Prediction markets exploded in popularity over the past two years, and now thousands of traders face a new challenge: tax season. If you traded on Kalshi, Polymarket, or PredictIt in 2025, you need to understand how the IRS views your profits and losses. The tax treatment differs dramatically across platforms, and getting it wrong can trigger audits or penalties. This guide walks you through the reporting requirements for each major prediction market in 2026.
Why the tax treatment differs across platforms
Not all prediction markets operate under the same regulatory framework. Kalshi is a CFTC-regulated exchange, which means it issues formal tax documents and treats contracts as commodities. Polymarket runs on blockchain technology and does not issue 1099 forms, leaving traders to self-report crypto gains. PredictIt operates under a no-action letter with unique rules. These structural differences create distinct reporting obligations for you.
The IRS classifies prediction market winnings based on the platform’s legal status and the nature of the contracts. Binary event contracts on Kalshi are treated differently than crypto-based positions on Polymarket. Understanding these distinctions helps you choose the correct tax forms and avoid misclassification.
Kalshi’s 1099-MISC treatment in 2026
Kalshi sends 1099-MISC forms to traders who earned over $600 in net profits during the tax year. Your winnings appear in Box 3 as “other income,” not as capital gains. This means you report the income on Schedule 1 of your Form 1040, and it may be subject to self-employment tax if the IRS considers you a professional trader.
You can deduct trading losses against your Kalshi gains, but only if you itemize deductions and maintain detailed records. Keep transaction logs, contract details, and timestamps for every trade. The IRS expects you to substantiate every deduction with clear documentation.
Filing flow for Kalshi traders
Download your 1099-MISC from Kalshi’s dashboard by mid-February. Cross-check the reported income against your own trade history. Enter the total from Box 3 on Schedule 1, Line 8z. If you have offsetting losses, attach a statement detailing each loss with dates and contract descriptions. Most tax software can guide you through this process, but complex situations may require professional help.
Polymarket’s self-reporting reality
Polymarket does not issue tax forms because it operates as a decentralized platform. You must track every transaction yourself and report gains or losses as cryptocurrency disposals. Each time you settle a winning contract, you realize a taxable event. The IRS treats this as property disposal under Notice 2014-21, which means capital gains rules apply.
Use blockchain explorers or portfolio tracking tools to compile your transaction history. Calculate your cost basis for each position and subtract it from your proceeds. Short-term gains (positions held under one year) are taxed at ordinary income rates, while long-term gains qualify for lower capital gains rates.