Prediction Market Taxes 2026: IRS Rules for Kalshi, Polymarket & Robinhood

You made $3,500 trading event contracts last year. Now what? The IRS wants its cut, but the rules for how prediction markets are taxed remain frustratingly unclear. No official IRS guidance exists for prediction market gains specifically. That leaves traders, accountants, and tax attorneys arguing over three possible classifications, each with a different tax bill.

This guide breaks down every scenario, shows the math, and tells you what to track so you are not scrambling in April.

How the IRS Might Classify Your Prediction Market Gains

The core problem: the IRS has not published specific rules for prediction market taxation. Tax professionals generally land on one of three treatments depending on the platform, the contract type, and how aggressive your accountant is.

Section 1256 contracts get the most favorable treatment. These are marked to market at year-end and taxed using a 60/40 split: 60% long-term capital gains, 40% short-term, regardless of how long you held the position. This treatment historically applies to regulated futures and options on regulated exchanges. The argument for applying it to prediction markets centers on CFTC-regulated platforms like Kalshi and ForecastEx, where event contracts are cleared through regulated infrastructure.

Short-term capital gains is the most common conservative position. You bought an asset, sold it at a higher price, profit gets taxed as ordinary income (since most prediction market positions are held under a year). This is how most tax professionals treat gains from unregulated platforms like Polymarket.

Gambling income is the wildcard. Some tax professionals argue event contracts are wagers, not investments. Gambling income is taxed as ordinary income, but the key difference is that gambling losses can only offset gambling winnings, not other income. This is the least favorable classification for profitable traders.

The platform you trade on matters. Kalshi, which operates as a CFTC-regulated designated contract market, has the strongest case for Section 1256 treatment. Robinhood event contracts, cleared through KalshiEX, likely fall in the same bucket. Polymarket, operating offshore with crypto settlement, almost certainly does not qualify. We dig deeper into the Section 1256 vs. capital gains debate in our event contract tax treatment guide.

Worked Example: $3,500 Gain Taxed Three Ways

Let's say you buy 100 Yes contracts on Kalshi at $0.40 each. Total cost: $40.00. The event resolves Yes, and each contract pays $1.00. Gross proceeds: $100.00.

But fees matter. Run it through the Fee Calculator first. Assume Kalshi charges a $0.02 per-contract fee on entry and exit. That is $0.02 x 100 x 2 = $4.00 in fees.

Net profit: $100.00 - $40.00 - $4.00 = $56.00 per batch.

Now scale that up. You made 62 similar trades throughout the year, netting $3,500 total after fees. Here is your federal tax bill under each classification, assuming you are in the 32% marginal bracket ($191,950+ single filer income):

Scenario A: Section 1256 (60/40 split)

• 60% taxed as long-term capital gains (15% rate): $2,100 x 0.15 = $315
• 40% taxed as short-term/ordinary (32% rate): $1,400 x 0.32 = $448
• Total federal tax: $763 (effective rate: 21.8%)

Scenario B: Short-term capital gains

• 100% taxed at ordinary income rate (32%): $3,500 x 0.32 = $1,120
• Total federal tax: $1,120 (effective rate: 32%)

Scenario C: Gambling income

• 100% taxed at ordinary income rate (32%): $3,500 x 0.32 = $1,120
• Total federal tax: $1,120 (effective rate: 32%)

Scenarios B and C produce the same tax bill when you are profitable. The difference shows up when you lose. Under capital gains treatment, $3,500 in losses offsets other capital gains dollar for dollar. Under gambling treatment, those losses can only offset other gambling winnings. If you have no gambling winnings, your losses are worthless.

2026 update: The One Big Beautiful Bill Act added a 90% cap on gambling loss deductions starting January 1, 2026. If your activity is classified as gambling, you can now only deduct 90% of your losses against winnings. Win $10,000 and lose $10,000, you still owe tax on $1,000 of "phantom income." This cap does not apply under capital gains or Section 1256 treatment.

The Section 1256 classification saves $357 on $3,500 in gains. Scale that to a $35,000 year and the difference is $3,570. Worth understanding.

1099 Reporting: What Each Platform Sends

Not every platform sends tax forms. Here is the current landscape:

Getting a 1099-B means the IRS already knows your proceeds. Not getting one does not mean you owe nothing. All income is taxable whether reported on a 1099 or not. Polymarket traders need to self-report. We cover the specifics in our Kalshi 1099 guide and Polymarket tax reporting walkthrough.

The 1099-B from regulated platforms reports gross proceeds and, in some cases, cost basis. Double-check the cost basis. Platforms sometimes report it incorrectly, especially for contracts bought in multiple lots at different prices.

Cost Basis and Record-Keeping

Track every trade. You need four data points per position:

For the 100-contract Kalshi example above:

• Cost basis: $0.40 x 100 = $40.00
• Fees (entry): $0.02 x 100 = $2.00
• Adjusted cost basis: $42.00
• Proceeds: $1.00 x 100 = $100.00
• Fees (exit): $0.02 x 100 = $2.00
• Adjusted proceeds: $98.00
• Net gain: $98.00 - $42.00 = $56.00

Run it through the PM EV Calculator before entering any trade to make sure the expected value justifies the position after fees and taxes.

If you use FIFO (first in, first out) accounting, which is standard unless you elect otherwise, your oldest shares get sold first. This matters when you build a position across multiple price levels.

Mark-to-Market and Wash Sale Rules

If your gains qualify for Section 1256 treatment, mark-to-market rules apply at year-end. Any open positions on December 31 are treated as if you sold and repurchased them at fair market value. You owe tax on unrealized gains and can deduct unrealized losses. This prevents the strategy of holding losing positions into the next year to defer recognizing gains.

Wash sale rules prohibit claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale. Whether wash sale rules apply to event contracts is another unsettled question. If your contracts are classified as securities (capital gains treatment), wash sales likely apply. If classified as Section 1256 contracts, wash sales do not apply, since mark-to-market already handles year-end positioning. If classified as gambling, wash sales are irrelevant.

The practical takeaway: if you sell a prediction market position at a loss and re-enter the same market within 30 days, keep records. Your tax professional needs that information regardless of which classification applies.

State Tax Considerations

Federal classification is only half the picture. State taxes add another layer:

• No income tax states (TX, FL, NV, WA, WY, SD, AK, NH, TN): No state-level concern.
• States that follow federal treatment: Most states conform to federal capital gains treatment, meaning Section 1256 gains flow through at the same 60/40 split.
• States with gambling-specific rules: A few states tax gambling winnings differently or have special reporting requirements. New York, for example, requires reporting all gambling income and has a state-level gambling loss limitation.

If you are trading significant volume, check your state's treatment of both capital gains and gambling income. The difference can be material. A bankroll management strategy that ignores tax drag at the state level is incomplete.

2026 Tax Deadlines and Filing Requirements

Tax season is here. If you traded event contracts in 2025, your filing deadline is weeks away. These are the dates that matter:

• January 31, 2026: Deadline for platforms to mail 1099-B and 1099-MISC forms. Kalshi, Robinhood, and ForecastEx send 1099-B forms. PredictIt sends 1099-MISC for gross proceeds over $600. DraftKings sends 1099-B for DraftKings Predictions trades. If you have not received yours, check your platform account's tax documents section.
• April 15, 2026: Federal tax filing deadline for 2025 returns. Report prediction market gains on Schedule D (capital gains) or Schedule C (if trading is your primary business activity).
• April 15, 2026: First quarterly estimated tax payment due for 2026 if you expect to owe $1,000+ in taxes this year.
• June 16, 2026: Second quarterly estimated tax payment due for 2026.
• October 15, 2026: Extended filing deadline if you file Form 4868 by April 15.

If you traded on multiple platforms, you will receive separate tax documents from each. With 8 platforms now active (compare them all), cross-platform traders may have 3-4 different 1099s to reconcile. Reconcile every 1099 against your own records. Platforms report gross proceeds. They do not always report cost basis correctly, especially for contracts bought in multiple lots.

Estimated taxes matter. If you made significant prediction market profits in 2025 and did not withhold, you may owe an underpayment penalty. The safe harbor rule: pay at least 100% of your prior year's tax liability (110% if AGI exceeds $150,000) through withholding or estimated payments to avoid penalties. With the prediction market industry growing rapidly through 2025, many first-time traders will face this issue for the first time this April.

ForecastEx Tax Treatment

ForecastEx operates through Interactive Brokers, which means your event contracts appear alongside stocks, options, and futures in a single consolidated 1099-B. This simplifies record-keeping but creates a classification question.

ForecastEx contracts are traded on a CFTC-regulated exchange, which supports Section 1256 treatment. The 60/40 split would apply: 60% long-term capital gains, 40% short-term. Interactive Brokers' year-end tax reporting already handles mark-to-market for other Section 1256 products like futures, and ForecastEx contracts may follow the same treatment in your consolidated statement.

Practical advantage: If you already have an IBKR account trading futures, your ForecastEx event contracts integrate into the same tax workflow. No separate platform exports. No manual reconciliation. The $0.01 per contract fee on ForecastEx is deductible as a trading expense, and it shows up directly in the IBKR cost basis calculation.

Check your IBKR year-end statement carefully. Verify whether ForecastEx positions are grouped with Section 1256 contracts or reported separately as equity transactions. The classification determines which section of your tax return they belong on.

PredictIt Tax Treatment

PredictIt has a unique tax situation. After winning its court challenge in July 2025, PredictIt is now CFTC-registered. But its fee structure (10% on profits plus 5% on withdrawals) and its historical 1099-MISC reporting create complications.

1099-MISC vs 1099-B: PredictIt reports gross proceeds exceeding $600 on a 1099-MISC, not a 1099-B. This is a holdover from its pre-registration structure. A 1099-MISC does not break down individual transactions, so you need to maintain your own trade-level records. PredictIt's transaction history export is the source of truth.

Fee deductions: PredictIt's 10% profit fee and 5% withdrawal fee are both deductible. The profit fee reduces your net gain per trade. The withdrawal fee is a separate expense. Track them independently.

Worked example: PredictIt profit after fees and taxes

You buy 100 shares at $0.45 ($45.00 total) on a market that resolves Yes at $1.00.

• Gross profit: $100.00 - $45.00 = $55.00
• PredictIt profit fee (10%): $55.00 x 0.10 = $5.50
• Net proceeds before withdrawal: $94.50
• Withdrawal fee (5%): $94.50 x 0.05 = $4.73
• Net cash received: $89.78
• Taxable gain: $55.00 - $5.50 = $49.50 (withdrawal fee is a separate deductible expense)
• At 32% tax rate: $49.50 x 0.32 = $15.84
• After-tax net: $89.78 - $15.84 = $73.94 on a $45.00 investment

Now that PredictIt is CFTC-registered, there is an argument for Section 1256 treatment going forward. Consult a tax professional on whether 2025 gains qualify for the 60/40 split. The registration was effective mid-year, so a split treatment (pre-registration and post-registration) is possible.

2026 Legislative Changes: One Big Beautiful Bill Act

The One Big Beautiful Bill Act, signed into law in late 2025, introduced two changes that affect prediction market traders starting in the 2026 tax year:

90% gambling loss deduction cap. If your prediction market activity is classified as gambling, you can now only deduct 90% of your losses against gambling winnings. Win $10,000 and lose $10,000 in the same year, and you still owe tax on $1,000 of phantom income. This cap does not apply under capital gains or Section 1256 treatment, which makes the classification question even more consequential than before.

Increased standard deduction. The Act raised the standard deduction, which means fewer traders will itemize. Since gambling losses are an itemized deduction (Schedule A), traders whose activity is classified as gambling and who take the standard deduction lose the ability to deduct any losses at all. Under capital gains treatment, losses offset gains on Schedule D regardless of whether you itemize.

The practical takeaway: the gap between favorable classification (Section 1256 or capital gains) and unfavorable classification (gambling) widened in 2026. Trading on CFTC-regulated platforms like Kalshi, ForecastEx, or DraftKings strengthens the argument for non-gambling classification. This is one more reason platform choice matters beyond just fees.

What to Do Right Now

The tax treatment of prediction markets will get clearer as the IRS catches up to the growth of event contract trading. Until then:

1. Track every trade. Export CSVs from every platform monthly. Do not wait until tax season.
2. Separate your platforms. Keep CFTC-regulated trades (Kalshi, ForecastEx) distinct from unregulated ones (Polymarket). They may receive different tax treatment.
3. Calculate your fees. Fees reduce your taxable gain. Run your totals through the Fee Calculator to make sure you are deducting everything you can.
4. Hire a tax professional who understands trading income. General-purpose CPAs often default to the most conservative (and most expensive) classification without exploring alternatives.
5. Do not ignore it. Polymarket not sending a 1099 does not mean the IRS will not find out. Crypto on-ramps and off-ramps create a paper trail.

Understanding how prediction markets work is step one. Understanding the fees is step two. Understanding the taxes is step three. Without all three, your edge calculation is wrong. For a complete platform breakdown including fee structures, see our best prediction market in 2026 comparison.