi's explicit CFTC registration is the strongest factual support for the Section 1256 argument. Kalshi has gone out of its way to structure its contracts to fit the swap exemption. The CFTC has pre-approved this structure.

Risk: If the IRS decides "swap exemption" is separate from "Section 1256 treatment," the argument fails.

Polymarket

Regulatory status: Unclear. Polymarket is a DeFi platform run from the Bahamas; it has no explicit CFTC or SEC authorization in the US. It operates in legal gray space.

Tax reporting: Polymarket does not send 1099s. Self-reporting is on you. Polymarket trades are likely on an Ethereum or other blockchain. You can trace your transactions and calculate P&L.

Why the Section 1256 argument is weaker for Polymarket: Polymarket is not a CFTC-regulated exchange. Polymarket is arguably a DeFi protocol, not an exchange, which may put it outside the Section 1256 framework entirely.

Recommendation: Approach 2 (gambling) or Approach 3 (ordinary income) is more defensible for Polymarket. If you're a Polymarket trader using Approach 1, be prepared to explain why a DeFi platform qualifies as a CFTC-regulated exchange.

Robinhood Prediction Markets

Regulatory status: Newly launched (Jan 2026). Robinhood is a regulated broker-dealer (SEC), but the Prediction Markets product is novel. Regulatory status unclear (likely CFTC or self-regulatory, but not yet explicit).

Tax reporting: Robinhood will likely send 1099s, but it's not yet clear which form (1099-B, 1099-MISC, etc.). Robinhood provides year-end trade statements and P&L reports.

Recommendation: Wait for Robinhood to clarify its 1099 position and then file accordingly. If Robinhood sends a 1099-B, follow that form's instructions. If they send a 1099-MISC or nothing, use Approach 2 or 3.

Special note: Robinhood's entry into prediction markets may force the IRS or CFTC to clarify sooner. New guidance could drop in 2026 or 2027. You might file conservatively now and amend later if guidance clarifies.

State-Level Complications (Especially NJ)

Federal vs. State Tax Treatment

The federal IRS framework above doesn't prevent states from imposing their own taxes on prediction market activity. Some states treat prediction markets as gambling and impose a wagering tax (e.g., New Jersey, Nevada, Illinois). Others treat them as capital gains and apply state income tax. Others treat them as business income and require a state license or business registration.

New Jersey Specifics

If you're a NJ resident, pay close attention. NJ has a historically strict gambling and insurance regulatory framework that creates unique traps for prediction market traders.

The NJ Insurance/Wagering Distinction. NJ classifies contracts on uncertain future events in two buckets: (1) Insurance, where you have an insurable interest and the contract indemnifies you against loss, and (2) Wagering, where you have no insurable interest and the contract is purely speculative. Prediction markets are almost certainly wagering under NJ law, not insurance.

NJ Gambling Winnings. Professional gamblers file Schedule C (business income) and deduct losses. Casual gamblers file ordinary income tax on net winnings; losses are not deductible beyond winnings. NJ allows full netting of wins and losses (unlike federal, which caps at 90% for 2026+).

The Trap for NJ Residents. If you use Approach 1 (Section 1256) federally, you get favorable 60/40 rates on your federal return. But NJ may not recognize Section 1256 treatment for prediction markets and could tax the full amount at ordinary income rates (up to 10.75%). You could pay federal tax at favorable rates and NJ tax at unfavorable rates.

Example: NJ resident realizes $10,000 net gain on Kalshi. Federal: Uses Approach 1, taxes $6,000 at 20% (LTCG) and $4,000 at 24% (short-term). Total federal = ~$2,100. NJ: Taxes $10,000 at ordinary income rates (~4-10.75% depending on bracket). Total NJ = ~$850. Total tax: ~$2,950 (effective rate ~29.5%). Compare to a resident of Florida or Texas: Total tax: ~$2,100 (effective rate ~21%). NJ residents are penalized by ~$850 for each $10,000 in gains.

What NJ Traders Should Do. Track gross winnings and losses separately -- you may need this for NJ reporting. Consult a NJ-licensed CPA before filing. Consider the state tax impact when deciding between Approaches 1, 2, and 3. File Form NJ-1040 with itemized deductions if you have substantial losses.

Practical Filing Steps for Each Approach

If You Choose Approach 1: Section 1256 Derivatives

1. Calculate your net P&L for the year from all prediction market trades.
2. On Schedule D (Capital Gains and Losses), go to Part III: "Gain from Form 6781, Section 1256 Contracts and Straddles." Enter your unrealized and realized gains/losses. Do NOT use Form 8949. The 60/40 split is automatic.
3. Report 60% as long-term capital gain and 40% as short-term capital gain.
4. For NJ residents: File Schedule A and note the state tax impact. You may owe ordinary income tax on the full amount in NJ even though you reported long-term gains federally.

If You Choose Approach 2: Gambling Income

1. Calculate your gross winnings and gross losses separately.
2. Determine if you're a "professional gambler." If yes: File Schedule C (Business Income and Loss). Report gross winnings as income and deduct all losses. If no: File Schedule 1 (Other Income) and report the net as taxable income. Losses cannot be deducted (under current law).
3. On Schedule 1, Line 21: "Other Income." Enter your net gambling winnings.
4. For NJ residents: File noting that you're claiming professional gambler status (if applicable) or that losses are non-deductible (if not).

If You Choose Approach 3: Ordinary Income (Schedule 1 or C)

1. Calculate your net P&L for the year.
2. On Schedule 1 or C: If Schedule 1, report the net as "Other Income." If Schedule C, report it as business income and deduct all losses as business expenses.
3. For NJ residents: Same as Approach 2, but note that you're treating it as miscellaneous income, not gambling income. This is the least defensive position for state purposes, but the safest federally.

What You Need to Track and Document

Regardless of which approach you choose, document everything:

Trade history. Date of purchase, contract ID (e.g., Kalshi contract number), amount invested, date of settlement/sale, amount received (or lost), and net P&L.

Platform statements. Year-end P&L report from Kalshi, Polymarket, or Robinhood. Monthly trade confirmations (if available). Any 1099 forms sent by the platform.

Intent and records. Document whether you're trading as a hobby, professional gambler, or business. Keep records of your trading strategy, time spent, and volume. This is crucial if the IRS audits and asks whether you meet the "professional trader" threshold.

State-specific records. If in NJ, separate records of gross winnings vs. gross losses. Any state-specific forms or disclosures required.

Professional advice. If you pay a CPA or tax attorney for guidance, keep the invoice and correspondence. This is a defense against penalties if the IRS later clarifies the treatment differently.

My Recommendation

The IRS has left a dangerous gap in guidance on prediction market taxation. Three approaches are defensible, but none is bulletproof:

Approach 1 (Section 1256 derivatives) is the most tax-efficient but the riskiest. Use it only if you're a high-volume Kalshi trader and comfortable with potential amendments.

Approach 2 (gambling income) aligns with state-level classifications and is consistent with how the IRS treats similar wagering. Use it if you're a semi-professional trader or in a state with strong gambling tax rules (like NJ).

Approach 3 (ordinary income) is the most conservative. Use it if you want to minimize audit risk and don't mind paying the extra tax now.

For NJ residents: Factor in state taxes. Approach 1 looks great federally but may be taxed at high rates in NJ. Approach 2 is more aligned with NJ's wagering framework. Consult a NJ CPA before filing.

My recommendation: Unless you're a high-volume Kalshi trader with a CPA or tax attorney advising you, use Approach 3 (ordinary income on Schedule 1 or C). It's the safest and most defensible. You'll pay more federal tax now, but you'll avoid audit risk and penalties. If the IRS later clarifies that Approach 1 is correct, you can file an amended return and claim a refund of the overpayment.

For 2026 filing: The situation may change. Watch for new IRS guidance (Revenue Ruling, Notice, or FAQ), CFTC clarification on Polymarket and Robinhood's regulatory status, state-level guidance from NJ or other high-tax states, and platform 1099 policies. File conservatively, document well, and be ready to amend if guidance clarifies.

Readers uncertain whether prediction markets are "gambling" or "investment income" should read our gambling tax services page, which walks through the distinction and covers the "professional trader" test in detail.

Frequently Asked Questions

Are prediction market winnings taxable?

Yes. All income is taxable under IRC Section 61 unless specifically excluded. Prediction market gains are not excluded. Regardless of whether you receive a 1099 from the platform, you must report your gains on your tax return.

What tax forms do I get from Kalshi, Robinhood, or Polymarket?

As of March 2026, it's unclear. Kalshi has said it will not send 1099s initially; Robinhood has not clarified; Polymarket doesn't send them (it's a DeFi platform). If you don't get a 1099, you must still self-report your income. The IRS can audit you for unreported gains even without a 1099.

Is prediction market income gambling or capital gains?

The IRS has not clarified. Three possible treatments exist: Section 1256 derivatives (60/40 long-term/short-term split), gambling income (ordinary rates, loss deduction limitations), and ordinary income (most conservative). Each has different tax consequences. The classification you choose affects your federal tax rate, your loss deduction ability, and your NJ state tax treatment.

Does the 90% gambling loss cap apply to my 2025 return?

No. The 90% cap under the OBBBA's amendment to Section 165(d) takes effect January 1, 2026. Your 2025 return (being filed now) still uses the old 100% loss deduction rule. However, if you classify prediction market income as gambling and continue trading in 2026, the 90% cap will apply to your 2026 activity. Read the full 90% cap analysis

What is the Section 1256 swap exclusion and why does it matter?

The Dodd-Frank Act includes a "swap exclusion" that exempts certain small prediction contracts from being classified as regulated swaps. Kalshi uses this exclusion to operate. Some practitioners argue this means Kalshi contracts qualify for Section 1256 tax treatment (60/40 long-term/short-term split). However, the swap exclusion was designed for regulatory purposes, not tax purposes. The IRS has not confirmed that swap-excluded contracts are Section 1256 contracts for tax purposes.

Does Polymarket's CFTC-regulated status help with tax treatment?

Polymarket is not CFTC-regulated in the same way Kalshi is. Polymarket is a DeFi platform based in the Bahamas with no explicit CFTC authorization. The Section 1256 argument is significantly weaker for Polymarket trades. Approach 2 (gambling) or Approach 3 (ordinary income) is more defensible for Polymarket.

How does NJ tax prediction market income?

NJ has not issued specific guidance on prediction market taxation. If NJ classifies prediction markets as gambling, winnings are taxed as ordinary income at rates from 1.4% to 10.75%. NJ allows full netting of gambling wins and losses (unlike federal, which caps at 90% for 2026+). If NJ classifies them as capital gains, NJ taxes all capital gains at ordinary rates with no preferential long-term rate and does not allow capital loss carryforward. Read more about NJ gambling tax rules

Do I have FBAR or FATCA obligations from Polymarket?

Potentially. If you hold funds on Polymarket (which operates from the Bahamas and uses foreign-based smart contracts), you may have FBAR (FinCEN 114) filing obligations if the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the year. FATCA (Form 8938) may also apply if your foreign financial assets exceed the reporting threshold ($50,000 for domestic filers, $200,000 for foreign residents). Consult a CPA or tax attorney if you have significant Polymarket holdings.

Is NJ going to ban prediction markets?

As of March 2026, NJ has not banned prediction markets. However, NJ's Division of Gaming Enforcement has indicated it is monitoring the space. NJ's strict gambling regulatory framework means prediction markets could face additional regulation or licensing requirements in the future. This does not change your current tax obligations.

Are prediction markets legal in my state?

Legality varies by state. Kalshi is legal in most states as a CFTC-regulated exchange. Polymarket's legal status is unclear in many jurisdictions. Robinhood Prediction Markets is available in states where Robinhood operates but may be restricted in some states. Check your state's gambling and securities regulations. Legality does not affect taxability -- even if your state restricts prediction markets, any gains are still taxable.

Should I file Form 8275?

If you're taking a position that differs from the IRS's likely interpretation (e.g., using Section 1256 for prediction markets), filing Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) can protect you from accuracy-related penalties if the IRS later disagrees. The form signals that you've considered the issue and taken a good-faith position. I recommend filing Form 8275 if you use Approach 1 or any position that isn't straightforward ordinary income reporting.

Should I wait to file until the IRS issues guidance?

No. You have a filing obligation regardless of whether the IRS has issued specific guidance. File by the deadline (or file an extension). Use the most defensible approach for your situation. If the IRS later issues guidance that changes the correct treatment, you can file an amended return. The statute of limitations for claiming a refund is generally 3 years from the original filing date.

Key Takeaway

The IRS has issued zero formal guidance on prediction market taxation, leaving traders to choose between three defensible approaches with wildly different tax consequences. Section 1256 treatment is the most aggressive but tax-efficient; gambling income aligns with state classifications; ordinary income is the safest. NJ residents face unique traps regardless of which approach they choose. Document everything, consider filing Form 8275 if you take a non-obvious position, and work with a CPA who understands both federal and NJ rules. Learn about our gambling tax services

Related reading: The 90% Gambling Loss Cap | How New Jersey Taxes Your Gambling and Sports Betting Winnings | DraftKings and FanDuel Tax Guide for NJ | Gambling tax services