Prediction Markets Tax Guide: Polymarket, Kalshi, and the IRS 2026

Prediction markets have gone from niche curiosity to mainstream financial instrument almost overnight. Whether you traded the 2024 election on Polymarket, hedged an economic forecast on Kalshi, or participated in a decentralized outcome market on-chain, there's a question that most platforms aren't answering for you: what's the tax treatment? The short answer is that prediction market tax rules depend heavily on which platform you used, whether it's regulated, and what country you live in — and the guidance is still evolving. This guide breaks it all down.

What Are Prediction Markets, Really?

A prediction market lets traders buy and sell contracts tied to the outcome of real-world events — elections, sports results, economic indicators, even crypto price levels. If your position resolves "correct," you receive a fixed payout (typically $1 per share). If it resolves "incorrect," the position expires worthless.

Mechanically, this looks a lot like a binary option — and that's no accident. The key distinction for tax purposes is how the platform is regulated and what the underlying instrument is classified as. Polymarket operates on the Polygon blockchain using conditional ERC-1155 tokens settled in USDC. Kalshi is a CFTC-regulated designated contract market (DCM) operating under US commodities law. Those distinctions create meaningfully different tax situations.

How Prediction Market Tax Works Under General Principles

No major tax authority — the IRS, HMRC, or the ATO — has issued guidance specifically targeting prediction markets as of 2026. That means the analysis flows from first principles: what kind of asset is a prediction market contract, and what kind of income does winning produce?

Under most jurisdictions, the core question is whether the instrument is:

• A capital asset — gains taxed as capital gains, losses deductible against capital gains
• Gambling income — taxed as ordinary income (or potentially tax-free, depending on the country)
• A regulated derivative — potentially subject to special mark-to-market rules

The answer differs by platform, and getting it wrong can mean either overpaying or underpaying — neither of which is a good outcome at filing time.

Polymarket: Crypto-Based, Decentralized, and Taxed Like Property

Polymarket is a decentralized prediction market running on Polygon. Users fund positions with USDC and receive conditional tokens representing YES or NO outcomes. When an event resolves, winning tokens redeem for $1 USDC each; losing tokens become worthless.

Because Polymarket positions are on-chain tokens, the IRS framework from IRS Notice 2014-21 applies: cryptocurrency (and by extension, crypto-native tokens representing financial positions) is treated as property for federal tax purposes. That means the general rules from IRC §1001 govern: you recognize gain or loss on each disposition, calculated as the difference between your amount realized and your adjusted basis.

Buying a Position

When you purchase YES or NO shares on Polymarket, you're acquiring a property interest. Your cost basis is the price you paid in USDC (generally treated as a USD equivalent). No taxable event occurs at purchase — only when you dispose of the position.

Selling a Position Before Resolution

If you sell your conditional tokens on the secondary market before the event resolves, that's a taxable disposal. Gain or loss equals your sale proceeds minus your cost basis. If you held the position for more than one year, long-term rates may apply under IRC §1221; otherwise it's short-term, taxed at ordinary income rates. Given the typical lifespan of a prediction market contract, most positions will be short-term.

Winning at Resolution

When a winning position resolves and you receive $1 USDC per token, that settlement is a taxable event. Your gain is $1.00 minus your cost basis per token. If you paid $0.70 per YES share on an event that resolved YES, your gain is $0.30 per share — short-term capital gain in most cases.

Losing at Resolution

Losing positions expire worthless. Under IRS Publication 544, a security or asset that becomes worthless is treated as sold on the last day of the tax year for $0. Your capital loss equals your full cost basis. These losses can offset capital gains from other positions — including from other crypto trades or even DeFi activity like LP farming or staking rewards.

One practical wrinkle: Polymarket doesn't issue 1099s. You are responsible for tracking every position, its cost basis, and its resolution. Tools that handle DeFi tax reporting and connect to Polygon will pull these on-chain transactions automatically — manual tracking across dozens of markets is error-prone and time-consuming.

Kalshi: CFTC-Regulated and Potentially Subject to Section 1256

Kalshi is different in a structurally important way: it's a CFTC-regulated designated contract market. This matters for taxes because regulated futures contracts — those traded on a qualified board of exchange — may qualify for treatment under IRC §1256, which provides a favorable 60/40 rule: 60% of gains are treated as long-term capital gains and 40% as short-term, regardless of how long you held the position. Additionally, Section 1256 contracts are marked to market at year-end, meaning unrealized gains and losses are recognized annually.

Whether Kalshi event contracts definitively qualify as Section 1256 contracts is a question that many tax professionals are actively debating, and the IRS has not issued a ruling specific to prediction market contracts from CFTC-regulated venues. If you have significant Kalshi activity, consulting a CPA with derivatives experience is worth the conversation — the tax outcome could differ materially from treating them as ordinary capital assets.

What's clear: Kalshi does issue 1099 forms for US users with reportable activity, which simplifies the documentation burden compared to decentralized platforms.

Is This Gambling Income?

This is the question most prediction market traders ask first — and the answer in the US is almost certainly no, for regulated platforms like Kalshi, and likely no for Polymarket as well, though the analysis is less settled.

The IRS taxes gambling winnings as ordinary income under IRC §61, and gamblers can only deduct losses to the extent of their winnings (not against other capital gains). But the IRS and courts have generally distinguished financial speculation from wagering. Prediction markets structured as exchange-traded contracts — particularly CFTC-regulated ones — look much more like financial derivatives than casino bets. Most tax practitioners treat prediction market contracts as capital assets, not wagering transactions.

That said, if a court or the IRS ever characterized these as gambling, the tax treatment would be less favorable: gains as ordinary income, losses only offsetting gains from the same activity.

How Tax Authorities Outside the US See Prediction Markets

The global picture is genuinely mixed — and in some cases, more favorable than the US treatment.

United Kingdom

The UK has historically treated gambling winnings as tax-free for individuals. If HMRC classifies Kalshi or Polymarket activity as gambling, UK residents could potentially receive winnings free of tax — a significant advantage. However, the HMRC Cryptoassets Manual makes clear that crypto-asset transactions are generally subject to Capital Gains Tax or Income Tax depending on the nature of the activity. For Polymarket specifically, where you're transacting in crypto tokens, HMRC would likely analyze the positions as crypto-asset disposals subject to CGT — not gambling income. The distinction between financial speculation and gambling is fact-specific under UK law.

Australia

The ATO's crypto guidance treats crypto assets as property, with gains and losses generally subject to Capital Gains Tax. Australia also generally does not tax gambling winnings for recreational gamblers. The classification question — financial instrument vs. wagering — matters as much in Australia as it does in the US. Traders who participate systematically, at scale, or as a business activity risk being treated as carrying on a business, making profits ordinary income rather than capital gains.

European Union

EU member states have no unified prediction market tax rule. Most treat crypto asset gains as capital gains or income depending on national law. Germany, for example, exempts long-held crypto from tax after one year; France applies a flat 30% on crypto gains. Whether prediction market contracts count as "crypto assets" or financial derivatives under national law adds another layer of complexity for EU-based traders.

Practical Steps: Reporting Your Prediction Market Activity

1. Identify your platform type. Kalshi (regulated, issues 1099s) and Polymarket (decentralized, no 1099) require different documentation approaches.
2. Establish cost basis for every position. For Polymarket, this means recording the USDC amount spent per YES/NO token at time of purchase. On-chain data is permanent — but parsing it manually is tedious.
3. Track resolutions separately. Winning resolutions and losing (worthless) resolutions are separate disposal events. Don't net them before reporting — report each position individually on your tax forms.
4. Consider holding period. Most prediction market contracts resolve in days to months, making short-term treatment the default. If you ever hold a position across a year boundary without it resolving, the holding period clock keeps running.
5. Flag Kalshi for potential §1256 analysis. If you have material Kalshi activity, bring this to a CPA — the 60/40 treatment under Section 1256 could be favorable, but requires accurate classification.
6. Keep records of all transactions. Even on regulated platforms like Kalshi, your 1099 may not capture every nuance of your cost basis. Download your full transaction history.

For Polymarket traders specifically, connecting your Polygon wallet to a tool like Defitax lets the software pull your conditional token transactions automatically, identify resolution events, and calculate gain/loss per position — saving hours of manual work that's otherwise inevitable when you've traded dozens of markets.

Key Takeaways

• Prediction market contracts are most likely treated as capital assets under US, UK, and Australian law — not gambling income — though no tax authority has issued definitive guidance specifically addressing prediction markets.
• Polymarket positions are on-chain property under IRS Notice 2014-21; gains and losses are capital, and you must track every position manually since no 1099 is issued.
• Kalshi contracts may qualify for favorable IRC §1256 treatment (60/40 long/short split) as CFTC-regulated instruments — consult a tax professional before assuming this applies to your situation.
• Outside the US, the gambling vs. financial instrument distinction can dramatically change your tax outcome — particularly in the UK and Australia where gambling winnings are generally not taxed.
• Good recordkeeping is non-negotiable. Whether you're filing a US Schedule D, a UK Self Assessment, or an Australian CGT schedule, you need acquisition dates, cost basis, and disposal proceeds for every position.