How Prediction Market Taxes Work in 2026: Kalshi, Polymarket & IRS Rules

In 2026, prediction market platforms like Kalshi, Polymarket, and Robinhood have gained immense popularity, with millions of traders participating in a diverse array of bets. However, the Internal Revenue Service (IRS) has yet to establish a definitive tax classification for event contracts, leading to confusion among traders and accountants regarding their tax liabilities.

The IRS has not provided clear guidance on how to treat gains and losses from prediction market contracts, resulting in up to four possible tax treatments for traders depending on their specific circumstances. One option is to classify gains as ordinary income, which is unfavorable because gains are taxed at the highest marginal rates (up to 37 percent federally) with no preferential treatment.

Another alternative is to classify profits as capital gains, which offers a more favorable tax rate (0, 15, or 20 percent depending on income). However, this classification is only applicable if the trader meets the stringent criteria set forth by the IRS, known as the "trader in securities" standard.

Additionally, traders could potentially use the Section 1256 contract treatment, which offers a 60/40 split between long-term and short-term capital gains treatment. This option is attractive but has not been officially recognized by the IRS, making such a claim speculative and potentially risky. Lastly, traders could classify their activities as wagering losses, which allows for deductions only against gambling winnings, severely limiting their tax benefits.

The lack of IRS guidance on prediction market taxation creates another issue: platforms themselves are not providing consistent or complete tax reporting. For instance, Kalshi, a CFTC-regulated prediction market platform, issues 1099-INT and 1099-MISC forms that report rewards and interest earned but do not capture trading profit or loss. This omission forces traders to manually calculate and report their trading gains, which increases complexity and audit risk.

Polymarket, on the other hand, operates as a decentralized protocol and does not issue tax forms to traders at all. Traders must manually track and categorize each transaction themselves, a tedious process that many traders inadvertently skip. This lack of reporting creates a false sense that their activity is not taxable.

Robinhood recently introduced prediction market contracts through Robinhood Crypto, but its annual statement format is not aligned with standard IRS tax form categories. Traders cannot seamlessly transfer this data into tax software, requiring custom interpretation and potentially leading to errors in reporting.

To avoid common pitfalls, traders must adopt a consistent, clear methodology for tax reporting across all their positions. They must also stay vigilant for any regulatory changes or developments scheduled for 2026, as the IRS has not yet announced any formal guidance on prediction market taxation. Furthermore, new platforms are entering the space, and some states are considering separate tax rules for prediction market activity, which could introduce additional compliance burdens for traders across multiple jurisdictions.