NJ-licensed CPA for Kalshi, Polymarket, and Robinhood event contract traders. I handle position classification, return preparation, Form 8275 disclosure, FBAR/FATCA compliance, and NJ-specific optimization. Every engagement handled personally by Greg Monaco, CPA.
Unlike stock trading (where your broker sends a 1099-B) or crypto trading (where Form 1099-DA is now required from centralized exchanges), prediction market platforms do not send users a complete tax form for event contract activity.
Kalshi issues 1099-INT for interest earned on cash balances (at or above $10), 1099-MISC for referral bonuses or credits (at or above $600), and a limited 1099-B for cryptocurrency transfer transactions only. Kalshi does not issue a 1099-B for event contract trades. Their help center states: "Kalshi cannot give members advice on their taxes."
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."
Polymarket International issues no tax forms of any kind. As an offshore platform (Panama entity), it does not collect sufficient identity information for US tax reporting. Polymarket US (beta) is expected to issue 1099 forms once past beta, but this has not been confirmed as of March 2026.
This places the entire calculation and reporting burden on you. Without a 1099, the IRS may not know about your trades immediately. But exchanges share data with regulators, and the IRS has demonstrated it can reconstruct trading activity through enforcement actions. Self-reporting is not optional.
I work with prediction market traders across all major platforms. Whether you made $500 or $500,000, the classification question affects your tax bill. You can also use our S-Corp savings calculator and crypto tax estimator alongside this service.
Kalshi processes approximately $6.7 billion in rolling 30-day volume as of early 2026, with 350,000 to 500,000 active markets. Sports contracts represent 85-92% of volume. Kalshi is a CFTC Designated Contract Market, making it the strongest candidate for Section 1256 treatment, though this remains untested.
Over 1 million Robinhood customers have traded event contracts, with 12 billion contracts traded in 2025 and 4 billion already in 2026. Robinhood routes orders through Robinhood Derivatives, LLC (a CFTC-registered FCM) to Kalshi's exchange. Robinhood is acquiring MIAXdx through its Rothera joint venture to launch its own exchange in 2026.
Polymarket International (offshore, Panama entity) issues no tax forms and requires self-reporting. Polymarket US (launched November 12, 2025 via QCEX acquisition) is invite-only with 6-12 week waits. The transition from offshore to regulated US entity creates a split reporting year for some traders. FBAR and FATCA obligations may apply for offshore activity.
PredictIt survived its CFTC challenge (final judgment July 22, 2025) and raised position limits to $3,500 from $850. The 5,000-trader-per-contract cap was eliminated. PredictIt charges 10% on gross profits plus a 5% withdrawal fee. Political event contracts only.
The OBBBA's 90% gambling loss cap is driving migration from traditional sportsbooks to prediction markets, which may offer full loss deductibility under non-gambling classifications. Industry analysis projects DraftKings and FanDuel could lose billions in handle from this migration. If you switched platforms to avoid the 90% cap, the tax classification question is critical.
Each platform has different regulatory status, fee structures, and tax reporting. Understanding the differences is essential for choosing the right tax treatment.
| Kalshi | Robinhood | Polymarket Intl | Polymarket US | PredictIt | |
|---|---|---|---|---|---|
| Regulator | CFTC DCM | CFTC FCM (via Kalshi; migrating to own Rothera exchange in 2026) | None (offshore, Panama) | CFTC DCM (via QCEX) | CFTC no-action letter |
| 1099 issued | 1099-INT, 1099-MISC, crypto 1099-B only. No event contract 1099-B | None. Explicitly states will not provide | None | Expected but unconfirmed | 1099-MISC for net winnings above $600 |
| Fees | Max ~$0.02/contract (taker: 0.07 × C × P × (1-P)) | ~$0.02/contract total (Kalshi + Robinhood commission) | Taker fees on select markets (introduced early 2026) | 0.10% flat taker fee | 10% profit + 5% withdrawal |
| US access | All 50 states claimed (9 cease-and-desist, MA sports geofenced) | All except MD; NV/NJ no sports contracts | Blocked (33 countries including US) | Invite-only beta, 6-12 week waits | All states (politics only) |
| Sports % | 85-92% of volume | Majority | Limited | Available | None (politics only) |
Note: Polymarket International volume figures cited by dashboards may be roughly double-counted due to how on-chain OrderFilled events work, per Paradigm Research (December 2025). All Polymarket volume data should be treated as reported figures. Data as of early March 2026.
The IRS has not clarified the correct classification. Each approach below is defensible, but each has different tax consequences and risk profiles. The right choice depends on your specific situation, trading volume, and risk tolerance.
All gains and losses receive 60% long-term / 40% short-term capital gains treatment regardless of holding period. Reported on Form 6781 and Schedule D Part III.
Tax math example: A trader with $50,000 in Kalshi gains would owe approximately $13,400 under Section 1256 treatment (blended rate ~26.8%) compared to $18,500 at ordinary income rates (37% bracket). Difference: $5,100.
Why it may apply: Kalshi appears on EY's Section 1256 qualified board or exchange list as a CFTC Designated Contract Market. Section 1256 losses can be carried back three years under Section 1256(h), and wash sale rules do not apply under Section 1256(f)(5).
Critical weakness: The CFTC classifies event contracts as "binary options," categorized as "swaps" under 7 U.S.C. Section 1a(47). IRC Section 1256(b)(2)(B), added by Dodd-Frank, excludes swaps from Section 1256 treatment. 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. Additionally, binary event contracts typically require full upfront payment with no daily variation margin, failing the regulated futures contract definition under Section 1256(g)(1).
IRS pattern: The IRS consistently construes Section 1256 categories narrowly. IRS Notice 2007-71 held that OTC foreign currency options are not "foreign currency contracts" under Section 1256(g)(2). The Tax Court in Summitt v. Commissioner (134 T.C. 248, 2010) similarly held OTC foreign currency options outside Section 1256. When the Sixth Circuit disagreed in Wright v. Commissioner (809 F.3d 877, 6th Cir. 2016), the IRS responded by issuing proposed regulations to codify its restrictive interpretation. Filing Form 8275 is recommended if taking this position.
Binary outcomes on real-world events resemble wagering. Multiple states classify prediction markets as gambling. Under this treatment, winnings are taxed at ordinary income rates.
The 90% cap: The OBBBA amended Section 165(d) to cap gambling loss deductions at 90% for 2026 tax years. This creates phantom income for break-even traders. For example, $20,000 in wins and $20,000 in losses means only $18,000 is deductible, leaving $2,000 in taxable income on zero actual profit.
Professional gambler status: Under Commissioner v. Groetzinger (480 U.S. 23, 1987), full-time gambling pursued with regularity to produce income for a livelihood can constitute a "trade or business." Professional status allows Schedule C reporting with business expense deductions, but triggers self-employment tax (15.3%). The courts also apply the nine-factor test from Treas. Reg. Section 1.183-2(b). No case has applied Groetzinger to prediction market trading.
NJ advantage: NJ allows 100% netting of gambling wins and losses on the NJ-1040. The 90% cap is a federal rule only. Amateur gamblers report on Schedule 1 Line 8b; professionals file Schedule C.
Report prediction market gains as miscellaneous ordinary income on Schedule 1 (other income) or Schedule C (if you are in the business of trading). This approach does not require taking a position on whether prediction markets are derivatives, gambling, or capital assets.
Why it is safest: The IRS is unlikely to challenge a taxpayer for reporting too much income. This is consistent with the principle: when in doubt, report more income and claim fewer deductions. You can file an amended return within the 3-year refund statute if the IRS later clarifies a more favorable treatment.
Who it suits: Traders who prefer certainty over optimization. Traders with small to moderate net gains. Anyone not confident in defending a more aggressive position. This is what the majority of traders and CPAs are doing by default.
High-volume traders who qualify as being in the "trade or business" of trading commodities may consider a Section 475(f)(2) election. This converts all gains and losses to ordinary (no capital loss limitations, no wash sale issues) and does not trigger self-employment tax. The election must be filed by the due date of the prior year's return. A 5-year lock-in applies under Rev. Proc. 2025-23. This is untested for prediction markets but theoretically available if event contracts qualify as "commodities" under Section 475(e)(2). The taxpayer must independently meet the trader test from Higgins v. Commissioner (312 U.S. 212, 1941).
Following U.S.-Israel strikes on Iran on February 28, 2026, prediction markets faced their most severe crisis. Polymarket set a daily volume record of $425 million. Over $529 million was wagered on "US strikes Iran" contracts, and $58 million on Khamenei-specific markets.
Kalshi invoked a "death carveout" clause in its contract rules, resolving its Khamenei market at the last traded price before death confirmation rather than the full $1.00 payout. After intense backlash, Kalshi reimbursed all fees and net losses (approximately $2.2 million). On March 2, 2026, Kalshi filed a rulebook amendment with the CFTC codifying a formal "Death Rule."
A class-action lawsuit was filed March 5: Risch v. KalshiEX LLC, Case No. 2:26-cv-02390 (C.D. Cal.), alleging breach of contract and California consumer protection violations. Blockchain analytics firm Bubblemaps identified six suspected insider wallets that collectively netted $1.2 million, all created and funded within 24 hours of the attack. The account "Magamyman" made $553,000 on Iran-related bets placed hours before news broke.
Six Democratic senators led by Adam Schiff sent a letter to CFTC Chair Selig with a March 9 deadline. The End Prediction Market Corruption Act was introduced March 5, 2026, banning government officials from trading event contracts. Federal law already prohibits futures on assassinations, war, and terrorism under 7 U.S.C. Section 7a-2(c)(5)(C), but this applies to US exchanges only.
For a detailed breakdown of tax implications from the Iran markets, read: You Made Money on the Iran Prediction Markets. Here's What You Owe. →
Whether sports event contracts are federally preempted "swaps" or state-regulated gambling is being litigated across multiple federal circuits. The outcome directly affects whether your state can regulate (and tax) prediction market activity differently from the federal treatment.
Judge Trauger issued a preliminary injunction (February 19, 2026) holding that sports event contracts are federally preempted swaps under the CEA. She wrote it was "hard to see" how a federally regulated nationwide derivatives exchange could function while adhering to divergent state restrictions.
Judge Barry-Smith granted a preliminary injunction (January 20, 2026) barring Kalshi from offering sports event contracts in Massachusetts. He rejected federal preemption, writing that Congress "never intended to displace traditional state powers to regulate gambling." The injunction is currently stayed pending appeal.
Judge Abelson became the first federal judge to deny Kalshi a preliminary injunction (August 1, 2025), writing: "Kalshi has failed to show a likelihood of success on the merits." Appeal to the Fourth Circuit is pending.
Judge Gordon dissolved Kalshi's preliminary injunction (November 2025) after ruling sports event contracts were not "swaps." He called it "absurd to think that Congress intended for DCMs to turn into nationwide gambling venues." Ninth Circuit oral arguments are scheduled for April 16, 2026.
A coalition of 39 state attorneys general plus D.C. has filed amicus briefs against Kalshi. NJ is among the 9 states that issued cease-and-desist letters. This circuit split will likely reach the Supreme Court by 2027.
NJ has not issued specific guidance on prediction market taxation. However, NJ's existing tax structure creates both advantages and traps for prediction market traders.
NJ allows 100% gambling loss netting on the NJ-1040. The federal 90% cap does not apply to your NJ return.
NJ taxes all capital gains at ordinary income rates (1.4% to 10.75%). There is no preferential long-term capital gains rate in NJ.
NJ may not recognize Section 1256 treatment for state purposes. If you use the 60/40 split federally, NJ could tax the full gain at ordinary rates.
NJ is one of 9 states that issued a cease-and-desist letter to Kalshi. NJ's Division of Gaming Enforcement is actively monitoring prediction markets.
The NJ Trap (Example)
NJ resident with $10,000 Kalshi gain using Section 1256 federally: Federal tax at blended 60/40 rate is approximately $2,100. NJ taxes the full $10,000 at ordinary rates, approximately $850. Combined: ~$2,950 (29.5% effective rate). Compare to a Texas resident with no state income tax: ~$2,100 total (21% effective rate). NJ residents pay roughly $850 more per $10,000 in gains due to the state-federal interplay.
If you traded on Polymarket International (the offshore platform operated from the Bahamas through Polo Digital Assets, Ltd.), you may have foreign account reporting obligations.
Required if the aggregate value of your foreign financial accounts exceeded $10,000 at any point during the year. Filed separately from your tax return (due April 15 with automatic extension to October 15). Penalties: up to $10,000 per report for nonwillful violations per Bittner v. United States (598 U.S., 2023). Willful penalties: the greater of $100,000 or 50% of account balance.
Required if foreign financial assets exceed $50,000 on the last day of the year or $75,000 at any time (single filers). Filed with your tax return. Section 6038D(b)(2)(C) covers "any financial instrument or contract" with a non-U.S. counterparty. Prediction market contracts with a Bahamas-based counterparty fit within this language. Penalty: $10,000 initially plus $10,000 per 30-day period of continued failure (up to $50,000).
Whether DeFi smart contract wallets constitute "foreign financial accounts" under 31 CFR 1010.350 is unresolved. FinCEN Notice 2020-2 stated virtual currency accounts are not currently reportable on FBAR, but announced intent to propose amendments. No final rule has been published as of March 2026. When uncertain, err on the side of filing.
Note: Accessing restricted platforms may violate their terms of service. This does not change your tax or reporting obligations.
Automated tools like PredictionTax (predictiontaxes.com) and PolyTax (polymarket.tax, $99) exist for calculating prediction market P&L and generating tax forms. These tools can help you organize your trading data and compute gains and losses.
What they cannot do: tell you which of the three approaches is most defensible for your specific situation, analyze how your NJ return interacts with your federal position, prepare Form 8275 disclosure documentation, evaluate FBAR/FATCA obligations, or represent you if the IRS questions your return. I handle all of these.
All prediction market tax engagements are handled personally by Greg Monaco, CPA, licensed in New Jersey (CPA #20CC04711400). No outsourcing.
Federal and NJ tax returns with prediction market income properly classified and reported. I prepare returns under all three approaches (Section 1256, gambling, ordinary income) and recommend the most defensible position for your situation.
Written analysis evaluating which of the three tax treatments is most defensible given your trading volume, platforms used, and state of residence. Includes IRC citations, case law references, and risk assessment.
Disclosure statement preparation for taxpayers taking a non-obvious position (such as Section 1256 treatment). Form 8275 reduces the penalty standard from substantial authority (~40% confidence) to reasonable basis (~20-25%), providing meaningful protection if the IRS later disagrees.
FinCEN 114 and Form 8938 filing for Polymarket offshore users. I evaluate whether your accounts meet reporting thresholds and ensure compliance with foreign account disclosure rules. FBAR penalties can reach $100,000 or 50% of account balance for willful violations.
NJ taxes all capital gains at ordinary rates with no preferential long-term rate. NJ also allows 100% gambling loss netting (no 90% cap). I optimize the federal-state interplay to minimize your combined tax bill across both returns.
Ongoing tax planning for active prediction market traders. Estimated tax payment calculations, mid-year projections, and monitoring of IRS or CFTC guidance that could change the correct treatment. Includes analysis of Section 475(f)(2) mark-to-market election for high-volume traders.
Have immediate questions? Try SAM (our tax chatbot) or HASH (our crypto tax chatbot) for quick answers while you decide.
In-depth articles covering the tax rules prediction market traders should know.
Three tax treatments ranked by defensibility. Platform-specific notes for Kalshi, Polymarket, and Robinhood. NJ traps and filing steps.
Read guideTax implications of the Iran/Khamenei controversy. Kalshi refunds, Polymarket offshore gains, insider trading allegations, and FBAR obligations.
Read guideHow the OBBBA changed Section 165(d), what phantom income means, and how prediction market traders may be affected.
Read guideNJ netting rules, withholding rates, and how NJ differs from federal. Critical for NJ prediction market traders choosing the gambling classification.
Read guideFor traders who bet on both traditional sportsbooks and prediction markets. Covers the interaction between the 90% cap and platform migration.
Read guideFull gambling and sports betting tax service page. W-2G reconciliation, NJ netting, professional gambler status analysis, and phantom income planning.
Read guidePractical tax advice, deadline reminders, and money-saving strategies delivered to your inbox. No spam, unsubscribe anytime.
By subscribing, you agree to our Privacy Policy.
The IRS has not clarified the rules, and every platform handles reporting differently. I'll analyze your situation, recommend the most defensible tax position, prepare your federal and NJ returns, and file Form 8275 if needed.
For a detailed walkthrough of all three approaches, platform-specific notes, and NJ traps, read the full prediction market tax guide.
Gregory Monaco, CPA LLC d/b/a Monaco CPA · NJ CPA Firm License #20CB00789800 · Personal License #20CC04711400
Livingston, NJ 07039 · (862) 320-9554 · taxhelp@MonacoCPA.CPA
Prediction market tax services are provided remotely to clients in New Jersey and other states where permitted. This page is for informational purposes only and does not constitute tax advice. Use of this website does not create a CPA-client relationship.