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

Important Disclaimer: The IRS has not issued formal guidance on how to classify prediction market transactions (e.g., Kalshi, Polymarket, Robinhood). This guide explores defensible tax treatments with wildly different consequences. It is not tax advice, does not constitute a CPA-client relationship, and you should consult a tax professional before filing. Content is accurate to my best knowledge as of May 29, 2026.

In This Article

1. The Two Things Every Prediction Market Trader Needs to Know First
2. What Is the Prediction Market Tax Question Nobody Can Agree On?
3. How Are Prediction Markets Regulated and Why Does That Affect Taxes?
4. What Are the Three Possible Tax Treatments for Prediction Markets (Ranked by Defensibility)?
5. How Does Each Prediction Market Platform Handle Tax Reporting?
6. 2026 Reporting Threshold Changes (OBBBA): W-2G and 1099-MISC
7. How Do States Like New Jersey Tax Prediction Market Income?
8. Worked Examples (Including the 90% Phantom Income Trap)
9. How Do I Actually File My Taxes for Each Prediction Market Tax Approach?
10. What Records Do I Need to Track for Prediction Market Taxes?
11. Recommendation
12. Key Takeaway
13. Frequently Asked Questions
14. Ready to File With Confidence?

The Two Things Every Prediction Market Trader Needs to Know First

Before you choose a tax treatment, internalize two things that single-handedly resolve most of the confusion in r/Kalshi, r/IRS, and r/personalfinance threads:

1. No 1099 does NOT mean no tax. Kalshi, Polymarket, and Robinhood do not issue a comprehensive Form 1099-B for event contract trades. Robinhood's official documentation states plainly: "Robinhood will not be providing 1099s for event contract trades. Event contract trades will not be reported to the IRS. Taxes related to event contracts are the customer's sole responsibility." The IRS still expects you to self-report. Absence of a 1099 is not absence of taxable income.

2. Kalshi's CSV stores values in CENTS, not dollars. This is the single most-common reporting error. If you export your Kalshi transaction CSV and sum the PnL column without dividing by 100 first, you will overstate gains or losses by 100x. Always divide all monetary columns (cost, proceeds, fees, PnL) by 100 before calculating totals. Camuso CPA flagged this; many traders have already filed wrong returns because of it.

What Is 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. If you need professional help, the tax preparation services cover all prediction market filing approaches.

Looking for prediction market tax services? See the Prediction Market Tax CPA service page for consultation booking and service details.

How Are Prediction Markets Regulated and Why Does That Affect Taxes?

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: Robinhood originally launched event contracts on October 28, 2024, routing orders through its CFTC-registered Futures Commission Merchant (Robinhood Derivatives, LLC) to Kalshi's exchange. On January 20, 2026, the Rothera joint venture (Robinhood + Susquehanna International Group) closed its acquisition of MIAXdx, giving Robinhood its own CFTC-licensed DCM and clearinghouse so it can clear in-house going forward. Binary outcomes, 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. These products can be several things at once: a CFTC-regulated derivative as an instrument, an event that "involves gaming" for CFTC public-interest review, unlawful gambling in a particular state, and - separately - property, wagering, or ordinary income for federal tax purposes. Each axis has its own authority, and none of them automatically decides the federal tax character.

The swap-classification question. The CFTC categorizes event contracts as binary options - a type of swap - under 7 U.S.C. Section 1a(47), and Dodd-Frank added IRC Section 1256(b)(2)(B), a tax provision that excludes swaps and similar agreements from Section 1256. If event contracts are swaps, that tax exclusion cuts against the 60/40 position. There is no Dodd-Frank carve-out that "exempts" Kalshi contracts from being swaps - the exclusion runs the other way.

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 May 29, 2026, the IRS has not issued a Revenue Ruling, Revenue Procedure, Notice, IRS FAQ, 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. CFTC DCM registration alone does not confer Section 1256 status under IRC §1256(g)(1), which requires the contract to meet the marked-to-market daily-settlement test. The IRS has implicitly acknowledged prediction markets exist through various enforcement actions and CFTC coordination but no published authority resolves event-contract classification.

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

The classification is unsettled, but it is not a menu. The correct starting point is the facts: which venue and contract, what the product filing says the instrument is, how you traded, and what records exist. Where genuinely unresolved law supports more than one treatment on the same facts, the position taken should be documented with supporting and contrary authority, applied consistently across platforms and years, and disclosed (Form 8275) when material - never selected by desired tax rate.

What Are the Three Possible Tax Treatments for Prediction Markets (Ranked by Defensibility)?

Approach 1: Speculative Derivatives (Section 1256) - Highest Audit Risk

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; Section 1256 activity is reported on Form 6781, which flows to Schedule D lines 4 and 11.

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 ~$2,160 (assuming 24% marginal rate and 20% LTCG rate).

Why some argue it: Kalshi is a CFTC-designated contract market, and Section 1256 covers certain contracts on qualified exchanges. But the CFTC's own product filings classify event contracts as swaps (binary options), which triggers the IRC Section 1256(b)(2)(B) tax exclusion - the argument's biggest weakness, not a feature. Some tax attorneys and crypto-focused CPAs have nonetheless used 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 IRC Section 1256(b)(2)(B) swap exclusion is a tax provision that cuts against 60/40 treatment; it is not a regulatory carve-out that blesses it. 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.

When the facts may point here: High-volume Kalshi traders (Kalshi is explicitly CFTC-regulated) whose contemporaneous records support derivative characterization - a position taken on the facts and disclosed on Form 8275, never selected merely to lower the rate.

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: Under a wagering characterization, casual gamblers report wins on Schedule 1, Line 8b and deduct qualifying losses on Schedule A, Line 16 only if they itemize. A professional gambler reports a qualifying trade or business on Schedule C. Starting in 2026, however, Section 165(d) limits the wagering-loss amount to 90% of losses and caps the deduction at gains for both casual and professional gamblers; Schedule C placement does not create an exemption.

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.

A professional gambler files a qualifying trade or business on Schedule C, but 2026 wagering losses and deductions incurred in carrying on wagering transactions remain subject to Section 165(d). A casual gambler reports winnings on Schedule 1, Line 8b and deducts qualifying losses on Schedule A, Line 16 only if itemizing. For 2026, both are limited to 90% of losses and never more than gains; a casual gambler taking the standard deduction cannot claim the loss deduction.

Example: You have $50,000 in prediction market wins and $40,000 in losses in 2025. If you're a professional gambler: You report on Schedule C, deduct your $40,000 in losses, and pay tax on the $10,000 net. If you're an amateur who itemizes: You report $50,000 in winnings on Schedule 1, Line 8b and deduct $40,000 in losses on Schedule A, Line 16. Your taxable gambling income is $10,000. For 2026 activity, the loss deduction would be capped at $36,000 (90% of $40,000), leaving $14,000 taxable. If you take the standard deduction, you cannot deduct any losses and owe tax on the full $50,000. (This amateur example assumes you itemize - if you take the standard deduction, losses provide no federal offset.)

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.

When the facts may point here: Traders whose activity and state-law posture actually align with a wagering characterization (for example, sports contracts in states that treat them as gambling).

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); if you rise to trader status, the trader and Section 475 rules determine the form, and Schedule C carries trading-business expenses rather than the gains themselves.

How it works: Each win (when a contract settles in your favor) is reported as ordinary income. If you're not a business, the result goes on Schedule 1, Line 8z (Other Income) - but under the ordinary-income approach each contract needs its own theory: your cost in a winning contract reduces the income you report, and a losing contract is deductible only under a provision that actually allows it (IRC Section 165(c)(2) profit-seeking transaction, a capital loss if the contract is property, a Section 165(d) wagering loss subject to the 90% cap for 2026+ if you itemize, or a valid Section 475/1256 regime). If you rise to trader status, deduct trading-business expenses on Schedule C; the gains and losses themselves follow the trader and Section 475 rules above. 'Net everything on Line 8z' is shorthand, not authority - large or loss-heavy years need provision-level review before filing.

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."

When the facts may point here: Traders whose records support ordinary-income reporting, with small net gains or losses, who are not positioned to defend a more technical characterization.

How Does Each Prediction Market Platform Handle Tax Reporting?

Kalshi

Scale: Kalshi posted $23.8 billion in total 2025 trading volume (1,108% year-over-year increase). As of early March 2026, rolling 30-day volume sits at approximately $6.7 billion with open interest of $433.6 million. Sports contracts represent 85-92% of volume.

Regulatory status: CFTC Designated Contract Market. Kalshi appears on EY's official Section 1256 qualified board or exchange list. However, the CFTC itself classifies event contracts as "binary options" categorized as "swaps" under 7 U.S.C. Section 1a(47). This swap classification may trigger the Dodd-Frank exclusion under IRC Section 1256(b)(2)(B) that Congress enacted to prevent such contracts from receiving 60/40 treatment.

Tax reporting: Kalshi issues 1099-INT for interest earned on cash balances (at or above $10), 1099-MISC for referral bonuses or credits ($2,000 or more for 2026 payments; $600 applied through 2025), and a limited 1099-B for crypto transfer transactions only. Kalshi does not issue a 1099-B for event contract trades. You must self-report. Kalshi provides year-end trade history and P&L reports. Kalshi uses FIFO accounting for its P&L display but explicitly disclaims this as tax advice. Kalshi has also identified Form 1099-DA reporting for in-scope digital-asset transactions.

Fee structure (updated February 5, 2026): Taker fees follow the formula 0.07 x C x P x (1-P), producing a maximum of approximately $0.02 per contract at the $0.50 midpoint. Maker fees are one-quarter of the taker rate. Kalshi pays up to 4.05% APY on idle cash balances.

Why Kalshi traders might prefer Approach 1: Kalshi's explicit CFTC DCM registration and presence on EY's Section 1256 QBE list is the strongest factual support for the Section 1256 argument.

Risk: The CFTC's own swap classification creates a strong argument against Section 1256 eligibility. In its February 2026 amicus brief in North American Derivatives Exchange v. State of Nevada, the CFTC argued that event contracts on CFTC-registered DCMs are swaps under the CEA. The IRS has consistently taken a narrow view of Section 1256 categories (IRS Notice 2007-71, Summitt v. Commissioner 134 T.C. 248, Wright v. Commissioner 809 F.3d 877). File Form 8275 if taking this position.

State restrictions and federal enforcement (as of May 29, 2026): 10 states have issued cease-and-desist letters to Kalshi (NJ, NY, NV, MA, MD, OH, MT, AZ, AR, IL). Massachusetts secured a preliminary injunction in January 2026 (currently stayed on appeal). In March 2026, Arizona filed the first criminal charges against prediction-market platform operators. Federal preemption actions and state enforcement have both expanded across multiple states through 2026; the exact agency, parties, and docket in each state are evolving, so verify current sources before relying on any specific enforcement claim. On April 6, 2026, the Third Circuit affirmed a preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi, holding that Kalshi's event contracts are swaps within the CFTC's exclusive jurisdiction under the Commodity Exchange Act and that the state action is therefore preempted. A coalition of 39 state attorneys general plus D.C. has filed amicus briefs supporting state regulatory authority. The federal/state preemption question remains unsettled and trades into the choice of federal tax classification (Section 1256 vs gambling vs capital vs ordinary).

Polymarket

Two platforms now exist: Polymarket International continues to operate at massive scale (smart contracts operated by Blockratize, Inc.). Polymarket US (QCX LLC d/b/a Polymarket US) launched in beta on November 12, 2025 via a $112 million acquisition of QCEX, and operates as a CFTC-registered DCM requiring full KYC. As of March 2026, Polymarket US remains invite-only with 6-12 week waits for new signups.

Volume caveat: A December 2025 Paradigm Research report revealed that most Polymarket dashboards have been double-counting volume due to how on-chain OrderFilled events work. Reported figures may be roughly twice the actual volume.

Tax reporting: Polymarket International issues no tax forms. Polymarket US is expected to issue 1099 forms once past beta, but this has not been confirmed. For International trades, you must reconstruct P&L from blockchain records.

Polymarket International (offshore): The US is among 33 completely blocked countries. VPN use is prohibited under Section 2.1.4 of the Terms of Service. The Section 1256 argument is significantly weaker for offshore trades, as Polymarket International is not a CFTC-regulated exchange. FBAR and FATCA reporting obligations may apply (see the prediction market tax services page for details).

Polymarket US (beta): Because Polymarket US is a CFTC-regulated DCM, the Section 1256 argument is stronger here than for International trades (similar to Kalshi). Available markets are more limited: sports, crypto, and entertainment. Political/election markets are delayed pending further CFTC review.

Recommendation: Approach 2 (gambling) or Approach 3 (ordinary income) is more defensible for Polymarket International trades. For Polymarket US trades, the analysis is similar to Kalshi.

Taker fees: Polymarket introduced taker fees on select crypto and sports markets in early 2026. Polymarket US charges a 0.10% flat taker fee.

Robinhood Prediction Markets

Scale: Over 1 million customers have traded prediction markets on Robinhood. Per Robinhood's publicly reported Q4 2025 / Q1 2026 earnings disclosures (see Robinhood Markets, Inc. Form 8-K filings on SEC EDGAR), CEO Vlad Tenev reported contract volumes in the multiple-billions range across 2025 and rapid growth into 2026; the firm describes prediction markets as one of its fastest-growing product lines by revenue. Verify specific figures against the most recent Robinhood SEC filing before relying on them in planning.

Regulatory status: Robinhood routes orders through Robinhood Derivatives, LLC (a CFTC-registered Futures Commission Merchant) to Kalshi's exchange. Robinhood is preparing to leave Kalshi's exchange: in January 2026, it closed its acquisition of MIAXdx through a joint venture with Susquehanna International Group called Rothera, giving Robinhood its own CFTC-licensed DCM and clearinghouse. Verify the exchange's current operational status before relying on it; as of mid-2026 Robinhood continued to route retail event contracts through partner-exchange infrastructure.

Tax reporting: Robinhood explicitly states "Robinhood will not be providing 1099s for event contract trades." Robinhood provides an Event Contracts Annual Statement summarizing trades, but labels it "not a substitute tax reporting form." Robinhood charges $0.01 per contract per side as commission, on top of Kalshi's exchange fees, for approximately $0.02 per contract total.

Recommendation: Use the same analysis as Kalshi (since Robinhood trades execute on Kalshi's infrastructure). Robinhood is restricted in Maryland (no event contracts at all) and Nevada/New Jersey (no sports contracts). File conservatively and amend later if the IRS clarifies.

PredictIt

PredictIt survived its CFTC challenge with final judgment in its favor on July 22, 2025. The $850 per-contract position limit has been raised to $3,500 (indexed to the Federal Election Campaign Act limit under CFTC Letter No. 25-20). The 5,000-trader-per-contract cap was eliminated. PredictIt charges 10% on gross profits plus a 5% withdrawal fee (the highest fee structure in the industry). PredictIt remains restricted to political event contracts only. PredictIt issued 1099-MISC for net winnings above $600 for 2025; the general 1099-MISC issuance floor rose to $2,000 for 2026 under OBBBA Section 70433 (IRC Section 6041(a)).

2026 Reporting Threshold Changes (OBBBA): W-2G and 1099-MISC

Two reporting thresholds changed under the One Big Beautiful Bill Act (P.L. 119-21) effective January 1, 2026. They affect what paperwork lands in your mailbox - but not your underlying tax obligation:

What this means for prediction market traders:

• Kalshi's 1099-MISC for credits/rewards will only be issued if those total $2,000 or more in 2026 (was $600 in 2025). Smaller bonuses still generate taxable income - just no paperwork.
• Even if W-2G thresholds applied (Kalshi/Robinhood do not currently issue W-2Gs for event contracts), the new $2,000 threshold would suppress most contract-level forms.
• The bigger 2026 change is not a threshold - it's the gambling-loss 90% cap. See worked examples below.

How Do States Like New Jersey Tax Prediction Market Income?

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 most likely wagering on current NJ enforcement posture, though as of July 2026 NJ has issued no income-tax guidance on the question - treat the NJ category as provisional, not insurance.

NJ Gambling Winnings. New Jersey permits full annual netting of gambling wins and losses within the gambling category, with a floor of zero, and does not adopt the 2026 federal 90% cap. Federal reporting differs by whether the activity is a qualifying trade or business, but professional status does not eliminate the federal Section 165(d) limitation.

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 - NJ nets them within the gambling category directly on the NJ-1040 (net gambling winnings line; the result cannot go below zero). NJ has no federal-style standard/itemized election, so there is no separate itemized deduction for losses to claim. If the activity is instead classified as business income, Schedule NJ-BUS-1 applies; a property characterization would use Schedule NJ-DOP (with no loss carryforward). Consider the state tax impact when deciding between Approaches 1, 2, and 3, and consult a NJ-licensed CPA before filing.

Worked Examples (Including the 90% Phantom Income Trap)

Example 1: Kalshi Net Winner (Capital Gains Approach)

Facts: 32% federal bracket. $15,000 total Kalshi proceeds, $8,000 total Kalshi costs, all positions held under 1 year. Single filer.

Example 2: Kalshi Break-Even Trader (Gambling Approach, 2026 Phantom Income)

Facts: 32% bracket. $50,000 gross Kalshi winnings AND $50,000 gross Kalshi losses in 2026. Net economic result: $0. Files using the standard deduction.

The standard-deduction trap: Even if this trader itemized, the 90% OBBBA cap would still create $5,000 of phantom taxable income from a break-even year ($50,000 winnings minus $45,000 deductible losses). Taking the standard deduction zeros out the entire loss deduction and taxes the full $50,000 in winnings. This is why gambling treatment is the worst possible 2026 classification for active prediction market traders.

Example 3: Polymarket Trader (Capital Gains, Property Treatment)

Facts: Bought 500 USDC at $1.00 each ($500 basis). Deposited to Polymarket. Bought "YES" for 250 USDC. Won. Received 500 USDC payout. Withdrew. Sold USDC back for $500.

Note: USDC is property under IRS rules, not cash. Each USDC disposition is potentially taxable. See Camuso CPA's Polymarket Taxes guide (opens in a new tab) for additional detail.

Example 4: Robinhood Section 1256 Position (Aggressive, with Form 8275 Disclosure)

Facts: 37% bracket. $100,000 net Robinhood event contract gains. Trader takes a Section 1256 position with Form 8275 disclosure.

Aggressive position. Consult a CPA before filing. Form 8275 disclosure is recommended to protect against accuracy-related penalties if the IRS later disagrees.

How Do I Actually File My Taxes for Each Prediction Market Tax Approach?

If You Choose Approach 1: Section 1256 Derivatives

1. Calculate your net P&L for the year from all prediction market trades.
2. Complete Form 6781, Part I (Section 1256 Contracts Marked to Market): report the realized results of each contract plus the December 31 mark-to-market on open positions. Form 6781 applies the 60/40 split automatically - 40% flows to Schedule D line 4 (short-term) and 60% to Schedule D line 11 (long-term). Do not use Form 8949 for Section 1256 contracts. If you have straddle positions, Parts II-III of Form 6781 and the mixed-straddle rules may also apply.
3. Report 60% as long-term capital gain and 40% as short-term capital gain.
4. For NJ residents: NJ does not recognize the federal Section 1256 60/40 split. Report the income in the applicable NJ gross-income category at ordinary NJ rates (net gains from disposition of property go on Schedule NJ-DOP; gambling-classified amounts go on the net gambling winnings line). NJ allows no preferential capital-gain rate and no capital-loss carryforward.

If You Choose Approach 2: Gambling Income

1. Calculate your gross winnings and gross losses separately.
2. Determine whether the facts establish a professional gambling trade or business. A professional files Schedule C; a casual gambler reports gross winnings on Schedule 1, Line 8b and uses Schedule A for qualifying losses only when itemizing. For 2026, professional and casual wagering-loss deductions are both limited to 90% of losses and never more than gains. Schedule C placement does not permit a professional to deduct all losses.
3. On Schedule 1, Line 8b: "Gambling income." Enter your gross gambling winnings. Deduct losses on Schedule A, Line 16 if you itemize.
4. For NJ residents: NJ allows full 100% netting of gambling wins and losses on the NJ-1040 regardless of the federal 90% cap. Report net gambling income on NJ-1040.

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 you rise to trader status, deduct trading-business expenses on Schedule C - the gains and losses themselves follow the trader and Section 475 rules (Form 8949/Schedule D, or Form 4797 with a valid Section 475 election), and trading gains are generally not self-employment income. Under the ordinary-income approach a losing contract is deductible only under an authorizing provision (IRC Section 165(c)(2) profit-seeking transaction, a capital loss if the contract is property, or a Section 165(d) wagering loss) - document the theory for each losing position.
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 Records Do I Need to Track for Prediction Market Taxes?

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.

Offsetting positions across platforms. If you hold economically offsetting positions on the same event - for example, YES on one venue and NO on another, or hedged sports and election exposures - the straddle rules can defer losses (IRC Section 1092), capitalize carrying costs (Section 263(g)), or, for appreciated positions, trigger constructive-sale treatment (IRC Section 1259). Mixed positions that combine Section 1256 and non-Section 1256 contracts have their own routing on Form 6781. Before deducting a loss on one leg of a paired trade, map both legs, the year-end values, and any unrecognized gain, and flag it for professional review rather than assuming each contract stands alone.

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 the gambling tax services page, which walks through the distinction and covers the "professional trader" test in detail.

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. See the full prediction market tax service page for details on how Monaco CPA handles these filings.

Related reading: Prediction Market Tax Services | Iran Prediction Market Taxes | 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

For tax preparation and planning services specific to prediction market income, visit the prediction market tax service page.

Frequently Asked Questions

Ready to File With Confidence?

Tax rules change frequently. If anything in this guide applies to your situation, a quick review with a CPA can prevent costly mistakes. Greg Monaco is a NJ-licensed CPA (License #20CC04711400). Greg remains responsible for every engagement and reviews, approves, and signs all client-facing work. Trained staff may assist under his direct supervision and confidentiality procedures.

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