Bet $550 on the World Cup through DraftKings and the IRS wants $185 of your winnings. Make the identical bet on Kalshi and it may want $134 — or it may want something else entirely, because nobody can tell you with certainty which number is correct. More than halfway through 2026, prediction market taxes remain the largest unanswered question in American betting: the IRS has not issued a single ruling, notice, or FAQ explaining how event contract winnings should be taxed, even though the rules that make the difference took effect on January 1.
KEY FACTS AT A GLANCE
- No guidance: The IRS has published no revenue ruling, notice, private letter ruling or FAQ on event contract taxation
- Three defensible answers: gambling income under Section 165(d), ordinary capital gains under Section 1221, or 60/40 treatment under Section 1256
- Already live: Since January 1, 2026, wagering losses are only 90% deductible — a break-even bettor can owe real tax
- Thin paperwork: Kalshi sends no comprehensive 1099-B for event contract trades; Polymarket sends nothing at all
- You owe it anyway: The reporting obligation exists whether or not a form arrives
- State split: North Carolina taxes prediction market operators at 6% and sportsbooks at 23% on the same games
Three Answers, Zero Rulings
Everything about how prediction markets are taxed flows from one unresolved question: what kind of thing is an event contract? Tax professionals currently defend three different answers, and each one produces a materially different bill on the same trade.
The first is gambling income. Winnings are fully taxable as ordinary income, and losses are deductible only against winnings, only if you itemize, and now only at 90 cents on the dollar. The second is ordinary capital gains under Section 1221, treating the contract as transferable property with a cost basis. Because most positions settle within weeks, gains would usually land in the short-term bucket and be taxed at ordinary rates up to 37% — but losses would net properly, with up to $3,000 of excess offsetting other income.
The third is Section 1256, the regime built for regulated futures. It splits any gain 60% long-term and 40% short-term regardless of how long you held the position, and it allows a three-year carryback election against prior Section 1256 gains. It is also the most contested. Green Trader Tax calls the position uncertain and potentially aggressive, noting that event contracts are not clearly regulated futures contracts and lack the statutory mark-to-market framework the section assumes. Camuso CPA makes the sharper structural point: Section 1256 is not a taxpayer election, and while CFTC designation is one route by which a venue may qualify as a qualified board or exchange, venue qualification alone does not establish that a prediction market contract is a Section 1256 contract.
The gap between the best and worst outcome is not trivial. Writing in Forbes, NC State accounting professor Nathan Goldman worked the arithmetic on a single $550 wager producing a $500 gain: roughly $134 in federal tax under Section 1256 treatment against $185 through a sportsbook, a saving of about $51 on one bet.
Why the IRS Won't Answer
The silence is not an oversight. Neither the Treasury Department nor the IRS would comment when Bloomberg asked, and the explanations tax professionals offer are all variations on the same theme: any answer the IRS gives lands it in the middle of a fight it did not pick.
The most concrete version of that problem is jurisdictional. The CFTC has spent the past two years insisting that event contracts are federally regulated derivatives rather than wagers, a position it is currently defending against states in court. If the IRS were to declare event contracts gambling for tax purposes, it would be contradicting another federal agency mid-litigation. Speaking to CNBC in July, Ryan Schutz — a former IRS special agent who now runs First There Tax — said he would like to see IRS guidance as the most definitive solution, but suspected the agency may be hesitant to publish anything that conflicts with the CFTC's position. He also described the situation as genuinely confusing for users of prediction markets, who are receiving conflicting advice.
Tax experts speaking to Bloomberg pointed to a second factor: a politically charged environment, including the Trump family's involvement in the prediction market sector. Whatever the mix of reasons, the practical effect is a vacuum that everyone else is now filling — the CFTC through its June proposed rule on sports event contracts, Congress through the Prediction Market Act of 2026, and states through their own tax codes.
"This is kind of the Wild West right now. We don't know who the sheriff in town is."
— Andrew Lautz, director of tax policy, Bipartisan Policy Center
Not everyone thinks the question is genuinely hard. Seth Hanlon, a senior fellow at the Tax Law Center at NYU School of Law, takes the view that the substance should govern regardless of the packaging.
"If it looks like gambling and smells like gambling, it's gambling, regardless of whether you dress it up as something different."
— Seth Hanlon, senior fellow, Tax Law Center at NYU School of Law
The 90% Trap
The classification question stopped being academic on January 1. Section 70114 of the One Big Beautiful Bill Act amended Section 165(d) so that wagering losses are deductible at only 90% of their amount, still capped at the year's wagering gains. It applies to tax years beginning after December 31, 2025, and the IRS issued proposed regulations implementing it in April. We covered the change when it first took effect and again as part of everything that changed for bettors in 2026.
The arithmetic is what makes it bite. Green Trader Tax gives the worked case: $100,000 in winnings against $100,000 in losses — a year in which you made nothing — produces $90,000 of deductible losses and therefore $10,000 of taxable income. Under capital or Section 1256 treatment the same year produces nothing to tax at all.
There is a second catch layered on top. The gambling loss deduction is an itemized deduction, so claiming it means giving up the $16,100 standard deduction — a trade that only makes sense for a narrow band of filers. According to tax commentary published this year, only around 14% of Americans are expected to itemize in 2026. For everyone else, gambling treatment means the losses simply do not come off at all.
What the Platforms Actually Send You
Many traders assume the paperwork will resolve the question for them. It will not. The reporting picture across the major venues is patchy enough that even accountants describe it inconsistently, and the most detailed account — from Camuso CPA, updated in July — is also the least reassuring.
| Platform | What you receive | Filed with the IRS? |
|---|---|---|
| Kalshi event contract trades |
A profit-and-loss statement summarizing trades, profits, losses and fees. No comprehensive 1099-B covering contract-level acquisitions, dispositions, basis or annual P&L | No |
| Kalshi everything else |
1099-MISC for credits and rewards of $600 or more; 1099-INT for cash interest of $10 or more; 1099-DA for digital asset activity via a third-party provider; 1099-B only for limited broker-type transactions | Yes |
| Polymarket | Nothing — the platform operates outside US reporting requirements, so all self-reporting falls to the trader | No |
| Robinhood | An Event Contracts Annual Statement | No |
| PredictIt | 1099-MISC | Yes |
Two things follow. First, a Kalshi profit-and-loss statement is a convenience document, not a tax determination — as Camuso CPA puts it, it does not establish federal tax character and will not necessarily contain every record needed to support a return. Second, and more importantly, none of this changes what you owe. The IRS position on gambling income is unambiguous in its own published guidance: winnings are fully taxable and must be reported whether or not a Form W-2G or any other form arrives.
THE ABSENCE OF A FORM IS NOT A LOOPHOLE
The reporting obligation is independent of the paperwork. If a platform sends you nothing, you are still required to report the income, and failure to do so exposes you to interest and penalties. What the missing forms actually change is the IRS's visibility — not your liability.
The State Layer: 6% and 23% on the Same Game
While Washington says nothing, states have moved — and they have moved in opposite directions. Holland & Knight counts at least 15 states that considered prediction market legislation in 2026, with nine now caught up in preemption disputes with the CFTC. Three approaches have emerged, and the tax rates attached to them differ by an order of magnitude.
North Carolina chose cooperation. Senate Bill 257, signed by Governor Josh Stein on July 7, 2026, is the first state law to explicitly recognize that the Commodity Exchange Act establishes exclusive federal regulatory authority for the CFTC over prediction markets. It taxes prediction market operators at 6% of net trading fee revenue attributable to North Carolina residents, imposes no licensing or registration requirement, and takes effect January 1, 2027. The same budget raised the sports betting operator tax to 23%. Before SB 257, prediction markets in the state paid only the 2.25% corporate income tax against sportsbooks' 18% — so North Carolina did not close the gap, it moved both numbers up and kept it.
Kentucky chose confrontation. House Bill 757, enacted in April, imposes a 14.25% excise tax on prediction market operators' transaction fees from January 1, 2027 — and defines "transaction fee" to include the amount the consumer pays to purchase the contract, not merely the operator's execution fee. That definition expands the tax base well beyond fee revenue. The CFTC sued, invoking McCulloch v. Maryland and the principle that the power to tax involves the power to destroy.
Illinois chose reclassification. Its FY2027 budget amended the state's Sports Wagering Act to treat certain sports event contracts as exchange wagers, attaching a $15 million license fee for the first four years and, according to Holland & Knight, a transaction tax of 1.75% on the first five million wagers rising to 3.5% above that. The CFTC has challenged both the licensing and tax provisions as preempted.
One clarification matters here, because it is the easiest thing in this story to get wrong: these are taxes on operators, not on you. A North Carolina resident who wins on Kalshi still owes the state's 3.99% individual income tax on that income, with no itemized loss deduction available, according to analysis from NC State's Poole College of Management. The 6%-versus-23% gap is a competitive advantage for the platform, not a discount for the bettor. It also explains why the money is moving: the American Gaming Association estimates prediction markets diverted more than $500 million in potential sports betting tax revenue over the past year.
The scale of the shift is what makes the tax question urgent rather than theoretical. Combined monthly trading volume on Kalshi and Polymarket rose from under $5 billion in September 2025 to roughly $24 billion in April 2026, according to the Pew Research Center — against an average of about $14 billion a month wagered through all legal US sportsbooks in 2025. The states losing that revenue are the ones now writing prediction market tax law, and the CFTC is suing them over it, having already won a Third Circuit preemption ruling in the broader federal-versus-state fight.
What to Do While Nobody Knows
No guidance does not mean no obligation, and it does not mean every position is equally defensible. Three things are worth doing before next filing season.
STEP 1: KEEP YOUR OWN RECORDS
Assume no platform will hand you a complete trade history. Export contract-level acquisitions, dispositions, basis and fees while you can still reconstruct them — the IRS requires records regardless of which classification you land on.
STEP 2: PICK A POSITION AND DOCUMENT WHY
Contracts on CFTC-regulated venues carry a stronger argument for capital or Section 1256 treatment than casual trading on unregulated platforms. Whichever you take, keep a written rationale — that is what protects you if guidance later contradicts it.
STEP 3: REPORT IT EITHER WAY
The one thing every source agrees on is that the income is reportable. A missing 1099 reduces IRS visibility, not liability, and non-reporting converts an unsettled classification question into a straightforward compliance problem.
Whether the vacuum closes soon is an open question. The Prediction Market Act of 2026, introduced by Senators McCormick and Gillibrand, would build a federal CFTC framework for event contracts, though its focus is retail protection and market integrity rather than tax classification. The CFTC's own proposed rule drew public comment through July 27, 2026. Neither resolves the Section 1256 question directly — but as tax practitioners have noted, a firmer regulatory framework would give the IRS something more stable to analogize from. Sloan Speck of Colorado Law has argued that the IRS is unlikely to offer formal guidance on sports-related futures contracts in the near term, and nothing in the past seven months suggests otherwise.
FAQs
Yes. All profits from prediction markets are taxable income and must be reported whether or not the platform sends you a tax form. What remains unsettled is the character of that income — gambling, capital gains, or Section 1256 — not whether it is taxable.
Not for event contract trades. According to Camuso CPA, Kalshi issues a 1099-MISC for credits and rewards of $600 or more, a 1099-INT for cash interest of $10 or more, and a 1099-DA for digital asset activity, but no comprehensive 1099-B covering contract-level trades. You receive a profit-and-loss statement instead, and that document is not filed with the IRS.
Undecided. The IRS has published no ruling, notice or FAQ resolving it, so tax professionals currently defend three treatments: gambling income under Section 165(d), capital gains under Section 1221, and 60/40 treatment under Section 1256. Contracts traded on CFTC-regulated venues carry a stronger argument for the latter two.
It depends entirely on classification. Under gambling treatment, losses are deductible at only 90% of their amount since January 1, 2026, capped at your winnings, and only if you itemize. Under capital or Section 1256 treatment, gains and losses net in full, with up to $3,000 of excess loss offsetting other income each year.
Yes. Polymarket issues no tax documents, which means all reporting falls to you. The absence of a form reduces the IRS's visibility into your trading, but it does not reduce your liability, and failing to report exposes you to interest and penalties.
Section 1256 is the tax regime for regulated futures contracts. It splits gains 60% long-term and 40% short-term regardless of holding period, and allows a three-year loss carryback. Whether it covers event contracts is unresolved: as Camuso CPA notes, CFTC designation may help a venue qualify as a qualified board or exchange, but that alone does not make a prediction market contract a Section 1256 contract.
Yes, under your state's ordinary income tax rules. The widely reported gap between prediction market and sportsbook tax rates — 6% against 23% in North Carolina, for example — applies to operators, not individuals. A North Carolina resident still owes the state's 3.99% individual rate on winnings, with no itemized loss deduction available.
Nothing suggests it is imminent. Tax practitioners point to the CFTC's position that event contracts are derivatives rather than wagers, which the IRS would risk contradicting mid-litigation, and to the politically charged environment around the sector. Sloan Speck of Colorado Law has argued the IRS is unlikely to publish formal guidance on sports-related futures contracts in the near term.
KEY TAKEAWAYS
- The IRS has published nothing — no revenue ruling, notice, private letter ruling or FAQ on how event contract winnings are taxed, more than halfway through the first tax year in which the difference is live
- Three treatments are in active use — gambling income, capital gains, and Section 1256 — and they produce materially different bills on identical trades
- Section 1256 is contested, not chosen — it is not a taxpayer election, and CFTC regulation of a venue does not by itself qualify a contract
- The 90% cap is the sharpest edge — a break-even year of $100,000 won and $100,000 lost produces $10,000 of taxable income under gambling treatment and nothing under capital treatment
- The paperwork will not decide it for you — Kalshi sends no comprehensive 1099-B for event contract trades and Polymarket sends nothing, but the reporting obligation stands regardless
- State rate gaps favor platforms, not players — North Carolina's 6% against 23% is an operator tax difference; individuals still owe ordinary state income tax on winnings
- Nobody expects this resolved quickly — the CFTC's derivatives position, active preemption litigation and the politics of the sector all cut against the IRS speaking first
Sources
- Extension and Modification of Limitation on Wagering Losses (proposed regulations) — Federal Register / Internal Revenue Service
- Internal Revenue Bulletin 2026-19 — Internal Revenue Service
- Topic No. 419, Gambling Income and Losses — Internal Revenue Service
- S.4469 — Prediction Market Act of 2026 — U.S. Government Publishing Office
- Prediction Markets Legislation in the 119th Congress — Congressional Research Service
- State of the States 2026 — American Gaming Association
- Trading volume on prediction markets has soared in recent months — Pew Research Center
- The States Are Coming for Prediction Markets: A New Frontier in Tax Policy — Holland & Knight
- North Carolina Bill Recognizes CFTC's Federal Regulatory Authority Over Prediction Markets — Decrypt
- How are prediction markets taxed? The IRS hasn't provided guidance yet — CNBC
- World Cup bets on prediction markets may get tax edge over gambling — Fortune / Bloomberg
- Prediction Market Taxes: Capital Gains, Gambling, or Something Else? — Green Trader Tax
- Kalshi Tax Reporting: What Your 1099 Leaves Out — Camuso CPA
- Prediction Market Taxes Explained: Why U.S. Tax Characterization Remains Unsettled — Camuso CPA
- IRS silence on prediction market winnings to cause confusion as World Cup begins — Thomson Reuters
- Sports Gambling and the Taxation of Prediction Markets — Sloan Speck, TaxProf Blog
- Prediction Markets vs. States: Tax Gaps and Legal Battles — Poole College of Management, NC State
- Prediction Markets Tax Benefits That May Be Built Into The Tax Code — Nathan Goldman, Forbes
- How Prediction Markets Are Taxed Under Federal Law — Pease Bell CPAs
