Prediction markets exploded in popularity over the past two years, and now millions of Americans face a new tax puzzle. Platforms like Polymarket and Kalshi let you bet on everything from elections to economic data, but the IRS treats these trades differently than stocks or crypto. Understanding what is a prediction market and how to report your gains is critical before April 15 rolls around.
A prediction market definition is simple: it’s a platform where you buy and sell contracts that pay out based on whether a real-world event happens. If you think inflation will hit 3% next quarter, you buy a “Yes” contract. If you’re right, the contract settles at $1. If you’re wrong, it’s worth zero. This binary structure makes prediction market basics feel like betting, but the IRS sees them as either commodity contracts or miscellaneous income depending on the platform.
Kalshi 1099-MISC vs swap treatment
Kalshi is a CFTC-regulated exchange, so your trades fall under commodity rules. Most users receive a 1099-MISC for net winnings rather than a traditional brokerage 1099-B. That means you report your total profit as “Other Income” on Schedule 1, line 8z, unless you elect mark-to-market accounting under Section 1256. The catch? Section 1256 gives you 60/40 capital-gains treatment (60% long-term, 40% short-term) even if you held contracts for one day, but you must file the election by your tax return due date.
Where each platform issues forms
Kalshi mails 1099-MISC forms to any user who nets $600 or more in a calendar year. Polymarket, built on the Polygon blockchain, does not issue tax forms because it operates offshore. You are still legally required to self-report every trade, but the platform won’t send a summary to the IRS. Always download your transaction history in January and reconcile it against your wallet records.
Polymarket self-reporting basics
Polymarket operates as a decentralized protocol, so you track every buy and sell manually. Each winning contract is a taxable event when you redeem it for USDC. Your cost basis is what you paid for the contract, and your proceeds are the $1 settlement value. If you bought a “Yes” contract at 65 cents and redeemed it at $1, you report 35 cents of short-term capital gain on Schedule D. Losing contracts create capital losses, which offset gains up to $3,000 per year against ordinary income.
Wash-sale considerations
The wash-sale rule blocks you from claiming a loss if you repurchase a “substantially identical” security within 30 days. In 2026, the IRS has not issued formal guidance on whether prediction market contracts qualify as securities. Most CPAs advise caution: if you sell a “Biden wins” contract at a loss and buy it back two days later, the IRS may disallow the loss. Crypto traders learned this lesson the hard way, and prediction markets may follow the same path as regulations tighten.