Do Taxes Apply to Winnings in Prediction Markets?

 Posted on August 03, 2026 in Taxation Law

Over the past few years, prediction markets have become popular. Platforms like Kalshi and Polymarket allow people to place bets on real-world events and potentially earn a significant amount of money if they are able to successfully predict what will happen. As more people use prediction markets, this has raised questions about how winnings may be taxed, whether losses may be tax-deductible, and how the IRS and different states treat these matters.

Because prediction markets are a relatively new area that may be addressed by taxpayers, the laws and policies detailing how they may be taxed have not yet been settled. People who use prediction markets may encounter concerns about how winnings should be reported, what taxes will need to be paid, and what deductions may be taken. An attorney with a strong background in tax law can provide legal guidance on how these matters may be addressed and how to avoid potential tax penalties.

Event Contracts Vs. Gambling

One of the key issues addressed in matters related to prediction markets is how winnings are classified. While these winnings may be similar to those received through gambling, prediction markets have taken steps to avoid the gambling classification and ensure that they are regulated by the federal government rather than state gambling commissions.

Tax laws are less favorable for taxpayers who engage in gambling. The One Big Beautiful Bill Act has placed a 90% cap on the deductions that may be taken for gambling losses starting in tax year 2026. This means that if a person had equal winnings and losses through gambling in a specific tax year, they would still be required to pay income taxes on 10% of their winnings.

Prediction markets have attempted to gain more favorable tax treatment by classifying their products as event contracts rather than gambling. These event contracts are considered to be futures contracts that are regulated by the Commodity Futures Trading Commission (CFTC). Because futures contracts are considered to be capital assets, capital gains taxes will apply to earnings. The full amount of losses can be deducted against winnings, and if losses exceed winnings, up to $3,000 in losses can be offset against a person’s ordinary income.

Futures contracts are addressed in Internal Revenue Code Section 1256, which uses a mark-to-market rule, treating assets as if they were sold for their fair market value at the end of a tax year. 60% of a person’s net gains through prediction markets will be taxed at the long-term rate, and 40% of net gains will be treated as short-term capital gains and subject to ordinary income taxes.

While prediction market winnings may currently be treated as futures contracts under Section 1256, the ways they may be handled may change in the future as new laws are passed and courts issue decisions. Multiple states have filed lawsuits seeking to classify prediction markets as gambling and make sure they are subject to state gambling laws. The CFTC has also taken legal action to maintain exclusive jurisdiction over event contracts. The matter may eventually reach the U.S. Supreme Court as prediction markets, state governments, and other parties seek a final decision on how winnings may be classified and taxed.

Contact Our San Jose, CA Tax Attorney

While prediction markets may present a lucrative opportunity, the uncertainty about how winnings may be taxed could lead to legal and financial concerns. Taking the right steps to report winnings, claim deductions on losses, and pay required taxes can help ensure that a person will be able to avoid potential penalties. At John D. Teter Law Offices, our San Jose tax lawyer can provide guidance on the best ways to avoid tax issues related to prediction market winnings while also addressing any changes in the law that could affect taxpayers. Contact us at 408-866-1810 to discuss these concerns in a consultation.